Written by Jonathan Vance, CFP®, EA
If you’ve read online about personal finance in the past, you likely already know what the 4% rule is.
If you’re part of the FIRE (Financial Independence, Retire Early) community, you may note that the 4% rule is the main driver of determining your FIRE number. Which is to take your annual expenses and multiply them by 25 in order to arrive at the estimated amount of assets you’ll need to be financially independent and retire.
Why multiply by 25? Well, because 1/25 is… 4%
But seemingly more and more, people tend to question the 4% rule.
I’ll aim to answer each of those questions and more in the remainder of today’s post.
I assumed at the beginning of this post that you already knew what the 4% rule is, but in case you don’t, here is a brief explanation.
In 1994, William Bengen published research in the Journal of Financial Planning that backtested historical market data. He wanted to find a reasonable safe withdrawal rate from a retirement portfolio that would prevent a retiree from running out of money before the end of their life expectancy.
In his research, he concluded that a retiree could take 4.15% out of their portfolio in their first year of retirement. They could then increase that dollar amount each subsequent year by the consumer price index, or CPI, regardless of whether the portfolio value was higher or lower the following year, and never run out of money.
His research assumed the retiree held a portfolio of 50% US Large Cap Stocks and 50% Intermediate Term US Government Bonds. He found that, across all historical retirement time periods beginning 1926 to 1963, this course of action would have lasted for at least 33 years, even in the absolute worst case scenario.
Bengen's research is incredibly helpful and has had a massive impact on simplifying financial planning. However, anytime broad research is conducted, there are almost always improvements to be made when applying it to highly individualized contexts.
Here are some immediate observations from this research as it applies to today’s retirees.
In other words, the 4% rule is directionally helpful as a starting baseline, but I argue that context-driven, individualized retirement income plans generally provide better recommendations for real-world retirees.
As I mentioned, a beginning withdrawal rate of 4.15% was mathematically safe even in the worst case scenario from Bengen’s research, but the average safe withdrawal rate was closer to 7%.
Let’s put that into real world terms by looking at an example client, who we will call Ron and Tammy Swanson.
If Ron and Tammy have a combined $1,500,000 in 401(k)s on their first day of retirement and follow Bengen’s safe withdrawal rate exactly, they can take $62,250 per year. That breaks down to just under $5,200 per month from their retirement portfolio in 2026. They will then increase it each year by inflation so that their purchasing power stays the same over time.
We will assume a nice, rounded 10% in total federal and state taxes for Ron and Tammy, meaning they get to spend just under $4,700 of their monthly income after paying taxes.
Easy enough. They just need to stick to the plan for the long haul and they are good to go.
But as you have probably already observed, what happens if we try to use that 7% number from Bengen’s average scenario?
That would give Ron and Tammy:
That is a massive difference. The gap between the safe withdrawal rate and the average withdrawal rate is $3,200 per month in spending.
That difference could significantly alter how they go about their day-to-day lives. It impacts everything, including:
Given that the difference between “safe” and “average” makes a tangible, real difference in Ron & Tammy’s everyday life, I don’t think they should just settle for safety without further exploring this topic.
Let's add some more facts about Ron and Tammy as we continue getting to know them. We will assume they are both 65 years old and have made the choice to delay Social Security benefits until they turn 70.
Once those benefits begin, their combined payments will total a nice, even $4,000 per month on a net after tax basis.
Now let’s look at how the 4% rule actually works in their situation:
At this point, Ron and Tammy are likely to question this way of thinking. Why should they wait around for five years following the 4% rule only to have their income almost double overnight? Are they just going to start spending significantly more when they turn 70? Will they drastically reduce their portfolio withdrawals at that point?
It is simply not a very practical scenario.
The same problem applies if they have a pension or other income sources like a rental home or part time consulting. Even though the 4% rule is easy to conceptualize, it is also easy to see how using it in real life ends up bringing up more questions than answers.
Before I get into the math, you may already know where I am going with this simply by doing some mental math on Ron and Tammy’s situation.
What if, instead of taking 4.15% every single year and adjusting that amount annually for inflation, they decided to level their income by doing something like this?
By taking the midpoint of $4,700 and $8,700, they decide that they are going to spend a constant, inflation-adjusted $6,700 per month.
In doing so, they will actually start with a withdrawal rate of closer to 6% instead of 4.15%. However, they know that they are only going to need to keep this higher withdrawal rate for the next five years or so before Social Security kicks in.
Once they start their Social Security benefits, they can expect their portfolio withdrawal rate to drop beneath what they would have otherwise spent with the 4.15% beginning withdrawal rate, adjusted for inflation.
And yet again, you may find yourself asking, "Wait, can they spend even more?"
After all, Bengen’s research found that the average safe withdrawal rate was closer to 7%. Why should Ron and Tammy feel the need to reduce withdrawals after they begin taking Social Security? And should they be taking even more than 6% over the next five years?
The answer is maybe, and there is a common statistical analysis used by CFP® Professionals to better answer that question.
Without getting too lost in the details, Monte Carlo simulations are broadly used in financial planning to answer the exact question proposed above: "How much can I realistically spend from my retirement savings per year without posing a real threat to running out of money before I run out of life?"
The beauty of using a Monte Carlo analysis in tailored financial planning is that you do not have to rely on the generic baseline assumptions used to arrive at Bengen’s 4% rule. Instead, you can customize the data to your unique situation, including:
A 4% rule of thumb could actually be too conservative or too aggressive for your situation, and a Monte Carlo simulation is one of the best ways to find out.
There is a lot of data that goes into these simulations, so it is vital to understand the exact assumptions being used, including rates of return, volatility, inflation, and spending adjustments. You could easily have one financial planner tell you that you are good to go and another one panicking that you need to spend less. It all comes down to the assumptions.
In either case, most financial planners will feel at ease if you transition into retirement with a Monte Carlo simulation score of at least 80% to 95% on your first day. Stated otherwise, in at least 800 to 950 out of 1,000 various market trials, your plan continued to have at least $1 leftover by your date of death.
However, starting with a high probability of success and staying with a high probability of success throughout retirement are two entirely different things, which brings us to our next section.
There are two main ways your plan’s health can get out of whack over time:
Of course, the first scenario is what scares most of us, but the second option should not be ignored.
If you hit a fortunate sequence of returns early in retirement, your spending capacity towards mid-to-late retirement may be higher than you initially expected. This could allow you to do more traveling, spending, and giving than you originally thought possible.
There is a real case to be made for continually monitoring your plan to watch out for both types of retirement plan failure.
One way to handle this is simply to monitor your probability of success continually to ensure it remains within a set range, such as 80% to 95% at all times. Another increasingly popular strategy is to plan ahead for variable spending by using defined guardrails, a floor and ceiling strategy, or similar.
The main advantage of variable spending methods is that they better address both types of retirement plan failure compared to a simple, rigid inflation-adjusted strategy.
Risk-based guardrails have relatively simple functionality. First, you build your base retirement plan using a broad set of assumptions. Next, you back into whatever level of spending yields an initial probability of success, such as 80%.
Then, you set some rules, or guardrails, such as:
As long as the plan remains between the upper and lower guardrails, you continue to follow a simple, inflation-adjusted spending strategy.
The guardrails used above are just examples. You could set your beginning point and both guardrails to be more conservative or more aggressive.
However, the functionality and overlying concepts remain the same. By building in upwards and downwards adjustment rules in advance, you hedge against both types of plan failure much better than you would with no rules at all.
Similar to guardrails, floor and ceiling spending rules define both an upper and lower spending limit to work from. The methodology is slightly different. With a floor and ceiling approach, you begin with a set level of spending and define your boundaries based on percentages of that original number.
For example, your rules might look like this:
I will not continue to beat my drum here because the core idea and practicality are very similar to guardrails or another variable spending method. Both approaches aim to protect your portfolio during downturns while building in expected spending increases when things are going well.
The 4% rule isn’t “right” or “wrong” in 2026, it’s still an excellent rule of thumb and can be great for accumulators as they target their eventual retirement nest egg.
However, for those nearing retirement or who are already in the withdrawal phase, I advocate at least considering a more tailored withdrawal approach than simply relying on the rules of thumb.
As we saw with Ron and Tammy, forcing a static withdrawal rate onto a changing retirement blueprint can leave you unnecessarily cash-strapped in your early retirement years. Though it’s a nice “safe” threshold, it may cause you to underspend and miss out on otherwise desired life experiences.
By upgrading from a static rule of thumb to the modern strategies we discussed, you may find yourself with a higher early retirement paycheck than a simpler approach may have called for.
After all, the goal is generally not to simply make the money last, but to also maximize the life you get to live with it.
If you’d like to have a conversation about further tailoring your retirement spending plan, click here to get started.
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