The premise of the 4% rule is simple: retirees can withdraw 4% of their starting retirement portfolio annually, plus inflation, for 30 years with a high probability they won’t run out of money. Unfortunately, in practice, the 4% rule has some major flaws and limitations: it doesn’t consider after-tax income, longevity, market volatility, changing income streams and expenses, or bond yields today.
Here’s an example of how the rule is intended to work. Assume an individual retires with a $1M investment portfolio. Their first year retirement withdrawal is $40,000. If inflation is 3%, the next year they can spend $41,200.
What the 4% Rule Gets Wrong About Retirement Income
Retirement Income Sources Change
The 4% rule assumes one steady stream of income throughout retirement: your portfolio. In reality, many retirees have will experience new or changing sources of income over time.
Social Security benefits, a pension, and required minimum distributions from retirement accounts happen over time, not on day one of retirement. So withdrawals may need to be much larger in the beginning of retirement, decreasing as other sources of income become available. Given that retirement expenses tend to decrease over time (overall) and new sources of income often become available, in some situations, the 4% rule underestimates the true safe withdrawal rate.
The 4% rule oversimplifies retirement income planning and the benefits of taking an individualized approach. Considering different withdrawal strategies from taxable versus tax-deferred accounts, factors like optimizing Social Security timing or deciding when and how to take a pension all matter in a retirement plan.
The best retirement plans are flexible and dynamic, allowing you to enjoy more of your success as conditions warrant and cutting back if necessary.
Don’t Assume Expenses Are Even
Spending is typically the highest at the beginning of retirement. If you don’t have a good handle on how much you’re spending before retirement, how will you know what you need in retirement? Another challenge: as some costs increase (like healthcare), other expenses (like food and travel) decrease. But not necessarily equally basis. The 4% method may result in years where portfolio isn’t enough, or is too much, to meet your actual needs.
It Gives You Pre-Tax Income, Not After-Tax
The 4% rule doesn’t include any ‘inflationary’ adjustment for taxes. And depending on the types of accounts you have and where you live, taxes can significantly change your after-tax income, which is really the only thing that matters.
For example, in 2026, the capital gains tax rate is 0% for married couples until their income is nearly $100,000, when the bracket increases to 15%.
So taking money from a brokerage account could potentially result in no taxable gain or perhaps even a capital loss. Compare that to distributions from retirement accounts distributions taxed as ordinary income. A couple with $100,000 in regular income would be entering the 22% income tax bracket. For high income retirees, the top bracket for regular income is 37% versus 20% for long-term capital gains. And that’s all before considering state taxes.
Another Retirement Myth: Living Off Dividend Income
Market Volatility Matters
Imagine two individuals about to retire. For simplicity, assume they both have a $1M portfolio on February 19, 2020, and are 100% invested in the S&P 500¹. One retires that day. The other retires a few days later on March 23, 2020. In this time the S&P 500 drops nearly 34%.
Using the 4% rule, the person who retired first can take $40,000 per year every year for 30 years (plus inflation). The second person can only take $26,400 each year, plus inflation. That’s a big gap for four days.
Although this example uses actual historical returns, it’s obviously an extreme example. In reality, both figures are probably wrong. Retirement income and lifestyle abilities should be monitored on an ongoing basis to help ensure alignment with real life.
To simply illustrate the impact of just one market downturn at the start of retirement, consider two retirees using the 4% rule: one portfolio enjoys 6% annual returns for 30 years while the other portfolio suffers a -15% loss in year one, before returning 6% annually.
This chart shows how sequence risk and volatility drag can impact retirement – something the 4% rule doesn’t consider. And if you think these numbers look favorable – remember – this hypothetical only assumes one year of losses over 60 combined years in retirement. To say this is unrealistic is an understatement.
In addition to market risk, also consider the impact of inflation. If inflation spikes, then the 4% rule says you can increase your annual income to compensate. Especially if a spike in the cost of living coincides with a market downturn, the impact on your retirement assets could be significant.
Longevity: Retirement is Longer
According to American Academy of Actuaries and Society of Actuaries, Actuaries Longevity Illustrator, www.longevityillustrator.org/, (accessed April 30, 2026), a couple retiring at 65 faces 32% odds at least one spouse is living after 30 years versus a 64% likelihood for 60-year-old retirees. And this assumes only average health.
People are living longer and spending longer than 30 years in retirement. So if you retired at 60 using the 4% rule, the odds are that a key assumption of your retirement plan is wrong. Early retirees should be especially wary of being led astray by the 4% rule. Since you don’t know how long you’ll live, it’s important to consider longevity in projections, which is common if you’re working with a financial advisor.
Asset Allocation: a 50/50 portfolio May Be Too Conservative
A key assumption of the 4% rule is the portfolio is a conservative mix of 50% equities and 50% bonds. Back in 1994 when the rule was born, bond yields were close to 8%². As of Q1 2026, the US 10-year treasury was roughly half that (4.3%).
Correlations among asset classes shift. Professional asset managers sometimes call the traditional 60/40 retirement portfolio into question. If a 60/40 mix doesn’t cut it, the 50/50 portfolio would fare even worse.
Retirement Plans that Don’t Bend, Break
The most robust retirement plans are flexible and stress-tested for different situations. While projecting a level annual retirement income, increasing by inflation, is helpful when beginning to assess the type of lifestyle your assets may be able to support, it has to go a step farther by tailoring the assumptions to your income needs, risk tolerance, and time in retirement for a more accurate picture. And with the help of your wealth advisor, adjust the plan as things change.
¹ For illustration purposes only. The 4% rule assumes a portfolio 50% in stocks and 50% bonds.
² US 10-year treasury yield.
[Last reviewed May 2026]
