The Warm Embrace of a Safe Withdrawal Rate

One of the biggest financial asymmetries we all face is retirement. Saving too much for retirement is not ideal, but saving too little is a disaster.

A lot of retirement planning is therefore focused on not running out of money before you die. The most ubiquitous reference you’ll see nowadays is to the “4% safe withdrawal rate”, or “4% rule”, introduced by William Bengen and made famous by the Trinity study.

The 4% rule was based on an analysis of historical U.S. stock & bond returns, and it concluded that withdrawing 4% annually from a portfolio would have been “safe” (you wouldn’t have run out of money) during a 30 year retirement over almost all of the historical period analyzed. This rule has led to much joy and celebration within the “FIRE” (financial independence / retiring early) community. Some folks even got Bengen tattoos.

The good thing about the 4% rule is that it simplifies how much one might need for retirement. Just divide how much money you’ll need annually by .04 (aka multiplying by 25), and you have the figure – down to the penny – needed for you to go throw a cup of coffee in your boss’s face and quit work forever. There are online calculators that allow you to calculate the actual day when you will reach “FI”.

The bad thing about the 4% rule is that it simplifies how much one might need for retirement.

I’m not going to go into the gritty details of the 4% rule because there are many others more skilled and with more time on their hands who have done so. Wade Pfau is a great source, and The Mad Fientist (he’s like a scientist, only for FI – get it?) put together an excellent and extremely comprehensive post.

The 4% Rule Isn’t Perfect

Even avoiding the details, though, I do have some critiques of the 4% safe withdrawal rate:

  • Past performance is not indicative of future results
    The first rule of investing. The Trinity study is an excellent and important analysis, but it’s an historical analysis.
  • The 4% rule wouldn’t have worked in a lot of other markets
    Just using U.S. results starting in 1925 is a bit of cherry-picking. Wade Pfau shows that the 4% rule wouldn’t have worked in a lot of other countries.
  • Current U.S. market conditions may pose a serious challenge to the 4% rule
    Interest rates are quite low, and stock valuations are quite high. This may be a bad time to start a 4%-rule-based retirement, though of course the bull run means a lot of folks are doing exactly that.
  • No one is willing to guarantee that the 4% rule is going to work
    If you blindly follow the 4% rule and somehow – just sayin’ – find yourself woefully short during retirement, you’ll be alone. The table-thumping experts who swore by it won’t take your calls or explain what happened, and the cheering crowd who high-fived you when you hit your number will have disappeared.
  • It’s too simple
    Planning for retirement can’t be done with a single number “rule of thumb”. Any time I see precision trumping accuracy, I get worried.

Update: The 4% Rule Is Perfect!

Even the most passionate adherents of the 4% safe withdrawal rate concede it has risks. However, those risks can be mitigated! Some arguments that the 4% rule is OK even if it isn’t include:

  • You can still work!
    If you use the 4% rule to retire early and it somehow doesn’t work out, you can go back to work to shore up the difference.
    Ummmmm, thanks? That is great. Because I was thinking of retiring, but work is OK too. Listen, this rule is supposed to say when I can retire. Going back to work is not retired, nor is it “financially independent”.
    It’s like I go to buy a car and ask, “Is it reliable?” The salesman says, “Maybe. But even if it breaks down you can still walk!”
    I can use this backup option with virtually any retirement plan. I can “retire” with $100 in my pocket, use that money to buy lottery tickets, and if they somehow don’t make me millions, I can go back to work. Yay!
  • You can cut expenses!
    If you find yourself betrayed by the 4% rule and your money is running out, you can do things like eat ramen or move to Bolivia.
    Wow. Let me write this down. Not enough money…start spending less. Got it.
  • You can invest more aggressively!
    The Trinity study and friends consider a mix of stock and bonds. Since stocks, over the long haul, should return more than bonds, increasing the stock allocation could improve results.
    Whoa. Let’s hold on for a second. Wade Pfau’s analysis (see table 2.1) suggests that isn’t always the case. Remember the vicious asymmetry we’re fighting – running out of money is a disaster, while having more money is just kinda nice. Higher return / higher volatility assets aren’t necessarily better in this race.
    Plus, if you take this point to its extreme, wouldn’t I be even better off buying stocks on margin? Let’s please not forget the “risk” part of the ol’ risk / return relationship.

The whole exercise of the safe withdrawal rate is to not run out of money. If I run out of money, I’m fully capable of figuring things out like “go back to work” or “cut expenses” on my own. Presenting those as reasons that the 4% rule still works is intellectually dishonest: they’re ways to mitigate when it doesn’t work, which is a very different thing.

I believe the only way to guarantee the 4% rule will work is to build a time machine and travel back to one of the periods where it did work. Though once you have a time machine, I imagine you can think up even more clever, movie-script-inspiring ways to make your money troubles go away.

How to Use the 4% Rule

Look, 4% rule. I like you. LIKE! I don’t love you, and I am always worried about over-simplifying “rules of thumb”. I do get worried that some in the “FIRE” community summarily dismiss all of the assumptions, caveats, and risks inherent in the rule and just use a simple calculation for their entire retirement planning.

The 4% rule should be used as an acid test. When your projected annual expenses x 25 is less than your total pile of assets, that’s the beginning of your retirement discussion and analysis, not the end. It is very possible you have enough money for retirement (you may have even more than you\’ll need), but it certainly isn’t guaranteed.

When to retire is one of the most important financial decisions we’ll face. A detailed spreadsheet projection that allows you to test key variables (beyond the bounds of the Trinity study) and explore numerous scenarios is a really good idea. So is exhaustively investigating issues like optimizing tax efficiency. The importance and complexity of this decision make a strong argument to consider hiring a fee-only financial planner to help. If you’re a financial rockstar, you might pay for an hour of advice and get a blessing for your plan (plus there’s always the chance you learn something new…). If you’re more of a novice, it’d be nice to have a professional validate the warm feeling of financial security you’ve been getting from some random guy on the internet.


When it comes to my own retirement planning, I don’t really use the 4% rule. The math and logic are sound, but I have more of a philosophical issue with it. I’ll lay that out, along with my own safe withdrawal rate (teaser: it’s even safer!), when I post next. Stay tuned!


Picture courtesy of Maklay62


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