The 4% Rule: Can You Get More From Your Retirement Portfolio?

By Sean Condon, CFP®

The 4% Rule is a simple calculation to help you determine how to make sure your retirement savings last.

darts The dreaded retirement conversation is often avoided, but it doesn’t have to be.  Seventy-seven percent of adults over 40 don’t know how much they can withdraw from their retirement accounts to avoid outliving their nest egg.[1] Here we aim to provide clarity.

Fortunately, determining your safe withdrawal rate isn’t as complicated as it sounds. It all begins with a simple, yet often misunderstood, financial rule.  It’s called the 4% Rule. Let’s take a deep dive into exactly what the rule is and its effect on your retirement mindset.

What Is The 4% Rule?

When you retire, you’re essentially turning your portfolio into a paycheck. The trick is deciding how much that paycheck should be. That’s where the 4% Rule comes in. According to this simple rule, when invested with a 60% equity/40% fixed income mix, your retirement savings should last at least 30 years if you withdraw 4% per year, with that dollar amount adjusted upward each year for inflation.

So, if you’ve saved one million dollars, four percent of your portfolio is $40,000 per year.  Add in $20,000 (for example) of Social Security, or any other income, and you have a total of $60,000 to live on in retirement (adjusted for inflation each year).  Compare this income estimate to your expected living expenses and you have an idea if your portfolio can sustain your retirement.

What If the Market Provides Below Average Returns?

It’s a common concern that as soon as you stop earning money, your investments will lose value or suffer a long period of poor returns.  This concern is wholly understandable.  It takes a major leap of faith to stop making money from your work and to trust that your portfolio and the markets – which are essentially out of your control – will carry the load. However, while past performance never guarantees future results, a bit of historical background on the 4% rule may help you rest easy.

The 4% safe withdrawal rate is not based on historical averages, it is based on historical worst-case scenarios.  This is in fact the point of the 4% rule being a safe withdrawal rate.  Retirees who took out 4% each year in retirement still had money left over 30 years later if they retired on the eve of the Great Depression, the stagflationary 1970s, or any other terrible period throughout market history.

When we sit down with retirees, we can’t know ahead of time if the next 30 years will be more like the best periods, the worst periods, or the average.  So, the purpose of the safe withdrawal rate is to simply assume that every period might turn out to resemble the worst.

Significant Upside of The 4% Rule

When you plan for your retirement to occur during the worst-case scenario, the result is that you will most often end up pleasantly surprised.   In fact, over 90% of historical 30-year retirement periods result in significant growth of wealth during retirement, even while withdrawing 4% each year.  Using this safe withdrawal rate approach, two-thirds of the time the retiree finishes with more than double what they started with, and the median wealth at the end of 30 years is almost 3X starting principal. Of course, the past doesn’t predict future results.

How Can I Get More Than 4%?

Your retirement planning is not something to put on Autopilot.  Although the 4% rule was designed as an easy way to set a static withdrawal rate that will last through retirement with a balanced portfolio, it is also far from perfect, as we have seen.  After all, if the goal of retirement is to safely turn your portfolio into a paycheck, you also don’t want to pay yourself too little and sacrifice quality of life during your golden years.

Based on average returns dating back 140 years, an initial withdrawal as high as 6.5% will last 30 years in retirement.  Now we surely wouldn’t advise you to begin retirement taking 6.5% from your portfolio and hope for average over the next three decades (after all, average means you would run out of money 50% of the time). But there areways to increase the withdrawal rate above 4% when needed.

As we’ve seen, the possibility for portfolio growth to exceed a 4% safe withdrawal rates is real.  The best way to safely and confidently withdraw more than 4% is to develop a process of ongoing adjustments to your portfolio and income stream.  Specifically, there are three key elements:

  1. Guardrail Strategy
  2. Portfolio design and rebalancing
  3. Withdrawal order and asset location

 1. The Guardrail Strategy

What if you could follow a conservative plan based on the 4% rule and still be able to increase spending during bull markets?  Well you likely can, if you follow the rules of the Guardrail strategy.

When following the Guardrail strategy, you vow to follow a set of pre-determined rules which influence the amount you can withdraw from your portfolio each year. If your portfolio value declines to a point which threatens its long-term viability, your following year’s withdrawal is reduced by 10%.  Conversely, should your portfolio grow above a certain threshold, your planned withdrawal is increased, and your portfolio income is given a “raise.”

Historically, adding this pair of decision rules to a retirement scenario allowed for an initial safe withdrawal rate higher than 4% in all previous retirement periods lasting 30 years.  That does not guarantee that history will repeat itself, but if does make a strong argument that ongoing monitoring of your retirement plan can add significant value.  By committing to the upper and lower “guardrails,” you can try to ensure that your withdrawal rate efficiently matches the reality of your retirement situation. There is a drawback: you must cut back spending during times when the lower guardrail is met. However, in practice this tradeoff is more than offset by the higher initial safe withdrawal rate obtainable.

2. Portfolio Design and Rebalancing

Investment principals don’t get any better than “buy low, sell high.”  Yet this idea is much easier said than done. This is simply because it is natural for investors to feel fear and greed and to buy or sell investments accordingly – often to their own detriment.

A better approach is to invest not based on emotion, but according to a disciplined process guided by rebalancing.  The sketch below illustrates the idea simply.  Start with a general asset allocation target that aligns with your risk tolerance.  Then take what the market gives you: if an investment rises, sell a little; if it declines, buy a bit.

3. Withdrawal Order and Asset Location

Most retirees have multiple accounts including IRAs, 401(k) Rollovers, Roth IRAs and/or taxable brokerage accounts.  Knowing which accounts to withdrawal from, and when, can help you save on taxes and increase the overall longevity or your portfolio.  According to a Vanguard study[2], advisors who create a strategic withdrawal plan for their clients can add up to 1% in annual value over the course of retirement.

There is similar value to be gained in “asset location,” which is the answer to the question “what investment goes where?”  Knowing which account to use for dividend-paying stocks versus higher-turnover investments, for example, can again minimize taxes and may increase portfolio longevity.

Next Steps

The 4% Rule is a simple calculation to help you determine how to make sure your retirement savings last. But as we have seen, it is far from a one-size fits all strategy.  You can very likely gain more clarity and income with your own individualized retirement planning. At Windgate Wealth, our team of financial advisors can help you design a personalized investment plan to help you achieve your goals. You can reach us by calling (844) 377-4963 or emailing You can also book an appointment online here.


[2]Quantifying Vanguard Advisors’ Alpha, September 2016

Perritt Capital Management, Inc. is the Registered Investment Advisor for Windgate Wealth Management accounts and does not provide tax advice. Consult your professional tax advisor for questions concerning your personal tax or financial situation.

Information here is obtained from what are considered reliable sources; however, its accuracy, completeness, or reliability cannot be guaranteed. The data above is based on current laws that may change.

First published February 2019.

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