The 4% rule has been the holy grail of FIRE planning for decades. But with inflation hitting 40-year highs, bond yields fluctuating wildly, and market valuations at historic levels, is this 30-year-old rule still reliable? Let's dive deep into the data.
Recent studies suggest the 4% rule might only have a 75-85% success rate in current market conditions—down from the historical 95% success rate. Here's what every FIRE planner needs to know.
The 4% rule, developed by financial planner William Bengen in 1994, states that you can safely withdraw 4% of your portfolio in the first year of retirement, then adjust that amount for inflation each subsequent year, without running out of money for 30 years.
Bengen's research was based on historical data from 1926-1976, testing various withdrawal rates across different 30-year periods. His findings:
| Withdrawal Rate | Success Rate | Worst Case Scenario |
|---|---|---|
| 3% | 100% | Portfolio grew |
| 4% | 95% | Portfolio lasted 30+ years |
| 5% | 75% | Ran out after 20 years |
The Cyclically Adjusted Price-to-Earnings (CAPE) ratio is currently around 30—well above the historical average of 17. High CAPE ratios historically predict lower future returns.
The original 4% rule assumed a 60/40 stock/bond portfolio. But with bonds yielding near historic lows for over a decade, the traditional portfolio balance is under stress.
The 4% rule was tested during a period of relatively stable inflation. With inflation volatility returning, the real purchasing power of withdrawals becomes unpredictable.
Based on current market conditions and forward-looking projections:
Instead of fixed 4%, adjust withdrawals based on portfolio performance and market conditions:
Gradually increase bond allocation as you approach and enter retirement to reduce sequence of returns risk.
Divide your portfolio into time-based buckets: 1-3 years (cash/bonds), 4-10 years (balanced), 10+ years (growth stocks).
The 4% rule is just one scenario based on historical averages. But what if you retire into a bear market? What if inflation spikes? What if bonds underperform for a decade?
Our Monte Carlo simulation runs thousands of different market scenarios to show you the probability of success for YOUR specific plan. Don't rely on rules of thumb when your financial independence is at stake.
The 4% rule isn't dead, but it's not the ironclad guarantee it once seemed. In today's market environment, a more conservative 3.5% withdrawal rate or dynamic strategy might be prudent. The key is understanding that any rule is just a starting point—your actual plan should account for your specific circumstances, risk tolerance, and market conditions.
Remember: FIRE isn't just about reaching a number—it's about maintaining financial independence for decades. Better to be conservative and secure than aggressive and sorry.