For years, the “4% rule” has been repeated as if it were a law of nature: withdraw 4% of your portfolio in year one, adjust that dollar amount for inflation each year, and you “should” be fine for a 30‑year retirement. The idea is simple and comforting—but the world it was built for looks very different from the one today’s retirees face.
Today, you are dealing with longer lifespans, changing interest‑rate environments, and a much better understanding of how market sequence risk and personal flexibility affect real‑world outcomes. The 4% rule is a useful starting point, but treating it as a rule you must obey can lead to two serious problems: taking more risk than you realize, or—just as common—spending far less than you safely could.
What the 4% Rule Was Designed to Do
The 4% rule grew out of research in the 1990s, which looked at historical U.S. stock and bond returns. The basic setup assumed:
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A balanced portfolio (typically around 50–75% stocks, the rest in bonds).
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A 30‑year retirement horizon.
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A fixed real (inflation‑adjusted) withdrawal that never moved down, only up with inflation.
Under those historical conditions, starting at 4% often survived 30 years, even through periods like the Great Depression and the 1970s. That is where the rule’s appeal comes from: it feels like a single, clean number that answers the question, “How much can I take?”
The trouble is not that the research was wrong; it is that the assumptions behind it rarely match a real retiree’s life. Few people hold the same allocation for 30 years, never adjust spending, or have an exactly 30‑year horizon.
How Markets and Rates Have Changed Since the 4% Rule
The original “4%” framing was built on backward‑looking U.S. market returns. More recent research uses forward‑looking assumptions that incorporate today’s valuations, interest rates, and inflation expectations.
Morningstar’s ongoing “State of Retirement Income” work, for example, has repeatedly updated what it considers a safe starting withdrawal rate for new retirees who want a fixed, inflation‑adjusted income over 30 years and a high probability of not running out. Recent reports have suggested starting rates closer to the 3.3%–3.9% range rather than a blanket 4%, reflecting expectations for lower long‑term returns and the impact of current valuations.
The headline takeaway is simple: a rigid 4% rule may be too aggressive in some environments if you insist on fixed, never‑reduced withdrawals—and too conservative if you are willing to be flexible.
The Big Risk the 4% Rule Ignores: Sequence of Returns
One of the most important risks in retirement is sequence of returns risk—the order in which good and bad market years show up. Two retirees with identical average returns can end up in very different places depending on whether poor returns hit early or late in retirement.
When you are withdrawing from a portfolio, bad markets in the first decade matter much more than bad markets in the third. Early losses, combined with ongoing withdrawals, shrink the base so much that even strong returns later may not fully repair the damage. A rigid 4% rule, which insists you keep increasing withdrawals with inflation no matter what, essentially assumes that you will not—or cannot—adjust even if those early years are rough.
For someone in their late 50s or early 60s planning a 30‑plus‑year retirement, this is a major blind spot. A better plan builds in the ability to pull back modestly after bad years and lean in after good ones, rather than locking into one path from day one.
H2: The Hidden Problem for Careful Savers: Underspending
Most 4% conversations focus on not running out. In practice, for many careful savers in their 50s and 60s, the bigger risk is never using what they saved. When you hear “4% is safe” enough times, it is easy to internalize a much stricter message: “More than 4% is dangerous; stay below that or you might go broke.”
Research and advisory experience increasingly show that many retirees with sufficient assets underspend, especially in their early, more active years. They stick with or even undershoot something like 4%, even when their plan could support more spending or more generosity to family or charity. That can lead to:
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Missed travel and experiences in the healthiest years of retirement.
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Leaving much larger‑than‑intended balances simply because they never felt “allowed” to spend.
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Paying more lifetime tax than necessary because big pre‑tax balances are never drawn down strategically.
In other words, the 4% rule can backfire in both directions: it can be too loose for a rigid, never‑adjusted plan, or too tight for someone who is actually willing and able to be flexible.
Why Flexibility Beats a Fixed Rule
Morningstar’s updated research highlights a key point: flexibility is a powerful lever. Retirees who are willing to adjust their withdrawals—especially trimming a bit after bad markets—can often start with a higher initial withdrawal and still maintain strong odds of success.
Two main families of flexible strategies often make more sense than a rigid 4% rule:
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Guardrail strategies: You start with a target withdrawal but set “rails” that trigger small raises or cuts if your withdrawal rate (withdrawal ÷ current portfolio value) drifts too high or too low.
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Variable percentage withdrawals (VPW): You withdraw a set percentage of your portfolio each year, often tied to age and time horizon, so the dollar amount naturally adjusts with market performance.
Both approaches explicitly acknowledge that retirement is not a straight line. They give you a framework instead of a fixed rule, which is especially appealing for retirees who want to balance enjoying life now with protecting their future.
How to Use the 4% Rule the Right Way
The 4% rule still has value—just not as a commandment. Used thoughtfully, it can help you:
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Translate a nest egg into a ballpark income range. For example, $1,000,000 at 4% suggests roughly $40,000/year as a starting discussion point.
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Sense‑check whether your current savings are “in the neighborhood” for the lifestyle you want, assuming you have also considered Social Security and any pensions.
From there, your actual withdrawal strategy should be customized to you. That means considering:
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Your time horizon (a couple in good health at 62 may need to plan for 30–35 years, not just 25–30).
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How strong your income base is—Social Security, any pension, rental income, etc.
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Your tax picture, including opportunities to shift income into lower‑tax “gap years” between retirement and claiming Social Security or starting required minimum distributions.
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Your willingness to adjust—how comfortable you are with making small changes in spending when markets or life surprise you.
In short, think of the 4% rule as a conversation starter with your advisor, not a finish line.
A Smarter Way: Personal Guardrails Instead of One Number
For many retirees, especially couples in their late 50s and 60s with meaningful savings, the sweet spot is a guardrail‑style plan built around their real numbers. Instead of asking, “Is 4% safe?” the questions become:
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What is a reasonable starting withdrawal given our portfolio, Social Security timing, health, and goals?
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What upper and lower guardrails fit our comfort level—when would we agree to cut a bit or give ourselves a raise?
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How will we combine this with our “bucket” structure so we are not forced to sell stocks at the worst moments?
For example, a couple might:
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Start at a 4.5% withdrawal based on their projections.
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Agree that if their effective withdrawal rate ever rises above, say, 6%, they will trim spending by 10% for the next year.
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Likewise, if their effective withdrawal rate falls below 3.5% because the portfolio has grown faster than expected, they will give themselves a 10% raise.
This approach is still grounded in math and research, but it recognizes that your preferences and behavior matter as much as the spreadsheet.
Turning Research Into a Real‑Life Plan
For someone approaching or in retirement around Sacramento, the real question is not “What is the safe number for everyone?” It is “What does a sustainable, flexible income plan look like for us?”
That plan will typically include:
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A clear view of guaranteed income (Social Security, pensions) and how that interacts with withdrawals.
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A spending range, not just a single number, so you can adjust up or down over time.
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A withdrawal strategy that blends research‑backed rules of thumb with your comfort level and the reality of your taxes.
Using the 4% rule as a starting point and then layering in modern research, flexible spending rules, and personalized planning helps you avoid two extremes: reckless overspending and lifelong underspending. The goal is not to “win” by dying with the most money, but to live well with the money you have, for as long as you have it.
If you’re approaching retirement and want help evaluating a safe withdrawal rate, schedule a complimentary consultation with our office. We’ll quantify a sustainable starting withdrawal rate for your portfolio and show how guardrails or other flexible rules could work in your situation.