4% Rule for Retirement is no longer valid

What is 4 percent rule of retirement?

The 4% rule is a guideline used in retirement planning that suggests withdrawing 4% of your initial portfolio value in the first year of retirement, then adjusting subsequent withdrawals for inflation in the following years. It is based on historical market data and is intended to provide a sustainable income stream throughout retirement. Here’s how it works with an example:

  1. Determine your retirement savings: Let’s say you have accumulated $1,000,000 in retirement savings.
  2. Calculate your initial withdrawal: Multiply your savings by the 4% rule to determine your initial annual withdrawal. In this case, 4% of $1,000,000 is $40,000.
  3. Adjust for inflation: Each subsequent year, you increase your withdrawal by the rate of inflation to maintain the purchasing power of your income. If inflation is 2%, you would increase your $40,000 withdrawal by 2% to $40,800 in the second year.
  4. Assess portfolio performance: Regularly review the performance of your investment portfolio. If your investments generate higher returns, your portfolio may grow, allowing for larger withdrawals. Conversely, if your investments underperform, you may need to adjust your withdrawals accordingly.
  5. Monitor and adjust as needed: Keep track of your expenses, investment performance, and overall financial situation. Adjust your withdrawals as necessary to ensure your retirement savings last throughout your lifetime.

Example: Let’s say you retire with a $1,000,000 portfolio and decide to follow the 4% rule. In the first year, you withdraw $40,000 (4% of $1,000,000). Assuming an annual inflation rate of 2%, in the second year, you would increase your withdrawal by 2% to $40,800. You would continue this pattern, adjusting for inflation each year.

It’s important to note that the 4% rule is based on historical market data and assumes a balanced portfolio of stocks and bonds. It does not guarantee financial success or account for individual circumstances or market fluctuations. Factors such as investment performance, retirement duration, and personal expenses can affect the sustainability of the 4% withdrawal rate. Therefore, it’s crucial to regularly reassess your financial plan, consider your unique situation, and consult with a financial advisor to make informed decisions about your retirement income strategy.

The 4% Rule: Why It’s Not Ideal for Early Retirement?

The 4% rule is a guideline often used in retirement planning that suggests withdrawing 4% of your initial portfolio value in the first year of retirement, then adjusting subsequent withdrawals for inflation. While it has been widely adopted and can be a helpful starting point, it may not be ideal for early retirement due to several reasons. Here are some key considerations:

  1. Longer retirement horizon: Early retirees typically have a longer time horizon than those retiring at traditional ages. With potentially 30 or more years of retirement ahead, the 4% rule may not provide sufficient income to sustain a longer retirement period.
  2. Sequence of returns risk: The sequence in which investment returns occur can significantly impact portfolio longevity. If early retirees experience poor investment returns or a market downturn early in their retirement, it can deplete their portfolio faster and reduce the sustainability of the 4% withdrawal rate.
  3. Higher healthcare costs: Early retirees often face higher healthcare costs due to being uninsured or ineligible for Medicare. These additional expenses can strain the 4% withdrawal rate, especially if healthcare costs rise faster than inflation.
  4. Flexibility and dynamic spending: Early retirees may have more flexibility in their spending patterns compared to traditional retirees. They may choose to front-load their expenses during the early active years of retirement and reduce spending later. The 4% rule assumes a consistent inflation-adjusted withdrawal rate, which may not align with the actual spending needs and preferences of early retirees.
  5. Lower bond yields: The 4% rule was developed during periods of higher bond yields. In today’s low-interest-rate environment, bonds may provide lower returns, making it more challenging to generate sustainable income using the traditional 4% withdrawal rate.

Given these factors, it is advisable for early retirees to carefully assess their unique circumstances and consider a more personalized approach to retirement planning. This may involve strategies such as having a larger portfolio, maintaining a flexible withdrawal rate, diversifying income sources, considering part-time work, and periodically reassessing and adjusting their financial plan to account for changing circumstances and market conditions.

How to retire early without using 4% rule?

Retiring early requires careful planning and consideration of various financial factors. Here are some steps and examples to help you understand the process:

  1. Define your financial goals: Determine your desired retirement age, the lifestyle you want to maintain, and the amount of income you’ll need during retirement. Consider your living expenses, healthcare costs, and any additional financial goals you may have.

Example: Let’s say you want to retire at the age of 45, and you estimate that you’ll need $50,000 per year to cover your expenses and maintain your desired lifestyle.

  1. Assess your current financial situation: Evaluate your current savings, investments, and any other potential income sources. Calculate your net worth and analyze your income and expenses to determine your savings rate.

Example: Suppose you currently have $500,000 in retirement savings and other investments. You are saving $20,000 per year, and your annual expenses are $40,000.

  1. Determine your retirement savings target: Calculate the amount of money you’ll need to accumulate to support your desired retirement lifestyle. Consider your estimated expenses, the length of your retirement, and any potential income from sources like Social Security or rental properties.

Example: If you plan for a 40-year retirement and want to withdraw $50,000 per year, you will need $2 million in savings. This can be calculated by multiplying your desired annual withdrawal by the number of years in retirement ($50,000 x 40 = $2,000,000).

  1. Increase your savings rate: To accelerate your journey towards early retirement, focus on increasing your savings rate. Look for ways to reduce expenses and allocate more money towards savings and investments.

Example: If you increase your annual savings to $30,000, you will be able to save an additional $10,000 per year.

  1. Invest strategically: Choose appropriate investment vehicles and asset allocation strategies to grow your savings over time. Consider a diversified portfolio that aligns with your risk tolerance and long-term goals.

Example: Suppose you invest your savings in a diversified portfolio of stocks and bonds that historically generates an average annual return of 7%.

  1. Minimize debt and expenses: Reduce or eliminate high-interest debt and unnecessary expenses to free up more funds for savings and investments.

Example: By paying off high-interest credit card debt, you can save on interest payments and redirect that money towards retirement savings.

  1. Consider additional income streams: Explore ways to generate additional income during your working years or in retirement. This could include part-time work, freelancing, rental properties, or creating passive income streams.

Example: You could earn an extra $10,000 per year through part-time work or rental income.

  1. Monitor and adjust your plan: Regularly review and adjust your retirement plan as needed. Keep track of your progress, reassess your goals, and make changes to your savings and investment strategies when necessary.

Example: If you find that your investments are not performing as expected, you might consider adjusting your asset allocation or seeking professional advice.

Remember that early retirement requires careful financial management, discipline, and long-term planning.

Discretionary Withdrawal Rate Example Scenario

The discretionary withdrawal rate is a concept that allows retirees to adjust their withdrawal rate based on their financial circumstances and market conditions. Unlike the fixed 4% rule, it provides more flexibility in managing retirement income. Here’s an example scenario to illustrate how a discretionary withdrawal rate could work:

  1. Assess your retirement needs: Let’s say you estimate that your annual retirement expenses will be $50,000.
  2. Calculate your baseline withdrawal rate: Determine a baseline withdrawal rate based on your portfolio value and desired income. In this example, let’s assume your portfolio is worth $1,000,000. If you choose a baseline withdrawal rate of 4%, it would be $40,000 ($1,000,000 x 4%).
  3. Evaluate your financial situation: Regularly assess your portfolio performance, market conditions, and personal financial circumstances. If your investments perform well and your overall financial situation is stable, you may consider maintaining the baseline withdrawal rate.
  4. Adjust withdrawals during market downturns: During periods of market volatility or poor investment performance, you may decide to temporarily reduce your withdrawal rate to preserve your portfolio. This could involve lowering your annual withdrawal to a percentage below the baseline rate.

Example: If you experience a significant market downturn, you may decide to reduce your withdrawal rate from 4% to 3% for a year. This would lower your annual withdrawal from $40,000 to $30,000 ($1,000,000 x 3%). By adjusting your withdrawals, you aim to protect your portfolio from potential losses and give it an opportunity to recover.

  1. Increase withdrawals during favorable market conditions: Conversely, when your portfolio performs exceptionally well, you might consider increasing your withdrawal rate above the baseline. This allows you to take advantage of higher investment returns and potentially enjoy a higher income during those periods.

Example: If your investments generate excellent returns, you may decide to increase your withdrawal rate from 4% to 5% for a year. This would raise your annual withdrawal from $40,000 to $50,000 ($1,000,000 x 5%). By adjusting your withdrawals upward, you can enjoy the fruits of favorable market conditions.

The discretionary withdrawal rate provides you with the flexibility to adjust your annual withdrawals based on your financial situation and market performance. It allows you to strike a balance between maintaining your desired lifestyle and ensuring the longevity of your portfolio. However, it’s crucial to exercise caution and monitor your portfolio carefully to prevent excessive withdrawals that could deplete your savings over time.


In conclusion, while the 4% rule has been a widely used guideline for retirement planning, it may no longer hold as strongly for several reasons. Factors such as longer retirement horizons, sequence of returns risk, higher healthcare costs, flexibility in spending, and lower bond yields have made it less ideal for early retirement. These factors highlight the need for a more personalized and dynamic approach to retirement planning.

Retirees, especially those considering early retirement, should carefully evaluate their unique circumstances, goals, and market conditions. It is important to consider a range of strategies, such as having a larger portfolio, maintaining flexibility in withdrawal rates, diversifying income sources, and periodically reviewing and adjusting financial plans. Seeking guidance from a qualified financial advisor who specializes in retirement planning can provide valuable insights and help develop a customized approach that aligns with individual needs and objectives.

Ultimately, retirement planning is a complex process that requires ongoing assessment and adjustment. While the 4% rule can serve as a starting point, it should be complemented by a comprehensive analysis of one’s financial situation and a flexible retirement income strategy that considers a variety of factors beyond a fixed withdrawal rate.

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