When planning for retirement, one of the most well-known rules of thumb is the 4% rule, a strategy created by financial planner William Bengen in 1994. This guideline suggests that retirees can withdraw 4% of their retirement portfolio in the first year, adjust that amount for inflation annually, and not run out of money for at least 30 years. It’s been widely accepted, but in today’s financial climate—rising inflation, market volatility, low bond yields, and unpredictable tax policies—many question whether it’s still a reliable rule to follow.

Let’s break down the origins of the 4% rule, the Trinity Study, and the factors that could make this approach outdated. We’ll also explore alternative strategies that could better protect retirees against inflation, sequence of returns risk, and market downturns while maximizing tax efficiency and overall wealth.

Understanding the Origins of the 4% Rule

William Bengen’s research was based on historical market data from 1926 to 1976. His goal was to determine a sustainable withdrawal rate that could withstand worst-case market conditions, including the Great Depression and high-inflation periods. Bengen found that retirees who withdrew 4% of their portfolio annually, adjusted for inflation, could confidently sustain their retirement for at least 30 years without depleting their savings.

Bengen’s findings were later confirmed by the Trinity Study, formally titled Retirement Spending: Choosing an Acceptable Withdrawal Rate by Cooley, Hubbard, and Waltz (1998). This study analyzed rolling historical market data and found that portfolios with at least 50% in stocks had a high probability of lasting through a 30-year retirement, even under unfavorable market conditions.

However, the financial landscape today looks very different from when these studies were conducted. Bond yields are historically low, inflation is rising, and market volatility is unpredictable—all of which impact the reliability of the 4% rule.

How Monte Carlo Simulations Challenge the 4% Rule

One of the best ways to evaluate the 4% rule is through Monte Carlo simulations, a statistical technique that simulates thousands of possible retirement scenarios based on historical market data, volatility, and random chance. Unlike Bengen’s original study, which was based on past performance, Monte Carlo simulations account for future uncertainty.

Monte Carlo analyses often reveal that the 4% withdrawal rate is risky in today’s economy because it assumes that bonds will provide adequate returns. However, given today’s low bond yields and unpredictable stock market, retirees who rigidly follow the 4% rule could run out of money much sooner than expected.

How Inflation Impacts Withdrawals

One of the biggest threats to the 4% rule is inflation. If you withdraw 4% in the first year and increase withdrawals based on the Consumer Price Index (CPI), higher-than-expected inflation could cause retirees to withdraw too much, too fast.

For example, if you retire with $1 million and start with a $40,000 withdrawal, but inflation jumps to 8% annually (as seen in 2022), your withdrawals would double in just nine years ($80,000), significantly depleting your portfolio.

This is why inflation-protected income sources, like fixed or fixed indexed annuities, cash value life insurance, and real assets may be superior to a traditional stock/bond portfolio.

Stocks vs. Bonds: The Asset Allocation Debate

Traditional retirement strategies use a mix of stocks and bonds, with typical allocations being:

• 50% Stocks / 50% Bonds (conservative)
• 60% Stocks / 40% Bonds (moderate)
• 70% Stocks / 30% Bonds (aggressive)

Bengen’s research showed that retirees need at least 50% in stocks for the portfolio to last 30 years. However, bonds have significantly underperformed in recent decades. With rising interest rates, bond prices decline, making them a poor hedge against market downturns.

Why Bonds Might Not Be the Best Option Anymore

• Low Returns: Bonds no longer provide the 5%-7% returns they did in the 1980s and 1990s.
• Inflation Risk: Fixed-income investments lose purchasing power when inflation is high.
• Market Volatility: Bonds are no longer the “safe haven” they once were—just look at 2022’s bond market collapse. The fact that when inflation goes up, both bonds and the overall stock market perform poorly, makes them a bad choice to hedge your portfolio.

Replacing Bonds with Better Performing Assets

Rather than relying on bonds, retirees can explore alternative low-risk assets with higher yields and inflation protection:

1. Fixed Indexed Annuities (FIAs): Provide better growth potential without stock market risk.
2. Cash Value Life Insurance: Offers much better growth potential than bonds and are tax advantaged.
3. Real Estate Investments: Rental income can outpace inflation.
4. Treasury Inflation-Protected Securities (TIPS): Adjust for inflation but with low yield.

These alternatives provide more stability and better long-term returns than bonds in today’s market.

The Sequence of Returns Risk: A Major 4% Rule Flaw

One critical flaw in the 4% rule is that it assumes steady market returns over time and does not account for sequence of return risk. In reality, the sequence in which you experience gains and losses makes a massive difference.

If you retire right before a bear market, your portfolio could take a huge hit early on, forcing you to withdraw from a shrinking portfolio, which dramatically increases the risk of running out of money.

Example: Retiring in 2000 vs. 2010

• A retiree in 2000: Experienced two major crashes (Dot-com bubble, 2008 crisis) early in retirement, significantly reducing their portfolio.
• A retiree in 2010: Benefited from a decade-long bull market, meaning their portfolio lasted much longer.

This is why having a safe, non-market-correlated income source, like an annuity or permanent life insurance, can protect against sequence risk. During bear markets, you can access other asset classes to allow your portfolio to recover from losses. The wall street rule of 100 takes this into account, helping to protect a greater portion of your income as you age.

The Impact of Taxes: Why the 4% Rule Ignores a Critical Factor

Another major flaw in the 4% rule is that it doesn’t consider taxes.

Tax-Deferred vs. Tax-Free Withdrawals

• Tax-Deferred Accounts (401(k), IRA): Every withdrawal is taxed as ordinary income.
• Tax-Free Accounts (Roth IRA, Cash Value Life Insurance): Withdrawals are completely tax-free.

A retiree withdrawing $40,000 from a 401(k) may only get $32,000 after taxes, whereas the same withdrawal from a Roth IRA or life insurance policy remains $40,000 tax-free. There’s also the threat of increasing the taxes social security by using tax deferred accounts.

How Tax Changes Affect Withdrawals

• If tax rates increase, retirees with tax-deferred accounts will need to withdraw more to cover taxes.
• Roth conversions or tax-free vehicles (like Indexed Universal Life) can provide a hedge against future tax hikes.

Since no one knows future tax rates, relying solely on tax-deferred savings like a 401(k) could be a huge mistake.

How Fees Destroy Retirement Savings

Another overlooked factor is investment fees, which significantly reduce retirement income.

High-Fee Investment Products to Watch Out For

1. Mutual Funds: Average 1%-2% in annual fees, compounding losses over decades.
2. Variable Annuities: Often charge 3%-5% in fees, making them inefficient for retirement.
3. Variable Life Insurance: High-cost structures reduce the value of investments.

Instead, retirees should consider low-cost ETFs, fixed indexed annuities, and tax-advantaged life insurance to maximize returns while minimizing fees.

Final Thoughts: The 4% Rule is NOT a One-Size-Fits-All Strategy

While the 4% rule worked historically, today’s financial landscape requires a smarter approach. Market volatility, low bond yields, taxes, and inflation all make a rigid 4% withdrawal risky.

A Better Retirement Strategy

• Replace Bonds with Higher-Yield Alternatives (FIAs, Life Insurance, TIPS, Real Estate).
• Use the wall street ‘Rule of 100’ to protect increasing portions of your income as you age.
• Make sure your retirement plan accounts for Taxes, Fees, & Sequence of Returns Risk.
• Minimize Fees and Market Risk by Avoiding Expensive Mutual Funds & Variable Products.
• Use Monte Carlo Simulations to Stress-Test Your Withdrawal Rate.

A dynamic withdrawal strategy with tax-free income sources will provide more stability and financial security than the outdated 4% rule.