For over 40 years, the 60/40 portfolio paired with a 4% withdrawal rate has been considered the gold standard for retirement income.
Hi, I’m Devin Choules, founder and CEO of Choules Financial, and in this week’s Key to Yes, we’re diving into the common pitfalls and concerns around the 4% rule—and whether or not it’s still the right strategy for your retirement.
So what is the 4% rule?
Back in the 1970s, a study showed that if you withdraw no more than 4% of your portfolio annually—adjusted for inflation—you had a very high chance of not running out of money over a 25- to 30-year retirement. But it was based on a portfolio made up of 60% equities and 40% bonds.
Here’s the problem: interest rates in the ’70s and ’80s were significantly higher than they are today. Even though we’re currently at a 25-year high in rates, they’re still much lower than they were back then. That raises concerns about whether a traditional 60/40 portfolio can generate the returns needed to support a 4% withdrawal strategy.
And many retirees aren’t actually invested in a true 60/40 portfolio. So if you’re using the 4% rule, but your allocations don’t match that structure, it may not work as intended.
There are other factors, too.
What if interest rates go lower again? What if your lifestyle changes and you want to spend more early in retirement? One flaw with the 4% rule is that it assumes you’ll spend the same inflation-adjusted amount every year for the rest of your life. But that’s not how most people spend in retirement.
From my experience, retirees tend to spend the most in the first 5 to 10 years—what we call the “go-go years.” Then, spending usually drops in the slower years. Your plan needs to account for that pattern, not just assume a flat withdrawal rate.
So what are the alternatives?
You need a strategy that can adjust based on market conditions, interest rates, your spending patterns, and tax laws. One major factor to consider is Required Minimum Distributions (RMDs). While RMDs start around 4%, they increase as you age, which can force you to withdraw more than planned and increase your tax burden.
That’s why having a proactive tax strategy matters—so you’re not forced to take too much from tax-deferred accounts and end up blowing up your plan.
We also help clients build flexible spending plans. That way, you can enjoy those go-go years while still protecting your long-term financial security as your needs change later in retirement.
All of this is why we build written retirement income plans—custom strategies that reflect your specific goals, resources, and timing.
This is critical because studies show that 64% of retirees fear running out of money more than they fear death itself. That’s according to Yahoo Finance. Think about that—more than half of retirees are more afraid of living too long than of dying, simply because they don’t feel financially prepared.
That fear disappears when you have a solid plan in place. You don’t need to wonder whether the 4% rule still works—you need to know what works for you.
If you’re unsure whether your withdrawal strategy is sustainable, or if you’re in the right investment mix, or if your plan is built to adjust with time—let’s talk.
We can help you build a plan, update it each year, and make sure you’re always on track.
That’s this week’s Key to Yes. As always, make sure to like, subscribe, and follow. Thank you so much—we’ll see you next time.
