Weekend Reading – Rethinking the 4% rule edition

Weekend Reading – Rethinking the 4% rule edition

Welcome to a new Weekend Reading post: my rethinking the 4% rule edition.

It’s nice to be back publishing these posts (I was off last weekend on vacation).

Before this Weekend Reading theme, a reminder about some latest posts on my site and my brother-site Cashflows & Portfolios:

I recently surpassed a new dividend income milestone.

I shared a list of many great retirement case studies here.

I’m giving away another book: The Psychology of Money.

At Cashflows & Portfolios, we’re giving away a copy of Balance by Andrew Hallam.

Rethinking the 4% rule edition

Should we all rethink the 4% rule?

I believe so.

In a few posts on my site, I’ve long since argued that the 4% rule (while a good starting point), is hardly a retirement drawdown plan to trust. There are a few key reasons why:

1. It might be too conservative. Yup. Depending on your time horizon, even if it is 30-years, remember depending on stock returns…the 4% rule was founded on the worst case scenario: a withdrawal rate of about 4.15% and rounded down to 4%. That withdrawal rate worked “in the worst historical market sequence…”. Mapped forward by guru Michael Kitces, even if you retired on the eve of the GFC (Great Financial Crisis 2008-2009), thanks to 10-year+ bull market that followed you’d still be WAY ahead. In fact, Michael and his team have done more work in recent years. They’ve replicated the Bengen study. In a whopping 50% of the time, using the 4% safe withdrawal rate you will finish not just WAY ahead but with almost X3 your wealth on top of a lifetime of spending using the 4% rule.

4% rule Kitces

Reference: Check out the outstanding Michael Kitces study on the 4% withdrawal rule – that shows the extraordinary upside potential in sequence of return risk.

2. Bonds don’t work anymore. Well, that’s not entirely true. Bonds in your portfolio (IMO) can be very useful for the following reasons:

  • as a hedge for/to ride out stock market volatility.
  • to help rebalance your portfolio (with equities).
  • to cash-in when spending is essential since cash is king for near-term spending.

Reference: Why would anyone own bonds right now???

Why would anyone own bonds now?

When Bengen published his study in the 1990s, bonds on their own delivered much higher returns. This is hardly going to be the case as we enter a long-term era of a. slowly rising interest rates and b. potentially higher inflation. Owning a large % of bonds in your portfolio is going to get eaten alive…

Inflation higher, rates to nowhere edition - Weekend Reading

Also, it’s important to remember that Bengen’s “safe” withdrawal success rate of 4% is based on just U.S. history. I believe it is poor logic to extrapolate both U.S. history going-forward COMBINED with ultra-low rates AND higher inflation today for any prospective retirees including those in Canada.

I guess like potato chips, the 4% rule is tempting and tasty to latch on to but devouring it blindly doesn’t do you any good.

3. Your plan, your future.

1-page financial plan

Personal finance is of course, personal.

That means your financial plan is yours and yours alone. I can’t tell you what your mix of stocks and bonds should be. I can’t tell you what your desired spending needs in retirement are. I can’t tell you if the stock market with thrive or sink in the coming years. I simply don’t know.

I can say with 100% certainty that depending on your time horizon, spending needs, tolerance for risk, appetite for wealth preservation, gifting, estate planning and more – and I can help you here – your financial drawdown plan must be very personal to you.

That means your 4% rule could be/should be 2.5% or 5.5%, or higher, or variable in between depending on a host of factors including hedging any sequence of returns risk.

Even Bengen, if you read his report, has some words of caution for you!

4% rule

Bengen noted in his 1994 study:

“Therefore, I counsel my clients to withdraw at no more than a four-percent rate during the early years of retirement, especially if they retire early (age 60 or younger). Assuming they have normal life expectancies, they should live at least 25-30 years. If they wish to leave some wealth to their heirs, their expected “portfolio lives” should be some longer than that. “

Bengen goes on to say:

“If the client expects to live another 30 years, I point out that the chart shows 31 scenario years when he would outlive his assets, and only 20 which would have been adequate for his purposes (as we shall see later, a different asset allocation would improve this, but it would still be uncomfortable, in my opinion). This means he has less than a 40-percent chance to successfully negotiate retirement–not very good odds.”

To paraphrase, Bengen’s study was relevant to 30 years in retirement. Not 35 years. Not 40 years and certainly not 50 years like any early retirees might desire.

Read more here: Why the 4% rule doesn’t work at all for FIRE.

In summary, the 4% rule, while interesting, catchy and likely a nice starting point – becomes barely relevant to you when you actually dig into your own numbers. 

Keep that in mind anytime you see an article on this subject!

More Weekend Reading…

A fine post by Fritz Gilbert, from Retirement Manifesto fame, who also questionned the 4% rule recently on Jon Chevreau’s site.

Related reading:

From Vanguard – updating the 4% rule for early retirees.

Read on about Wade Pfau’s very smart expert take on the 4% rule here.

Canadian MoneySaver interviewed author, speaker and former banker Larry Bates (author of Beat the Bank) recently.

You can Beat the Bank like Larry does and invest like he does here.

Beat The Bank like Larry Bates

Andrew Hallam did some fine work in his latest book, Balance, and shared why some FIRE devotees really miss the mark when it comes to their goals in this article.

Nick Maggiulli at Of Dollars and Data told us: you’ve been thinking about inflation all wrong.

I like this thinking which is aligned with mine:

“So what does this mean for you? If you want to protect your finances against inflation you should:

  1. Have a higher savings rate
  2. Own income-producing assets that tend to rise with inflation

By having a higher savings rate, you need less of a rise in income to offset future changes in prices (i.e. you have a bigger buffer against future inflation). And by owning income-producing assets such as stocks, farmland, and real estate, your wealth should keep pace with inflation (to some degree) over the long-run.”

Great stuff Nick, these were my thoughts on inflation here.

MoneySense highlighted some budget impacts for all of us.

What’s up with balanced portfolios in 2022? Dale Roberts shares that and more.

Tawcan is flying with his dividend income.

I mean, look at how other investors are doing with their dividend income??? Wow. You go John!

How on earth did John get there?

A combination of this stuff:


Save, invest, earn


Have a great weekend!


My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.

7 Responses to "Weekend Reading – Rethinking the 4% rule edition"

  1. Mark

    Can you tell me how firm you are about rebalancing your portfolio? I generally try to keep my stocks around 5% of my total portfolio but I have a couple of stocks that have and continue to do well. Analysts on my TD site continue to recommend them as a buy. I have Altagas and it is getting close to 10% of the portfolio value. It also pays a good dividend. Should I sell some and get back to 5%?

    1. Great question Terry. I tend to rebalance my portfolio by buying some lagging assets.

      For example, in 2021, utilities weren’t doing well, CNR was in my opinion, down, among others like ATD.

      So I bought those.

      Most are up from then in 2022.

      Banks like EQB seem to be beaten up a bit so buying that now. An update coming 🙂

      In terms of letting winners run, I’m fine with that. I have a few of those and I also have a “5% rule” whereby I try to keep any one stock to ~5% (or not much more) of any overall portfolio. That said, I don’t automatically sell anything if it crosses 5%. 10% or more, yes, I might consider selling some individual stock just in case.


      Hope that helps a bit.


  2. When I see this 4% stuff it begs the question – Four Percent of what?
    Not my CPP/QPP. Not my OAS, not my company pension, not my RIF, not my LIF
    Those are all pretty well set in stone or subject to mandatory withdrawal rates which, if you are over 65, are higher than 4%.
    I posit that for most people the 4% rule has absolutely no relevance because quite simply they only have the above mentioned sources of revenue. If they have all of them!
    The only time you get to exercise the 4% rule is through a TFSA or non-registered investments. And even then I can not quite see someone selling off 4% of their rental apartment. I would venture that if you are obliged to dip in to your TFSA then you may have a financial problem looming in the future.
    So hopefully the 4% rule or higher are non-starters and you just need to understand your spend rate versus your income rate. Then figure out how much you need to live the life you want. Hopefully not in excess of your revenue.
    As to myself, CV-19 has reduced spending over the last couple of years so I am fortunate to be able to set aside some funds to generate more dividends.
    Will be getting out a bot more this year so vacation/entertainment will be higher. But that is what it is meant for – to enjoy life. I am fortunate to be able to do this.


    1. Ricardo: you are very fortunate from what I know…

      I would argue the only time any 4% rule makes sense is during any year whereby you have already figured out what your withdrawal rate for that year should be – and it happens to be 4% 🙂

      Life is not a straight-line and nor should any drawdown plan. That makes no sense.

      To your point: “…hopefully the 4% rule or higher are non-starters and you just need to understand your spend rate versus your income rate.”

      Thanks for your thoughtful comment!

    2. I consider 4% rule as a start point for retirement planning. Once your investable assets is around yearly expense * 25, it’s time to seriously consider when and how to retire. Once retired, I don’t think anybody really follow this rigidly.


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