The 4 Percent Rule: Limitations and Alternatives

Although the 4 percent rule remains a reliable benchmark, many experts are questioning its efficacy as economic conditions evolve. RossHelen/Shutterstock

The 4 percent rule has been the rule for retirement spending for decades. According to David Blanchett, managing director and head of retirement research at PGIM DC Solutions, 61 percent of financial advisors use the 4 percent withdrawal rule.

According to this rule, retirees should withdraw 4 percent of their savings each year, adjusted for inflation, and should not run out of money in 30 years. Developed in the 1990s, this idea has saved the lives of many retirees planning their golden years. Although the 4 percent rule remains a reliable benchmark, many experts are questioning its efficacy as economic conditions evolve.

The Origins of the 4 Percent Rule

Let’s rewind a bit. According to William Bengen, who analyzed historical market data on stock and bond returns over the 50 years between 1926 and 1976, the 4 percent withdrawal rate is safe.