The 4% Rule Is Dead! No It's Not!

The 4% rule isn't an endpoint, it is a starting point.

Monevator had a post describing why the 4% rule does not work. Included in their reasoning was it doesn't account for taxes and that the back tests only look at 30 year retirements when they can be longer. The "safe withdrawal rate" of 4% in the US is lower in other countries using the same process that gets us to 4% here; it was 3.36% in the UK, 1.01% in Germany and 27 basis points (yikes) in Japan.

It may not consider taxes and maybe 30 years is too short for planning purposes but I think the bigger threat to the 4% rule is that it is built on total returns from the bond market that do not exist anymore. In subsequent decades I suppose that opportunity could come back but there is no visibility for when that might happen. For anyone new, interest rates dropping from double digits to zero over the course of 30-ish years created massive gains which are built into the results underlying the 4% rule.

Despite all of that, I think there is a different and much more productive way to look at the 4% rule. It is a building block of understanding for withdrawal rates. A 4% withdrawal rate has a better than 90% probability of working out (not outlasting your money). Once you understand the basics then you are making a more informed decision about any deviation away from 4%.

The 4% rule might also be too simplistic for several reasons. The first one is that life's spending needs are lumpier than needing the same percentage every year. My wife and I bought the house we live in back in 2012. When we bought it, it needed a lot of work and we spent the money. It was a lot but made the house much easier to live in, it was worth money and the work was needed. This year we are now getting more work done. It is fairly extensive but much less than seven years ago. Large outlays like this every few years, ten years, whatever are very real life things and not extravagances but in this case protecting our shelter and our asset (the value of the house). If you are spending a lot of money every year like this then you might run into problems but hopefully your financial/retirement plan can withstand these as occasional expenditures.

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