The 4% Withdrawal Rule

The goal of any retirement income or withdrawal strategy is to live a good standard of living without running out of money but also without leaving behind too much and thus living a more meagre life than necessary.

The 4% withdrawal or drawdown rule is probably the most common retirement income withdrawal strategy in use today and is an easy one to understand. Because of this, I am starting my series on retirement income withdrawal strategies here. This rule of thumb was created by William Bengen, a California-based financial planner in 1994. It is based on a study1 of historical returns, and looks at what rate one can safely withdraw without running out of money before dying.

How the rule works.

In its simplest form, this rule says that upon the age of retirement, the amount of annual retirement income is locked in at 4% of the retirement portfolio. Each year, the withdrawal amount is increased by the rate of inflation. The original study that found this 4% rate used historical rates of return from the US stock market and US bond market. The portfolio examined was a 60:40 ratio of shares to bonds and assumed a 30 year retirement.

Basically, if at retirement you have $1,000,000 in your retirement accounts, this method says that you can withdraw $40,000 in the first year, and each year thereafter you can withdraw the previous year’s amount plus inflation. Only in the very worst case would all the principal be gone after 30 years but it should last at least that long. Be aware that varying the asset allocation from 60:40 or the time horizon from 30 years will result in safe withdrawal rates different from 4%.


This method is simple. The drawdown amount is basically constant except for an inflation boost every year.


There is no adjustment to the withdrawal amount depending on investment performance. Two retires with wildly different portfolio balances might have the same annual income or two with the same portfolio balance might have very different incomes.

Income for all of retirement is calculated based on the value of the portfolio at one point in time, the date of retirement. This inflexibility means a retiree could be unnecessarily forgoing available income if investment performance is good.

This method ignores the effects of fees and taxes which reduce the 4% safe withdrawal rate. Because the study was based on US equity and bond markets only, it ignores the effects of added diversification which more recent studies show can increase the safe withdrawal rate.

Is 4% still a safe rate?

There has been much talk recently about whether recent lowered expectations of investment returns should lead to a reduction of the safe 4% withdrawal rate. Some argue that as bond interest rates have been at record lows for a prolonged period, the 4% withdrawal rate is too high. Others argue that because the rate was determined by reference to actual worst case and not average returns from the last 130 years, the 4% rate should still be safe going forward2, but may not be as safe as once thought. Personally, I think there may need to be some adjustment, certainly for returns in New Zealand.

Applicability to New Zealand retirees

Recent studies3 imply that the safe withdrawal based on just New Zealand assets would be slightly less than the 4% determined for the USA. However early evidence of globally diversified portfolios shows improvement for NZ retirees. In 67.9% of simulated cases, a NZ retiree that was globally diversified did better than one that was not. More studies of safe withdrawal rates for NZ retirees are needed however.

With all the drawbacks around this simple method it is easy to rule it out. However, I still think that it is a good starting point to begin thinking about how to turn a retirement nest egg into an income stream. In future posts I plan to discuss other dynamic approaches that allow a retiree to benefit from the performance of their portfolio while still taking their future financial safety into account.

  1. William P. Bengen, Determining Withdrawal Rates Using Historical Data, Journal of Financial Planning, October 1994, pp. 14–24. (PDF) 
  2. Michael Kitces. What Returns are Safe Withdrawal Rates REALLY Based Upon
  3. Wade Phau, Does International Diversification Improve Safe Withdrawal Rates?, Advisor Perspectives, March 4 2014. (PDF) 

2 thoughts on “The 4% Withdrawal Rule”

  1. 4% rule misses one important thing.
    Early in retirement people are more mobile and require more funding per annum than later in life when the body slows down.
    Example. You are more likely to do world trips etc when young and active than in your 80’s

  2. Will, that is true, but as you get older, medical and other associated costs rise comparative to the youthful sixties, so you would likely end up spending similar amounts. If the 4% of your nest egg doesn’t sound like enough for you to live on, make sure your nest egg is bigger

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