Why the 4% Retirement Rule Will Bankrupt You: The Math They Don’t Teach – Outdated advice that’s costing retirees!)
You’ve saved for decades. You’ve built a solid retirement nest egg. And now you’re ready to follow the famous 4% rule that everyone talks about.
Here’s the problem: The 4% rule might destroy your retirement.
Most retirees don’t know this. They think pulling out 4% of their savings each year is safe. It’s not. This 30-year-old rule is based on outdated math that doesn’t work in today’s world.
Recent research from Morningstar shows the “safe” withdrawal rate has dropped to just 3.7%. That’s down from 4% in 2024 and represents a significant shift in what experts consider sustainable. Even worse, the creator of the 4% rule himself now says it should be 4.7% – but only with a more diversified portfolio than most retirees have.
But the real problem isn’t just the percentage. It’s that the 4% rule ignores seven major risks that could wipe out your money. These risks are bigger today than when the rule was created in 1994.
In this article, you’ll learn exactly why the 4% rule fails. More importantly, you’ll discover better strategies that let you spend more money safely in retirement.
Let’s start with the first way this “safe” rule could bankrupt you.
Reason #1 – The 4% Rule Was Built for a Different World
The 4% rule isn’t some natural law. It’s just one man’s research from 1994.
Financial planner William Bengen created it by looking at stock and bond returns from 1926 to 1991. He found that a retiree could withdraw 4% in their first year, then adjust for inflation each year after. In the worst historical cases, the money would last 30 years.
That was 30 years ago. The world has changed.
Bond yields were much higher then. In 1994, you could get 6-8% on safe government bonds. Today, bond yields are much lower, which reduces the income your portfolio can generate. This breaks the math behind the 4% rule.
People live longer now. A healthy 65-year-old today has almost a 50% chance of living past 90. That’s not 30 years of retirement. It’s 25-30 years minimum, and often much more. The 4% rule wasn’t designed for 35 or 40-year retirements.
Market conditions are different. Morningstar’s 2025 research uses forward-looking market assumptions, not just historical data. Their analysis shows that future returns will likely be lower than in the past.
Here’s what this means for you: A $1 million portfolio following the old 4% rule gives you $40,000 in year one. But Morningstar’s current research suggests 3.7% is safer – that’s $37,000 instead. You’re already $3,000 short in year one.
The rule assumes a perfect 50/50 stock and bond mix. Most retirees don’t have this exact allocation. If you’re more conservative with 30% stocks and 70% bonds, or more aggressive with 80% stocks, the 4% rule doesn’t apply to you.
It ignores taxes completely. The rule doesn’t account for taxes you’ll owe on withdrawals from traditional IRAs and 401(k)s, or investment management fees that eat into your returns. Your real spending power is much less than 4%.
The bottom line: The 4% rule was built for a world of higher bond yields, shorter retirements, and different market conditions. That world doesn’t exist anymore.
Reason #2 – Sequence of Returns Risk Will Destroy Your Portfolio
This is the hidden killer that most retirees never see coming.
The sequence of returns risk means that when you get bad market returns matters more than the returns themselves. If you retire right before a market crash, you could run out of money years earlier than someone who retires right after a crash – even if you both get the same average returns over time.
Here’s a real example: Two investors start retirement with $1 million and withdraw $50,000 per year (adjusted for inflation). Investor A faces a 15% loss in years 1 and 2, then 6% gains. Investor B gets 6% gains first, then the 15% losses later. Investor A runs out of money in year 16. Investor B’s money lasts until year 25.
Same total returns. Same withdrawals. But the timing made a 9-year difference.
Why this happens: When markets crash early in retirement, you’re forced to sell more shares to get the same dollar amount. Those shares are gone forever. They can’t recover when markets bounce back.
The first five years of retirement are the “danger zone,” according to Morningstar research. If you get hit with bad returns during this period, the damage is often permanent.
The 2022 example: Retirees who started in 2022 got crushed. Stocks fell about 18%. Bonds fell 13%. Retirees following the 4% rule still had to withdraw their inflation-adjusted amount while their portfolios were shrinking.
Research shows that a 15% portfolio loss in your first year, combined with a 3.3% withdrawal, increases your odds of running out of money by six times. Six times more likely to go broke.
The 4% rule makes this worse. The rule tells you to keep withdrawing the same amount no matter what happens in the market. Bad year? Still take out 4% plus inflation. Terrible year? Same thing. This guarantees you’ll be selling low when you should be preserving capital.
Think about someone who retired in January 2022 with $1 million. By the end of 2022, their portfolio might be worth $750,000. But the 4% rule says they should still withdraw about $42,000 in 2023 (4% plus inflation). That’s now 5.6% of their remaining portfolio.
This creates a death spiral. High withdrawals from a shrinking portfolio mean less money available for future growth. Even when markets recover, you don’t have enough left to benefit.
The math is simple but deadly: Withdraw too much too early, and compound growth can’t save you.
Reason #3 – Inflation Is Silently Eating Your 4% Rule Alive
The creator of the 4% rule calls inflation “the greatest enemy of retirees.” Here’s why he’s right.
The 4% rule assumes inflation will be steady and predictable. It’s not. Inflation comes in waves, and the timing of high inflation periods can destroy your retirement just like bad market returns.
Recent inflation destroyed 4% rule followers. From 2021 to 2024, inflation hit levels not seen in 40 years. It peaked at over 9% and stayed above 5% for extended periods. If you were following the 4% rule, your $40,000 withdrawal in 2021 needed to become $47,000+ by 2024 just to buy the same things.
But your portfolio probably didn’t grow fast enough to support that increase.
Healthcare inflation is even worse. Healthcare costs grow 2-3% faster than general inflation every year. As you age, healthcare becomes a bigger part of your budget. The 4% rule doesn’t account for this acceleration.
Geographic inflation varies wildly. If you live in Florida or Texas, your housing costs might be skyrocketing faster than national averages. The 4% rule uses national inflation numbers that might not match your reality.
Here’s what “sequence of inflation risk” looks like: Two retirees with identical 30-year retirements might have completely different outcomes based on when high inflation hits them. Early high inflation is much more damaging than late high inflation.
Social Security doesn’t keep up. Social Security’s cost-of-living adjustment for 2025 is 2.5%. But if your real costs are rising 4-5%, Social Security is falling behind. This puts more pressure on your portfolio withdrawals.
The 4% rule’s inflation adjustment is too simple. It assumes you can just add last year’s inflation rate to this year’s withdrawal. But what if inflation was 8% last year and your portfolio lost 15%? You’re supposed to withdraw 8% more from a portfolio that’s 15% smaller.
Real example: Let’s say you started 2022 with $1 million and planned to withdraw $40,000. By the end of 2022, your portfolio might be worth $800,000 after market losses. But 2022 inflation was about 6.5%. The 4% rule says you should withdraw $42,600 in 2023. That’s 5.3% of your remaining portfolio – much higher than the “safe” 4%.
Deflation is also dangerous. The 4% rule assumes you’ll always adjust upward for inflation. But what if we get deflation? The rule doesn’t tell you to reduce withdrawals. You could be taking out too much during deflationary periods.
The reality: Inflation isn’t steady, predictable, or uniform. The 4% rule’s simple approach to inflation will get you in trouble.
Reason #4 – Your Portfolio Mix Is Probably Wrong for the 4% Rule
The 4% rule only works with exactly 50% stocks and 50% bonds. If your portfolio is different, the rule doesn’t apply. Most retirees get this wrong.
If you’re more conservative, the 4% rule is too aggressive. Let’s say you’re nervous about stocks and keep 70% bonds, 30% stocks. Your portfolio won’t generate enough growth to support a 4% withdrawal rate. You’ll likely run out of money faster than the rule predicts.
If you’re more aggressive, timing becomes critical. Maybe you keep 80% stocks, 20% bonds. This could support higher than 4% withdrawals in good times. But portfolios with higher stock allocations have bigger swings in cash flows and more frequent raises and cutbacks.
Bonds broke the correlation in 2022. The 4% rule assumes stocks and bonds move in opposite directions. When stocks fall, bonds should rise to provide stability. In 2022, both stocks and bonds fell together. Stocks dropped 18%, and bonds dropped 13%. The diversification benefit disappeared.
International stocks weren’t in the original model. Bengen’s updated research includes international stocks, small-cap stocks, and mid-cap stocks. His new “safe” rate is 4.7% – but only with this broader diversification. If you only own U.S. large-cap stocks and bonds like the original study, 4% is too high.
Real estate changes everything. Many retirees own rental properties or REITs. These weren’t part of the original 4% rule research. Real estate has different risk and return patterns than stocks and bonds. Your withdrawal rate should be different, too.
Cash positions matter. Smart retirees keep 1-2 years of expenses in cash. This helps avoid selling stocks during market downturns. But cash earns almost nothing after inflation. If 10-20% of your portfolio is in cash, you need the rest to work harder.
Here’s the real problem: Bengen himself now uses a much more diversified portfolio in his updated research. His new 4.7% rate assumes you own U.S. stocks, international stocks, small-cap stocks, mid-cap stocks, and bonds. Most retirees don’t have this level of diversification.
Target-date funds don’t match either. Many retirees use target-date funds that automatically adjust their stock/bond mix as they age. These funds might start at 50/50 but quickly become more conservative. As your bond allocation increases, the 4% rule becomes less appropriate.
The bottom line: The 4% rule was designed for one specific portfolio mix. If yours is different – and it probably is – the rule could be dangerous.
Reason #5 – The Longevity Problem No One Talks About
The 4% rule assumes a 30-year retirement. That’s not realistic anymore.
A healthy 65-year-old today has nearly a 50% chance of living past 90. That’s 25 years minimum, but could easily be 30-35 years. Women live even longer on average.
Early retirees face 40-50-year retirements. The FIRE (Financial Independence, Retire Early) movement has people retiring at 50 or 55. Vanguard research shows FIRE retirees need much lower withdrawal rates – around 3.3% for a 50-year retirement. The 4% rule will bankrupt early retirees.
Healthcare costs explode in later years. About 70% of retirees will need some form of long-term care, with costs averaging $60,000+ annually. The 4% rule doesn’t account for this major expense that typically hits in your 80s and 90s.
Spending isn’t flat throughout retirement. It usually has three distinct phases: Early retirement (high spending on travel and activities), mid-retirement (lower, stable spending), and late retirement (high healthcare and care costs). The 4% rule assumes you spend the same amount every year. That’s wrong.
Couples face different challenges. One spouse typically lives much longer than the other. The surviving spouse might face 5-10 additional years of expenses, but with reduced Social Security benefits. The 4% rule doesn’t help you plan for this.
Cognitive decline affects money management. As you age, making complex financial decisions becomes harder. The 4% rule’s simple approach might seem helpful, but it doesn’t adapt to changing needs or declining capacity to manage investments.
Here’s a real example: Sarah retires at 62 with $1 million. She plans to follow the 4% rule for 30 years, taking her to age 92. But Sarah is healthy and might live to 95 or 100. Those extra 3-8 years could be the most expensive of her life due to healthcare needs. The 4% rule leaves her with no buffer for this possibility.
The math gets worse over time. Even if the 4% rule works for the first 20-25 years, portfolio depletion accelerates toward the end. You might be fine at age 85 but broke at 90. There’s no safety margin for longevity.
Required minimum distributions force higher withdrawals. Starting at age 73, you must take required minimum distributions (RMDs) from traditional retirement accounts. These percentages increase with age and can be much higher than 4%. At age 85, RMDs are about 6.25% of your account balance.
The reality: Retirement could last 40+ years, not 30. Healthcare costs will spike in your final years. The 4% rule doesn’t give you enough margin for error when longevity is the biggest risk you face.
Reason #6 – Modern Market Conditions Have Broken the Math
The 4% rule was based on historical market returns from 1926-1991. But those conditions don’t exist today.
Stock market valuations are extremely high. The CAPE (Cyclically Adjusted PE) ratio shows stocks are much more expensive today than in most historical periods. High valuations historically predict lower future returns. If stocks return 6% instead of the historical 10%, the 4% rule fails.
Bond yields started from a much higher baseline. In the early 1980s, you could get 10-15% on government bonds. Even in 1994, bonds yielded 6-8%. Today’s bonds yield much less, reducing your portfolio’s income-generating ability. Lower bond yields mean the 4% rule is too aggressive.
Market volatility has increased. Modern markets swing more wildly than in the past. This creates bigger challenges for retirees who need a steady income. Higher volatility means the sequence of returns risk is more dangerous.
Currency and global risks weren’t as important in 1991. Today’s economy is much more connected globally. Currency fluctuations, trade wars, and international crises can affect your portfolio in ways that weren’t relevant 30+ years ago.
Technology disruption accelerates. Entire industries can be wiped out faster than ever before. The companies that made up the original study might not even exist anymore. This creates new types of investment risk that the historical data doesn’t capture.
Morningstar’s 2025 research specifically accounts for these changed conditions. Their forward-looking analysis shows that higher equity valuations and lower bond yields require more conservative withdrawal rates.
The interest rate environment is different. The 4% rule was created during a period of declining interest rates. Lower rates boost stock and bond prices. We might now be in a period of rising or volatile rates, which hurts both stocks and bonds.
Demographic changes affect markets. Baby boomers are retiring in massive numbers. This creates selling pressure on stocks and bonds as retirees withdraw money. The original 4% rule didn’t account for this demographic shift.
Here’s what this means: Even using the same 90% success probability that Bengen used, Morningstar’s current research shows 3.7% is the highest safe withdrawal rate. That’s 0.3% lower than the traditional rule, which might not sound like much but equals $3,000 less per year on a $1 million portfolio.
The “safe” rate keeps dropping. Morningstar’s safe withdrawal rate was 3.3% in 2021, 3.8% in 2022, 4.0% in 2023, and 3.7% in 2024. This shows how sensitive withdrawal rates are to changing market conditions.
The reality: Market conditions change, but the 4% rule doesn’t. Using 30-year-old assumptions in today’s market is a recipe for disaster.
Reason #7 – The Tax Time Bomb Nobody Mentions
The 4% rule completely ignores taxes, but taxes can cut your real spending power by 20-30%.
Most retirement money is pre-tax. Your 401(k) and traditional IRA withdrawals are taxed as ordinary income. If you withdraw $40,000 using the 4% rule, you might owe $8,000-12,000 in federal taxes alone. Your real spending money is only $28,000-32,000.
State taxes vary wildly. Some states don’t tax retirement income. Others tax it heavily. If you live in California or New York, your state tax bill could be $3,000-5,000 on top of federal taxes. The 4% rule doesn’t account for where you live.
The government makes you withdraw more than 4% through RMD rules. Starting at age 73, RMDs require you to withdraw specific percentages that increase with age. By age 80, you must withdraw about 5.35% of your traditional account balances. By age 90, it’s over 8%. These forced withdrawals often exceed the 4% rule and create higher tax bills.
Medicare surcharges kick in at higher income levels. If your retirement income exceeds certain thresholds, you pay extra Medicare premiums called IRMAA (Income-Related Monthly Adjustment Amount). These can add $2,000-4,000+ to your annual costs.
Tax rates might rise in the future. Federal and state governments face massive budget deficits. Tax rates could be higher in 10-20 years than they are today. The 4% rule assumes current tax rates will continue forever.
Roth conversions change the math. Many smart retirees convert traditional IRA money to Roth IRAs to reduce future taxes. But this creates a tax bill today and changes your asset mix. The 4% rule doesn’t help you optimize this strategy.
Here’s a real example: John has $1 million in his 401(k) and follows the 4% rule. He withdraws $40,000 in year one. After federal taxes (22% bracket), state taxes (5%), and Medicare IRMAA surcharges, his real spending money is about $28,000. That’s only 2.8% of his original portfolio, not 4%.
Investment location matters. If you have money in taxable accounts, traditional IRAs, and Roth IRAs, the order you withdraw from these accounts affects your taxes. The 4% rule doesn’t give you a strategy for tax-efficient withdrawals.
Capital gains vs. ordinary income. Money in taxable investment accounts might qualify for lower capital gains tax rates. But the 4% rule treats all money the same. You could be overpaying taxes by not optimizing your withdrawal strategy.
Estate planning affects withdrawal strategy. If you want to leave money to heirs, the tax treatment of different accounts matters. Roth IRAs are better for inheritance than traditional IRAs. But the 4% rule doesn’t help you optimize for estate planning goals.
The bottom line: Taxes can easily turn a 4% withdrawal into 2.5-3% real spending power. The rule’s complete ignorance of taxes makes it dangerous for most retirees.
Why Financial “Experts” Still Push This Broken Strategy
You might wonder: If the 4% rule is so dangerous, why do financial advisors still recommend it?
- It’s simple to sell. Complex strategies require more explanation and education. The 4% rule fits on a business card. “Just withdraw 4% per year” is easy marketing, even if it’s wrong.
- Many advisors haven’t updated their training. Financial planning education often lags behind current research. Advisors learned the 4% rule years ago and haven’t studied the newer research showing why it fails.
- Liability protection. If an advisor recommends the 4% rule and you run out of money, they can say “everyone uses this approach.” If they recommend a newer strategy and something goes wrong, they face more liability risk.
- Industry profits from simple advice. Complex, personalized strategies require more time and expertise. That means higher fees and more work. The 4% rule lets advisors manage more clients with less effort.
- Software and tools haven’t caught up. Many financial planning software programs still use the 4% rule as their default. Newer approaches like risk-based guardrails require more sophisticated software that many advisors don’t have.
- Marketing inertia. The financial media has repeated the 4% rule for decades. Changing the message now would require admitting they were wrong. It’s easier to keep promoting the familiar advice.
The result: You get outdated advice that could ruin your retirement while the “experts” protect themselves.
The Guardrails Strategy That Beats the 4% Rule
Fortunately, there’s a much better approach. It’s called the “guardrails” strategy.
Created by financial planner Jonathan Guyton and computer scientist William Klinger, guardrails allow you to start with a 5.2-5.6% withdrawal rate – much higher than the 4% rule. Even better, Morningstar research shows guardrails provide 30% more retirement income than the static 4% approach.
How guardrails work: You set upper and lower boundaries around your target withdrawal rate. If your withdrawal rate goes outside these boundaries, you make a 10% adjustment.
Here’s a simple example:
- Target withdrawal rate: 5%
- Upper guardrail: 6% (20% above target)
- Lower guardrail: 4% (20% below target)
- Portfolio value: $1 million
- First year withdrawal: $50,000
Year 2 scenario: Your portfolio drops to $800,000 due to market losses. Your planned $52,000 withdrawal (adjusted for inflation) would be 6.5% of your portfolio. That’s above your upper guardrail of 6%. So you reduce your withdrawal by 10% to $46,800.
Year 3 scenario: Markets recover and your portfolio grows to $1.1 million. Your planned withdrawal would be 4.2% of your portfolio. That’s below your lower guardrail of 4%. So you increase your withdrawal by 10%.
Why guardrails work better than the 4% rule:
Guardrails protect against sequence of returns risk by requiring spending cuts during bad markets, preserving capital for future growth. The 4% rule forces you to keep withdrawing during downturns.
Guardrails let you benefit from good markets by allowing spending increases. The 4% rule caps your upside.
99% of retirees can safely start with a 5.2-5.6% withdrawal rate using guardrails. That’s $52,000-56,000 per year on a $1 million portfolio instead of $40,000 with the 4% rule.
Real-world example: A 64-year-old couple with a $4 million portfolio wanted to spend $220,000 per year. The 4% rule would only allow $160,000, giving them a 69% chance of success. Using guardrails, they could spend the full $220,000 with a 99% success rate.
The trade-off: Guardrails create some variability in your income. Some years you’ll need to cut spending by 10%. In other years, you can increase it by 10%. But this flexibility lets you spend much more money overall.
Setting your guardrails: Most experts recommend 20% above and below your target rate, with 10% adjustments. But you can customize these based on your risk tolerance and spending flexibility.
The key insight: Dynamic strategies that adjust based on market performance are much safer than static rules like the 4%. You reduce risk by being flexible, not by being rigid.
Modern Withdrawal Strategies That Actually Work in 2025
Beyond guardrails, several other strategies outperform the 4% rule.
Strategy 1: Morningstar’s Flexible Approaches
Morningstar’s 2025 research shows their 3.7% “base case” is for people who never want to adjust their spending. But flexible strategies allow much higher withdrawal rates.
Their best flexible approach: Skip inflation adjustments after portfolio losses. For example, don’t increase your withdrawal after the 2022 market crash, despite high inflation. This simple change can boost your safe starting rate significantly.
Strategy 2: The Bucket Approach
The bucket strategy segments your savings into three buckets: 1-3 years of expenses in cash, 5 years in bonds, and the rest in growth investments. This protects you from the sequence of returns risk.
During market downturns, you spend from your cash bucket instead of selling stocks at low prices. Financial advisors recommend keeping 1-3 years of expenses in cash or cash equivalents for this purpose.
Strategy 3: TIPS Laddering
Treasury Inflation-Protected Securities (TIPS) can currently support a 4.4% withdrawal rate with 100% certainty. You buy TIPS with different maturity dates to create steady, inflation-protected income.
The downside: A TIPS ladder leads to full portfolio depletion in 30 years, leaving nothing for heirs. But it guarantees your money will last exactly as long as you need.
Strategy 4: Risk-Based Guardrails
Risk-based guardrails use your portfolio’s probability of success instead of withdrawal rates to make adjustments. If your plan drops below 80% probability of success, you cut spending. If it rises above 90%, you can spend more.
This approach handles complex situations better than simple withdrawal-rate guardrails. It would have required only a 3% spending cut for 2008 retirees, compared to 28% for traditional Guyton-Klinger guardrails.
Strategy 5: Dynamic Spending (Vanguard)
Vanguard’s dynamic spending approach allows a retiree with a 50/50 portfolio to withdraw 5.0% per year with the same confidence level as 4.3% using the traditional approach.
You set a “floor” (the lowest you’ll cut spending) and a “ceiling” (the most you’ll increase it). For example, a
1.5% floor and +5% ceiling means you’ll never cut spending by more than 1.5% or increase it by more than 5% in any year.
Which strategy is right for you?
- Conservative retirees: TIPS laddering or Morningstar’s 3.7% rate
- Flexible retirees: Guardrails or dynamic spending
- Retirees with other income sources: Higher withdrawal rates are safer when Social Security covers your basic needs
- Early retirees: Lower rates (3.3% or less) due to longer time horizons
The key: All of these modern strategies outperform the rigid 4% rule by adapting to changing conditions.
