Rethinking Retirement Spending: Why the 4% Rule May No Longer Be Relevant
- Ryan A. Dunn, CFP®
- Nov 5
- 4 min read
Key Takeaways
The traditional 4% retirement withdrawal rule is outdated and often inadequate for modern retirees.
Retirement has three phases: Go-Go, Slow-Go, and No-Go years, each requiring different spending rates.
Early retirement usually comes close to the 4% withdrawal rate. Middle retirement years often see a drop in expenses. Later retirement may require significantly more for healthcare costs.
Social Security, inflation, medical expenses, and other income sources should be integrated into personalized withdrawal rate calculations.
Conventional wisdom is that retirees should draw down no more than 4% of their portfolio every year to fund their lifestyle. But with people living longer and with healthcare costs rising, the so-called Four Percent Rule isn’t viable for many retirees. We’ve found that a straight 4% distribution rate throughout retirement is often sufficient in the early years of retirement but can be stretched further in the middle and later years of retirement.
Unfortunately, most of the simple retirement calculators you find online plug in a fixed drawdown rate for your entire retirement (the default is often 4%). That can be misleading. While many calculators account for inflation, most don’t account for severe market shocks early in retirement. Most don’t account for your other sources of income such as Social Security, pensions, annuities, rental properties and dividend-paying stocks and bonds. All of these factors greatly impact a retirees’ drawdown percentage and that’s why we’re constantly discussing it and adjusting during our planning meetings. Again, volatile stock markets and inflation can have a big impact on the drawdown calculation, especially in your early retirement years. Your account value could go down by 10-15% during a bear market year, or we could have another spike in inflation. Events like these mean we might need to be more flexible in order for your plan to work over the long term.
Three Phases Of Retirement
Everyone ages differently and life circumstance change as we go through our transitions. So, you must adjust your drawdown rate for each phase.
1. The Go-Go years are the first phase of retirement. Typically, you have higher expenses in this phase as taking more “bucket list” trips, spending more time traveling to see family and spending more money on hobbies, passions and interests that you never had time for while working.
2. The Slow-Go years are the second phase of retirement. Here things start to slow down. Often, you’re not traveling as much and maybe spending more time at home. But even here, a 4% drawdown may be inappropriate because you don’t need as much income to fund your lifestyle and there’s more potential for saving.
3. The No-Go years are the third phase of retirement. Here medical and eldercare expenses start to ramp up. While you’re not traveling or dining out as much as before, your “self-care” expenses are higher, and you’ll likely need to draw down far more than 4% of your nest egg.
Many retirees, including our clients, tend to be very cautious in their golden years and the Four Percent Rule exacerbates that reluctance to spend. Most of our clients can afford to spend a lot more than they’re allowing themselves to spend. In fact, we often have to push clients to spend more money and start enjoying life more without guilt. They’ve worked hard. They’ve saved diligently. Now it’s time to enjoy the rewards of that diligence. Otherwise, you could die with a big sum of money, and usually it goes to the kids or other beneficiaries.
Bottom line: The Four Percent Rule is so general it doesn’t do a sufficient job of explaining how much money you can potentially spend in retirement. That’s where we come in. We spend substantial time developing customized retirement plans and spending plans for our clients. We “stress-test” their portfolios for thousands of different market conditions. We help clients see how well their portfolios are likely to hold up under a myriad of scenarios – including deep bear markets, periods of high inflation, even war.
We also build out different scenarios of what they might potentially spend on eldercare, medical care, continuing care retirement communities, home healthcare and more in later retirement and what their cash needs would look like under each scenario. We can even model in the impact of those later-in-life expenses if they occur just when a bear market or period of high inflation hits. Once completed, you can see the sense of relief on clients’ faces and that’s very rewarding for us as advisors.
Social Security
I know many of you are worried about Social Security remaining solvent throughout your retirement. We’re not projecting any defaults or insolvency to the program for the coming decades. Instead, we’ll likely see the full retirement age getting pushed back further or simply removing the income cap from FICA or making it unlimited. We don’t anticipate any cuts to benefits and we expect to continue incorporating full Social Security benefits into our clients’ retirement calculations and plans.
Planning For Pre-Retirees
When preparing middle-aged clients for retirement, we spend a lot of time preparing a projected cash flow schedule for them. We go through their goals and talk about what it’s going to cost to reach those goals, and then we add an inflation estimate. Then we project what their taxes are likely to be and determine what their distribution rates will be at different stages of retirement (see chart below). As you can see, the drawdown rate is NOT a straight 4% a year for 25 to 30 years. It’s less than 4% in the early years and significantly more in the later years.
Let's say a newly retired couple needs a draw of $120,000 a year ($10,000 per month) for living expenses. Also assume they expect to receive $40,000 a year ($3,333 per month) from Social Security when they must start taking it by age 70. Once they start receiving Social Security, we’ll reduce their draw to $80,000 a year from $120,000 and that's going to change their distribution rate.
Conclusion
The 4% rule may have once been a helpful starting point, but it simply doesn’t reflect the complex realities of modern retirement. Your spending needs will evolve, your income sources will shift, and unexpected events—like market downturns or medical costs—can change the picture dramatically. That’s why we build flexible, personalized plans and revisit them often, so you can feel confident no matter what phase of retirement you’re in. You’ve done the hard work of saving—now it’s our job to help you spend wisely and enjoy it without unnecessary worry.
RYAN A. DUNN, CFP®, is a Wealth Manager at Novi Wealth
