By Quantinvestor in retirement — 16 Jul 2025

The 4-Percent Rule: Can It Still Work in Low-Yield Environments?

Introduction

The 4-percent rule has been a cornerstone of retirement planning since the mid-1990s, promising that retirees could withdraw 4 percent of their portfolio in the first year of retirement and adjust that amount for inflation each year without running out of money over a 30-year horizon. But the world has changed. Government bond yields hover near historic lows, equity valuations remain elevated, and retirees live longer than ever. In this low-yield environment, many investors wonder whether the 4-percent rule is still a safe guideline or a relic of a bygone era.

What Is the 4-Percent Rule?

The 4-percent rule was popularized by financial planner William Bengen, who examined U.S. market returns from 1926 to 1992. By looking at every rolling 30-year period, Bengen found that a balanced portfolio of 50 percent stocks and 50 percent intermediate-term Treasury bonds could sustain a 4 percent initial withdrawal—adjusted each year for inflation—without exhausting funds. In other words, if you retired with $1 million, you could withdraw $40,000 in the first year, increase that amount to keep pace with rising prices, and still have money left after three decades, even in the worst historical scenarios.

Why Low-Yield Environments Challenge the Rule

The success of the 4-percent rule depends on two fundamental inputs: portfolio returns and inflation. When Bengen ran his original study, 10-year U.S. Treasury yields averaged more than 5 percent, and the Shiller P/E ratio for U.S. stocks was below 15. Today, yields on high-quality bonds barely exceed 4 percent, and the Shiller P/E is closer to 30. Lower interest rates reduce the income that bonds contribute, while high valuations may limit future equity returns. As a result, forward-looking return expectations are materially lower than in the past. The math is simple: weaker returns mean that a fixed 4 percent withdrawal consumes portfolio principal more quickly, raising the probability of depletion.

Evidence From Recent Research

Studies from Morningstar, Vanguard, and academic researchers confirm the pressure on sustainable withdrawal rates. Morningstar’s 2023 "State of Retirement Income" report suggests that a starting withdrawal rate closer to 3.3 percent is safer given today’s market conditions. Meanwhile, Vanguard’s analysis of global asset returns projects a 2.8 to 3.5 percent sustainable rate depending on asset allocation. These findings do not say the 4-percent rule must fail, but they make clear that retirees using it without adjustment face a narrower margin of safety.

Adjusting Assumptions: Inflation, Longevity, and Spending Patterns

Three underlying assumptions also deserve scrutiny:

Inflation: The original study assumed inflation averages of around 3 percent. If inflation runs hotter, a retiree must increase withdrawals more aggressively, eroding principal faster. Conversely, periods of low inflation may allow higher real withdrawals.

Longevity: A 30-year horizon once covered most retirements, but many couples now face a 40-year window. Extending retirement length without lowering withdrawals increases failure risk.

Spending Patterns: The rule presumes constant real spending, yet data show that retirees often spend more in early years, less in middle years, and more again near the end due to healthcare. Recognizing these changing patterns can lead to more efficient withdrawal strategies.

Strategies to Make the 4-Percent Rule Work Today

Even in a low-yield world, retirees are not powerless. Several adjustments can bolster the durability of their portfolios.

1. Lower the Withdrawal Rate

Reducing the initial rate to 3 to 3.5 percent dramatically improves sustainability. While this means spending less early on, it provides a larger cushion against market downturns.

2. Dynamic Spending Adjustments

Instead of blindly increasing the withdrawal for inflation each year, consider a guardrail approach. For example, if the portfolio rises significantly, boost withdrawals; if it falls 20 percent, freeze or cut spending temporarily. Research by Wade Pfau and Jonathan Guyton shows that adaptive rules can allow higher initial withdrawals with comparable safety.

3. Diversify Beyond Bonds

Traditional 60/40 portfolios rely on bonds for stability, but low yields force investors to seek other income sources. Adding dividend-paying stocks, real estate investment trusts (REITs), or high-quality infrastructure funds can increase expected returns and hedge inflation, albeit with greater volatility.

Every year you delay claiming Social Security after full retirement age, your benefit rises by roughly 8 percent. Treating delayed Social Security as a bond-like asset can justify spending more from the portfolio early on while locking in higher lifetime income later.

Alternative Frameworks

Some planners advocate abandoning the 4-percent rule entirely in favor of more sophisticated models:

Bucket Strategies: Segment assets into short-term cash, intermediate bonds, and long-term growth buckets. Spending comes first from cash, shielding growth assets during bear markets.

Floor-and-Upside: Cover essential expenses with guaranteed income sources—Social Security, pensions, or annuities—then invest remaining assets for growth. This separates needs from wants and reduces sequence-of-returns risk.

Probabilistic Planning: Monte Carlo simulations run thousands of market scenarios to estimate success probabilities. Withdrawal rates can then be tailored to target, say, a 90 percent chance of portfolio survival.

Key Takeaways

1. The 4-percent rule was built on historical data when yields and valuations differed markedly from today’s environment.

2. Lower expected returns and longer retirements tighten the margin of safety, suggesting initial withdrawals closer to 3 percent may be prudent.

3. Dynamic spending, broader diversification, and delaying guaranteed income benefits can all help maintain lifestyle goals.

4. Alternative frameworks like bucket strategies or floor-and-upside planning offer more personalized, flexible approaches than a one-size-fits-all rule.

Conclusion

The 4-percent rule remains a valuable starting point because it is simple, memorable, and grounded in empirical analysis. Yet clinging to it rigidly in a low-yield environment courts unnecessary risk. By tempering initial withdrawals, embracing adaptive spending, and diversifying intelligently, retirees can still craft a resilient income plan. The lesson is not that the 4-percent rule is dead, but that rules of thumb require context. With thoughtful updates, the spirit of the rule—balancing spending needs with portfolio longevity—can continue to guide successful retirements even amid today’s challenging markets.