If you have spent any time researching retirement income, you have encountered the 4% rule. Withdraw 4% of your portfolio in the first year of retirement, adjust that dollar amount for inflation each year, and your money should last 30 years. The rule is cited by financial journalists and personal finance websites, repeated by advisors across the country. It has the feel of settled science.
The feeling is misleading. The rule was built on a specific set of historical conditions that no longer exist exactly as they did, and it rests on an assumption most retirees cannot meet in practice: that you can reduce your spending when markets fall.
The cases where it works brilliantly and the cases where it fails catastrophically are determined largely by a variable no one controls: when, in market history, your retirement begins.
What Is a Safe Withdrawal Rate?
A safe withdrawal rate is the percentage of your retirement portfolio you can withdraw annually without depleting the portfolio over a defined retirement period. The withdrawal amount is typically adjusted for inflation each year to preserve purchasing power.
The 4% rule is the most widely cited safe withdrawal rate guideline. It holds that withdrawing 4% of your portfolio in year one, then adjusting that dollar amount for inflation in subsequent years, has historically sustained a 30-year retirement across most market conditions.
On a $1.5 million portfolio, 4% is $60,000 in year one. If inflation runs at 3%, year two’s withdrawal is $61,800. Year three is $63,654. The dollar amount rises each year regardless of what markets do.
That last sentence is worth pausing on. The dollar amount rises each year regardless of what markets do. It is the feature that makes the rule intuitive, and the flaw that makes it dangerous.
How Was the 4% Rule Created?
The rule traces to a 1994 paper by William Bengen, a financial planner in Southern California. Bengen was not a university researcher. He was a practitioner who wanted a defensible answer to a client question: how much can you safely withdraw without running out of money?
Bengen used historical S&P 500 and Treasury returns from 1926 to 1992, a 50/50 portfolio allocation rebalanced annually, and a 30-year retirement horizon. He looked at every possible retirement starting date in that data and asked: what is the highest initial withdrawal rate that would have survived the worst historical sequence of returns?
The answer was 4.15%. Bengen called it the SAFEMAX — the maximum initial withdrawal rate that would have worked even in the worst-case historical scenario. The rule is, by construction, a floor derived from bad historical luck, not an expected outcome.
Four years later, three finance professors at Trinity University extended Bengen’s work. Philip Cooley, Carl Hubbard, and Daniel Walz backtested various portfolio allocations and withdrawal rates against 1925 to 1995 market data. Their paper, “Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable,” introduced the concept of “portfolio success rates,” measuring what percentage of historical periods a given withdrawal rate survived.
The Trinity Study gave the 4% rule its academic credibility. It also introduced language that the popular press has consistently misread. A 90% success rate in the Trinity Study means 10% of historical retirees following that strategy ran out of money. More important, the authors were explicit about what the study was and was not:
“The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required… The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning.”
The authors built in a requirement their readers mostly ignored: ongoing adjustment. That nuance did not survive as the rule spread.
Why Did the 4% Rule Appear to Work?
Bengen’s data ran from 1926 to 1992. The final three decades of that dataset include one of the most exceptional bull markets in U.S. history.
From 1982 through 1999, the S&P 500 averaged approximately 18.34% annually, based on historical return data from Aswath Damodaran at NYU Stern School of Business. The long-term historical average is roughly 10%. The 1982 to 1999 period ran at nearly 1.7 times the long-term average for 18 consecutive years.
Here is a sample of what those years looked like:
- 1985: +31.24%
- 1989: +31.49%
- 1991: +30.23%
- 1995: +37.20%
- 1997: +33.10%
A strategy that “never failed” in data spanning this period was stress-tested partly on historically anomalous conditions. The returns that made the 4% rule appear conservative were the product of a specific economic era, not a permanent feature of capital markets.
What Is the $23.4 Million Problem with the 4% Rule?
The clearest way to see the rule’s fragility is through a direct comparison.
Two retirees, both starting with $1.5 million. Both invest 100% in the S&P 500. Both withdraw 4% in year one, then adjust for inflation each year. The only difference is when they retire.
The 1980 retiree steps into the historic bull market of the 1980s and 1990s. In the first year, the S&P 500 returns 31.74%. Withdrawals are small relative to rapid growth. Early gains compound on a full portfolio. Twenty years later, the balance stands at $23,945,676. The retiree has taken out more than $1.6 million in income and has 15 times their original balance.
The 2000 retiree follows the identical strategy. The S&P 500 returns -9.03% in year one. Then -11.85%. Then -21.97%. Three consecutive down years at the start of retirement. The portfolio is shrinking, and the retiree is still withdrawing the inflation-adjusted income amount, because that is what the rule requires.
Twenty years later, the balance stands at $495,319.
Same strategy. Same starting amount. Same discipline. A $23.4 million difference explained entirely by when they needed to start taking money out of the market. (Source: Damodaran, Aswath. “Historical Returns on Stocks, Bonds and Bills: United States.” NYU Stern School of Business, 2025, as presented in Lifeworks Advisors investment management analysis.)
This comparison is presented for illustrative purposes only, using actual historical S&P 500 index data without adjustment for investment fees, taxes, or expenses. Index returns cannot be invested in directly. Individual results would vary based on portfolio composition, fees, and withdrawal timing. Source: Damodaran, Aswath. “Historical Returns on Stocks, Bonds and Bills: United States.” NYU Stern School of Business, May 2025.
This is sequence of returns risk. A portfolio growing without withdrawals can recover from early losses. Compounding has time to do its work. When a portfolio is funding living expenses, that recovery path narrows with every share sold at a depressed price. Those shares are gone. They cannot participate in any eventual recovery. Fewer shares at lower prices, combined with continued withdrawals, creates what the math makes inevitable: a shrinking pool that cannot sustain the income it once could.
Research by Wade Pfau, one of the leading academic researchers in retirement income, estimates that approximately 77% of a portfolio’s final retirement outcome is explained by the returns of the first 10 years, a finding documented in Morningstar’s research on Pfau’s work on safe withdrawal rates. The damage from an early bad sequence is largely irreversible. Later good years cannot fully compensate for what was spent and sold during the early decline.
What Hidden Assumption Does the 4% Rule Make?
The 4% rule’s deeper problem is an assumption so embedded in its design that it rarely gets named directly.
The rule assumes that the dollar amount you withdraw increases every year for inflation. Healthcare and groceries cost more each year. So does housing. The rule builds in inflation adjustments because the researchers understood that a retiree’s spending needs grow over time.
Now consider what happens in the 2000 scenario, when the portfolio is down significantly in the first three years. The rule says to keep withdrawing the inflation-adjusted amount. But the portfolio is depleted. The withdrawal now represents a much larger percentage of a much smaller balance.
The academic response is that retirees should reduce spending in bad market years. Flexible spending strategies hold up better than fixed withdrawals, and Morningstar’s retirement income research has found that retirees willing to adjust spending can sustain starting withdrawal rates of nearly 6%, compared to 4% for those requiring fixed real withdrawals. (Morningstar Retirement Income Research, 2021–2023.)
The problem is that spending flexibility is easier to model than to live. A retired couple cannot decline chemotherapy because the S&P fell 20%. They cannot skip the property tax bill because their portfolio had a bad year. The largest costs in retirement, healthcare and housing, are exactly the costs that resist cutting. Bengen himself, speaking to CNBC in September 2025, called inflation “the greatest enemy of retirees” and acknowledged that surviving it requires spending cuts in bad years. The man who created the rule concedes that following it in a downturn requires doing something most retirees cannot do.
The rule works on paper. Life is not paper.
What the Research Shows Today
The 4% rule’s success depended significantly on the interest rate environment of the period studied. Bonds in Bengen’s era carried yields that are no longer available. Low bond yields mean low future bond returns.
In 2013, researchers Michael Finke, Wade Pfau, and David Blanchett published “The 4% Rule Is Not Safe in a Low-Yield World” in the Journal of Financial Planning. Using actual January 2013 bond yields rather than historical averages, they calculated that the projected failure rate for a 4% withdrawal strategy jumped from approximately 6% to 57%.
Pfau has consistently placed the probability that the 4% rule works for today’s retirees at 65 to 70 percent. That means a failure rate of 30 to 35 percent. Roughly one in three retirees following this strategy may run out of money before their 30-year horizon ends. A risk that high is not consistent with a rule that is treated as settled science.
Morningstar’s annual safe withdrawal rate research illustrates how much the “safe” rate varies with market conditions:
| Year | Morningstar Estimated Safe Rate | Market Context |
|---|---|---|
| 2021 | 3.3% | Ultra-low bond yields, high equity valuations |
| 2022 | 3.8% | Rising interest rates |
| 2023 | 4.0% | Higher fixed-income yields, moderating inflation |
| 2024 | 3.7% | Higher equity valuations; slightly lower bond yields |
| 2025 | 3.9% | Equity valuations elevated, bond yields supportive |
A number that ranges from 3.3% to 4.0% depending on the year is not a rule. It is a range that requires a current assessment to apply. That assessment requires someone to do it.
The academic research supporting income-focused allocation strategies reinforces this conclusion from a different direction. Research from Dimensional Fund Advisors found that conventional wealth-focused portfolios with fixed withdrawals face a failure rate of approximately 33% when early-retirement stock market returns are poor. Income-focused portfolios designed around matching assets to income needs showed failure rates near 1 to 3% under the same conditions. (Pellerin 2021, Dimensional Fund Advisors.)
As Nobel laureate and Harvard Business School professor Robert Merton put it in his 2014 Harvard Business Review essay: “investment value and asset volatility are simply the wrong measures if your goal is to obtain a particular future income. Communicating with savers in those terms, therefore, is unhelpful, even misleading.”
When Does the 4% Rule Actually Make Sense?
A fair treatment of the 4% rule requires acknowledging what it is good for, and there are legitimate cases.
For retirees who have no advisor, no income plan, and no framework for thinking about withdrawals, a structured approach beats no approach. The rule’s historical success rate is real: in most 30-year periods from 1926 onward, a 4% withdrawal strategy has worked. The worst-case scenario is survivable, which is what Bengen designed it to be.
The rule also works better under certain conditions:
- A diversified portfolio rather than 100% equities (Bengen’s original was 50/50 stocks and bonds)
- Flexibility to reduce withdrawals by 10 to 15% in severe downturns
- Significant guaranteed income from Social Security or pensions that reduces reliance on portfolio withdrawals
- A 30-year rather than 35 or 40-year time horizon
For someone with a pension covering basic expenses and Social Security covering most of the rest, the 4% rule may work well as a guideline for discretionary portfolio withdrawals. In that context, the portfolio is supplementing stable income, not replacing it.
Bengen’s own research, with a fully diversified portfolio, supports a starting rate up to 4.7%. His position has always been that the rule is a floor, and that most retirees have more room than the floor implies. Applied as a starting reference point, with active monitoring and the willingness to adjust, it can serve retirees well. Applied as a fixed plan, it cannot.
What Is a Better Framework Than the 4% Rule?
The real alternative to a withdrawal rate formula is a different question entirely.
Instead of “what percentage of my portfolio can I withdraw,” the more productive question is “what does the life I want to live cost, and how do I build income streams to fund it?”
Asking this question changes everything about retirement planning. It starts with budget, not portfolio. It identifies income sources with greater reliability than portfolio withdrawals alone: Social Security, pensions, bond ladders and certificates of deposit laddered to cover specific years of spending, structured notes, or hedged equity strategies that seek to provide more defined return profiles in various market environments. Each of these carries its own risks (including issuer and counterparty risk for structured notes) and none eliminates the possibility of loss. It asks what portion of income needs to be stable and what portion can come from a portfolio positioned for long-term growth.
Professor Merton described the structure this way — retirement income needs fall into three categories (Merton 2014):
| Category | Description |
|---|---|
| Non-negotiable | Minimum essential income that must be inflation-protected and, ideally, guaranteed for life. Covers housing, healthcare, food — expenses that cannot flex. |
| Desired | Conservatively flexible income for meaningful but adjustable spending: travel, dining, family support. Can modestly decline in a difficult year without threatening security. |
| Aspirational | Additional income from growth assets for spending that would be welcome but is not required — legacy, luxury, or major one-time expenses. |
Planning around these three categories, rather than a single withdrawal percentage, produces income that retirees can count on.
Consider the economics from a commissioned advisor’s perspective. They earn money from product sales, so a formula that requires no product purchases holds no appeal to recommend. A fee-only advisor earns the same fee regardless of what income strategy you use, which means the advice can follow the math rather than the sales opportunity.
The 2000 retiree’s experience was not a product of bad discipline or poor planning. It was a product of having a formula when they needed a plan. The formula said: withdraw this amount. The plan would have asked first: where does this income come from, and how does that source hold up when markets fall?
Common Questions About the 4% Rule and Safe Withdrawal Rates
What is the 4% rule in retirement?
The 4% rule is a guideline for retirement withdrawals: withdraw 4% of your portfolio in the first year of retirement, then adjust that dollar amount for inflation each year. It was developed by financial planner William Bengen in 1994 using U.S. market data from 1926 to 1992 and was designed to survive the worst historical 30-year period without depleting the portfolio.
Is the 4% rule still a good guideline?
It depends on market conditions and individual circumstances. Morningstar’s safe withdrawal rate research has estimated the appropriate rate anywhere from 3.3% to 4.0% in recent years, depending on bond yields and equity valuations at retirement. In low-yield environments, academic research has shown failure rates as high as 57% for a fixed 4% strategy. It is a useful starting point, not a guarantee.
What is sequence of returns risk?
Sequence of returns risk is the danger that the timing of investment returns can determine whether a retirement portfolio survives. Poor returns in the early years of retirement force asset sales at depressed prices; later good years cannot fully repair what was sold during the decline. Research suggests that approximately 77% of a portfolio’s final outcome depends on the returns of the first 10 years.
Does the safe withdrawal rate change by age?
Yes. The 4% guideline is calibrated for a 30-year retirement. Someone retiring at 55 with a potential 40-year retirement needs a lower starting rate, often estimated at 3.3% to 3.5%, to account for the longer time horizon. Someone retiring at 70 with a shorter expected horizon might safely withdraw more. The rate should be recalculated for your specific retirement duration.
Can I withdraw more than 4% if I’m willing to cut spending?
Research suggests yes. Morningstar’s work has found that retirees willing to adjust spending downward in poor markets can sustain starting rates close to 6%. The tradeoff is real: spending flexibility, particularly in healthcare and housing, is genuinely difficult to maintain in retirement. Any higher starting rate requires a commitment to actual spending reductions when markets underperform.
What is an alternative to the 4% rule?
Income-focused planning: building an income plan around what your life costs, funded by specific income sources rather than portfolio withdrawals alone. Social Security, pensions, CD ladders, structured notes, and hedged equity strategies can each play a role — though each also carries its own risks and should be evaluated for your specific situation. This approach separates the question of income reliability from the question of portfolio growth.
Is the 4% rule based on the S&P 500?
The original Bengen research used a 50/50 allocation between U.S. large-cap stocks (comparable to the S&P 500) and intermediate-term U.S. Treasuries. A 100% equity portfolio would produce different results, as illustrated by the 1980 versus 2000 retiree comparison in this post, where both used 100% S&P 500 and experienced dramatically different outcomes based solely on retirement timing.
Key Takeaway
The 4% rule is a useful starting reference. Using it as a complete retirement income plan asks more than it was designed to provide. It was built on historical data that included one of the greatest bull markets in American history, and it requires spending flexibility that most retirees do not have. As research from Pfau, Morningstar, and others has shown, the estimated safe rate varies meaningfully with market conditions — which means applying it requires the kind of current assessment the rule itself was supposed to replace.
The 1980 retiree and the 2000 retiree did not make different decisions. They faced different conditions. A plan built around what your life costs, funded by income sources designed for reliability rather than portfolio performance, may be less vulnerable to conditions outside your control. For a broader look at the retirement risks that income-focused planning addresses — inflation, longevity, sequence risk, and healthcare costs — see our guide to financial risk in retirement.
If you are within 10 years of retirement, the time to understand your real income needs is now, before the sequence of returns makes that decision for you. A fee-only advisor can help you build an income plan that starts with what your life costs and works backward to the assets and strategies that may fund it, rather than starting with a portfolio percentage and hoping market conditions cooperate. If you’re still evaluating advisors, see our guide on questions to ask a financial advisor to identify one who specializes in retirement income planning.
Sources
- Bengen, William P. “Determining Withdrawal Rates Using Historical Data.” Journal of Financial Planning 7, no. 4 (October 1994): 171–180.
- Cooley, Philip L., Carl M. Hubbard, and Daniel T. Walz. “Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable.” AAII Journal (February 1998).
- Damodaran, Aswath. “Historical Returns on Stocks, Bonds and Bills: United States.” NYU Stern School of Business, May 2025. https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
- Finke, Michael, Wade D. Pfau, and David M. Blanchett. “The 4 Percent Rule Is Not Safe in a Low-Yield World.” Journal of Financial Planning 26, no. 6 (June 2013): 46–55.
- Lifeworks Advisors. Investment Management Presentation, slides 10–12, 2025. (Internal proprietary analysis based on Damodaran historical returns data.)
- Merton, Robert C. “The Crisis in Retirement Planning.” Harvard Business Review 92, no. 7/8 (July–August 2014): 1401–1408.
- Morningstar. “Morningstar’s Retirement-Income Research: Finding Your Safe Withdrawal Rate.” https://www.morningstar.com/retirement/morningstars-retirement-income-research-finding-your-safe-withdrawal-rate; and “Retirement Income and Safe Withdrawal Rates in 2023.” https://www.morningstar.com/retirement/retirement-income-safe-withdrawal-rates-2023
- Pellerin, Mathieu. “Researching Retirement: The Impact of Inflation, Interest Rates, and Market Risks.” Dimensional Fund Advisors, July 26, 2021.
- Pfau, Wade D., cited in Morningstar. “Wade Pfau: The 4% Rule Is No Longer Safe.” https://www.morningstar.com/funds/wade-pfau-4-rule-is-no-longer-safe
- Bengen, William P., quoted in CNBC. “4% Rule Inventor William Bengen: Inflation Is Retirees’ ‘Greatest Enemy.'” September 3, 2025. https://www.cnbc.com/2025/09/03/4percent-rule-inflation-retirement.html
Lifeworks Advisors is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance. Any indices referenced are unmanaged and cannot be invested into directly. Index returns do not reflect fees, expenses, or sales charges. All data is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Historical S&P 500 return data sourced from: Damodaran, Aswath. “Historical Returns on Stocks, Bonds and Bills: United States.” NYU Stern School of Business, May 2025.