Is the 4% Safe Withdrawal Rate In Retirement Dead?

This retirement article is original content written by Manchester, CT Financial Advisor Thomas Scanlon, CFP®, CPA.

Safe with lock in the shape of a house.

What is the 4% Rule?

Bill Bengen, now a retired Financial Advisor, put forth the 4% ‘Safe’ Withdrawal Rule in the Journal of Financial Planning in 1994. The 4% Rule essentially provides a useful rule of thumb that says retirees can withdraw 4% from their investment portfolio the year they retire. This amount can then be increased annually by the rate of inflation.  Hypothetically, if the portfolio had about 50% stocks and 50% fixed income, using the 4% rule, in theory the portfolio should last retirees about 30 years or so.

The idea here of course is not outliving your money.

If you retired at age 65 and your portfolio lasted you 30 years that would get you to age 95.  That’s a pretty good runway. If you wanted or needed more than the 4% annually, well that could make for some very lean years later in life. 

It appears that inflation has not been something most folks have been concerned with for an extended period of time until recently. Inflation, as measured by the Consumer Price Index (CPI), surged 6.8% in November, 2021. This was the highest rate since 1982, almost 40 years. The so-called Core Consumer Price Index, which excludes food and energy prices, rose 4.9% from a year ago. 1)  Jerome Powell, Chair of the Federal Reserve, had indicated that inflation is “transitory”, or temporary.  He has since backed off from this narrative. In other words, inflation will be with us for some period of time going forward.

With hindsight, clearly we should have been focused on two major areas hiding in plain sight, healthcare and higher education.

According to the U.S Bureau of Labor Statistics, prices for health insurance are 71.67% higher in 2021 than in 2005, an average increase of 3.44% per year.

One of the best lines back when Obamacare was initially being proposed was, “If you think healthcare is expensive now, wait until it’s free.”  True that.

The inflation rate in higher education makes inflation in healthcare look like the Junior Varsity team.  The ten year historical rate of inflation has been about 5%. 2) The slow but consistent rise in the cost of higher education has been insidious. Oh, by the way, it appears everyone didn’t exactly pay cash for their college degree, if they even got one.  Some students (and parents) borrowed some money. Apparently, they didn’t know about the 5 Reasons to Fund a 529 College Savings Plan. The net result of all of this borrowing is that student loan debt is up to about $1.73 Trillion.  Yes, that’s with a T. That’s up from $833 Billion in 2010. 3)  Up more than double in just over a decade. Not in a good way but wow!

Due to the Pandemic, President Biden has put a hold on student loans being required to be paid.  Recently he kicked the can down the road again. Now borrowers can stay in deferment until May 1, 2022.  There are several competing proposals to forgive student loans.  The least amount to be forgiven of $10,000 was proposed by President Biden, other proposals go up from there.

By the way, there is no ‘forgiveness.’ If one of these proposals passes it’s merely transferring the obligation to the U.S. Taxpayers.

What this means is don’t use the government’s figures for inflation.  This number means nothing to you individually. I notice our family does eat.  We also use energy, although we are driving significantly less during the pandemic.

You need your own personal inflation index focused on the Big Three:

  • Housing
  • Higher Education
  • Healthcare

If you own a home, you really don’t need to be very concerned about inflation as it relates to real estate. You are already in the game.  It’s important to understand housing at 33%, is one of the larger components of CPI. It’s also 40% of the Core CPI. 4)  Keep in mind; this is The Last Bidding War for Homes.

If your children are now adult children (at least on paper) again, inflation in higher education should also not be a concern to you.  Healthcare…that’s a different story. We all need to be concerned about inflation in Healthcare.  Unfortunately there is no escaping this one. 

What May Have Caused its Death?

The short answer is inflation, interest rates and expected stock market returns going forward. As we mentioned above inflation, absent in healthcare and higher education, has been muted for an extended period of time.  This has really changed due to the Pandemic. If inflation persists at these high levels it’s difficult to envision retirees using the 4% rule and increasing it by the inflation level annually.  This does not appear to be ‘safe’ and would likely cause your portfolio to be completely drained well before the 30 years it was originally designed for.  This would not be a good thing.

The 10 Year Treasury yield was 5.75% in 1994.  In early 2022, the 10 Year Treasury is 1.67%.  In other words, the yield for the 50% of the portfolio you have in fixed income is almost 70% less. Yikes! Although they are still exceptionally low, interest rates are expected to rise.  The stock market returns have been off the charts during the current Bull Market. The S&P 500 Index set seventy record highs in 2021. Returns will eventually regress to the mean.

Why does it Matter?

It clearly matters in spades for pre-retirees and retirees. Many folks are shocked when they hear about the 4% rule for the first time. Some have told me, “So, I can take out $40,000 a year?” No, that’s not what I said. I said 4%. Well, I guess if you had $1 million, you could take out $40,000!

To determine how much you would need to retire, reverse engineer the 4% rule. Estimate what you need in retirement, minus your Social Security Benefits and any pension, if applicable and multiply by 25. If you needed $50,000 a year, you would need to have $1,250,000 ($50,000 times 25) saved.  

Keep in mind, going forward, most retirees sole source of guaranteed fixed income is their Social Security Benefit. Back in the day, many retirees had a three legged stool for retirement.  The first leg on the stool was their pension plan benefit.  Your father or grandfather would go to work for a company and, perhaps, spend their entire career there.  I know, it sounds strange and I’m dating myself.  Stick with me here. Back then, if you stayed with the company long enough you would vest and become eligible for a pension when you retired. This was the first leg on the stool.  The second leg on their retirement stool was their Social Security Benefit.  Finally, the third leg on the stool was their personal savings.

If Capital One (COF) was to ask them, “What’s in your wallet?” Imagine that, they would say money!

It didn’t hurt that your grandparents had one of everything;

  • One job
  • One spouse
  • One house
  • One car

 OK, perhaps some of them had two cars but neither of them was leased!

For many in that generation the three legged retirement stool provided a reasonably comfortable retirement. Has anything changed since then?  Just a few things:     

Employer sponsored pension plans are long gone.  Unless you work for the Federal, State or Municipal government, odds are you will never see a pension.  Congratulations if you are getting a pension. Remember to count your blessings.  

If you don’t have a pension plan (like me) one leg of your three legged retirement stool just got knocked off.


Most private employers’ terminated their pension plan years ago as they determined they couldn’t afford to fund their pension plan. Many, although clearly not all, have adopted a 401(k) plan instead. Many employers will offer an employer match on their 401(k) plan.  This is a good thing for recruiting and retaining employees. With that said, even if the employer has an employer match, the preponderance of the contributions going into the plan are made by the employee. The primary funding for retirement has clearly shifted from the employer to the employee.  

Concerns about the Social Security System going bankrupt have been elevated. Benefits are expected to be paid in full until 2037, when the reserves are expected to be exhausted. 5)  

There are technically no reserves.  It’s a GIANT Cigar Box with a bunch of IOU’s in it.

With that said, I’m not as concerned about this as others may be.  Some small changes like increasing the Social Security Wage Base and extending the date of Full Retirement Age can go a long way. The other thing is seniors vote.  Sometimes they vote more than once in Chicago I’ve been told.

What is a Safe Withdrawal Rule Going Forward?

The Great Recession of 2008-2009 was absolutely brutal. The S&P 500 Index, a bellwether for the U.S. Economy, declined 49.17% from October 2007 to March 2009. 6)  

One of the government’s responses was to cut interest rates to zero to stimulate the economy.  Then they managed to artificially keep them there for well over a decade.  The sign was clear. Take risk. Investors did.

The 4% Safe Withdrawal Rule is not dead. It’s definitely different however. You should consider putting thirty months of living expenses into your cash reserve. Sell your Stocks and Bonds consistent with your asset allocation and replenish this fund annually to maintain the thirty months. You should also understand that Cash is Not Trash. The large cash reserve could allow you to ride out a Bear Market in style without disrupting your asset allocation.  Yes, there will be a Bear Market.  No, we don’t know when, how long or how challenging it will be. 

To adjust to the new normal, consider ratcheting down the fixed income exposure from the hypothetical 50% referenced earlier. Very gradually increase the stock exposure through dollar cost averaging over at least thirty months.  

As Mark Twain supposedly said, “The reports of my death are greatly exaggerated.”

  2. CNBC.Com December 10,2021
  3. FINAID.Org
  4. Blog.firstam.Com June 9, 2021
  5. SSA.Org
  6. Investopida.Com

Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Thomas Scanlon and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.