Are 4% Withdrawals Still Feasible In Retirement?

Are 4% Withdrawals Still Feasible In Retirement?

By: Max Valavanis, CFP®

Since 1994, many financial advisors have considered the 4% withdrawal rule gospel. A rule that could be written in stone. It’s simple; every year, a retiree can pull 4% – plus inflation – from their retirement accounts to live off in perpetuity. For decades this principle has been steadfast and a pillar of the financial planning community. However, just like life, things change.

In an economy scarred by hyperinflation and a turbulent stock market, should retirees live by a rule developed when neither was present? Currently, many portfolios continue to lose value, and the economy’s high inflation is driving down the real value of retirement funds.

The golden 4% rule was conceived in 1994 by Certified Financial Planner William Bengen. While operating his California practice, he researched the previous returns in the stock and bond markets, trying to formulate the ideal withdrawal rate to align with retirement accounts. Then in 1998, the Trinity Study truly solidified the 4% rule. The three researchers from the Texas university determined there’s a 98% chance a retiree could live 30 years off the 4% rule. 98% sounds simply amazing, but does this figure hold true today?

Unfortunately, the economy is a living and breathing entity; and with economic changes, the rulebook may need to be rewritten. Even William Bengen stated the rule was oversimplified, and more recently, in 2021, Morningstar conducted its own study. The financial services firm determined a new safe withdrawal rate to be around 3.3%. Moreover, this new withdrawal rate would only have a 90% success rate! In fact, Morningstar determined the 4% rule would be successful a measly 80% of the time. While this would be the best odds in a casino game, it isn’t prudent regarding your retirement nest egg. In three decades, the failure rate for a 4% withdrawal has multiplied by ten folds!

In finance, it is said that history does not repeat itself, but it does rhyme. Sadly, there is no “one size fits all” withdrawal rate that would benefit everyone. No one has a crystal ball to magically find the best withdrawal rate, but I can use my expertise to plan out your retirement income. If done improperly, you risk outliving your money. If you require planning your income in retirement or believe your current plan is out of date, give our office a call at 321-956-7072. We specialize in lifetime income planning for retirees and offer free consultations. 

Securities offered through J.W. Cole Financial, Inc. (JWC) Member FINRA/SIPC. Advisory services offered through J.W. Cole Advisors, Inc. (JWCA). ValaVanis Financial and JWC/JWCA are unaffiliated entities.