The Risk of the 4% Withdrawal Rule

Shawn Plummer

CEO, The Annuity Expert

As pensions have continued to be a less common source of retirement income, it has become necessary to develop alternative retirement income approaches. Ask 100 people how much income your retirement nest egg can generate in retirement, and you will get 100 different answers. However, while there are different strategies and approaches, one rule of thumb is usually the basis from which all others are built, the 4% Withdrawal Rule.

But is Bengen’s 4% safe withdrawal rate still safe?

The 4% Rule

In October 1994, William Bengen published an article in the Journal of Financial Planning entitled “Determining Withdrawal Rates Using Historical Data.” His article set the stage for a debate many financial professionals still have today.

The study determined how many retirees could withdraw from their retirement nest egg without running out of money.

Bengen’s research concluded that for a 60-65-year-old retiree, a 50/50 allocation between stocks and bonds with a withdrawal rate of 4% of the initial portfolio value, adjusting annually for inflation, could generate retirement income for 30 years.

Today, however, researchers are beginning to rethink Bengen’s 1994 research. For example, many researchers believe a safe withdrawal rate isn’t 4%, but 2.8% or 2%, or even as low as 1.49%.



Simply put, Bengen’s research assumes that your retirement portfolio was invested in stocks and bonds, and Bengen’s assumptions did not consider today’s long period of historically low bond yields. His research also did not account for taxes, fees, or increased longevity.

The low yields drag down the potential performance of the bond portion of your portfolio lower than what Bengen assumed. And before you think that simply reducing your bond holdings will be the answer, increasing your exposure to stocks will increase your exposure to volatility, which adds a whole new level of risk to your retirement.

Challenges of Withdrawal Rates

In 2013, Morningstar published a report entitled “Low Bond Yields and Safe Portfolio Withdrawal Rates.” Its goal was to look at the impact of historically low bond yields on the success rates of different withdrawal rate strategies. Morningstar concluded that withdrawal rates would need to be significantly lower than 4% to have a high probability of success.

Alternatives to The 4% Rule

Fixed index annuities (FIAs) may be one potential solution to address lower withdrawal rates. FIAs and annuities generally can provide more guaranteed income than a pure withdrawal rate strategy. 

FIAs are designed to be long-term vehicles that offer income benefit riders, which may be offered either built-in or, for an additional cost, can provide retirees with lifetime income.

The 4% Rule vs. Annuities

To see how you can potentially address this issue, consider Bill and Jill. Bill and Jill have $1 million saved and need $40,000 a year for retirement.

4% Withdrawal Rate

Bill planned to withdraw 4% of his portfolio to generate the $40,000. However, based on recent research published by Morning Star, Bill would only have a 50% chance of having his money last 30 years. Alternately, to have a 90% chance of having his money last for 30 years, he would have to lower his retirement income to $27,000.


On the other hand, Jill elects to incorporate a fixed index annuity into her retirement strategy.

By using a portion of her $1 million to purchase a fixed index annuity, she can still reach her retirement income goal of $40,000. Plus, the income generated by the fixed index annuity can be guaranteed to generate lifetime income.

The key is that to address the many retirement risks, you may need to consider retirement products that you may not have contemplated when you were saving for retirement.

Annuities are just one of these types of products that are specifically designed to help generate retirement income.

Next Steps

So, what is the takeaway from all of this? First and foremost, depending on the 4% safe withdrawal rate to support you in retirement, you may be in for a rude awakening. Second, it’s always essential to consult with an expert when planning your retirement – someone who can help crunch the numbers and give you a realistic idea of how much money you will need to sustain your desired lifestyle. Finally, at The Annuity Expert, we believe it’s never too early or too late to start planning for retirement, so please don’t hesitate to contact us for a quote. We would be happy to help!

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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