Do retirees need to rethink the Trinity 4% SWR rule?

Published August 24, 2015   Posted in How to Think

It is all the rage these days to attack the Trinity 4% rule as something based on flawed research or old data that resembles nothing of today’s society. As the market continues its selloff into 2016, is there any validity to this pessimism?

The common theme among these whining articles is by using a fixed 4% withdrawal rate, you’re introducing far too much risk, and our retirement stash may very well dissolve into nothingness.  They are also quick to point out the circumstances where the 4% fails to maintain our stash.  It’s true, the 4% does fail, but only for those who refuse to adjust.

Is the Trinity 4% rule still a valid retirement guideline?For example, this week is “market correction” territory.  The Dow lost nearly 10% of its value last week.  This is one of those times where adjustments may be needed.  It happens.

And naturally, each critic has their own counter proposal that they believe to be THE WAY to manage your income during retirement.

Pardon me for jumping into this entirely pointless debate, but I believe these writers are completely missing the point, and in some ways, we’re all pretty much saying the same damn thing in the end – BE FLEXIBLE.

For example, Todd from wrote a piece that attacked the 4% rule, arguing that its one-size-fits-all approach is just flat wrong.

How can a static, one-size-fits-all solution to a problem as varied and complex as knowing how much money you need to retire be correct?

How could retirees in 1921, 1966, and 2010 share the same safe withdrawal rate when market valuations, interest rates, inflation expectations, and expected lifespans were completely different?

It’s impossible. It’s wrong.

Yet, that is the conventional wisdom in the financial planning profession. It is known as the “4% Rule,” and it is widely considered “the truth” in safe withdrawal rates for retirement.

Towards the bottom, you’ll find this:

The key point is to use common sense.

That means use the research and calculators as guidelines only. Don’t apply static models based on blind faith just because they have become conventional wisdom and everyone says they are true.

Todd’s closing advice is 100% sound and spot on, but the presumption that early retirees may adhere to the 4% rule like gospel may not be accurate. At least…I hope it isn’t.

A Barrons article published an interview with Wade Pfau, a now-well-known professor and blogger who is another outspoken critic of the 4% rule.

[The 4% rule] not always appropriate. The rule suggests that if retirees withdraw 4% of their portfolio in their first year of retirement, and adjust that initial amount for inflation in subsequent years, they’ll have a low risk of depleting their portfolio in 30 years. In 1994, a 30-year retirement was a conservative assumption — retiring at 65 or even 55 and living another 30 years was well beyond average life spans. But today, there is a 50% chance that one member of a higher-income, 65-year-old couple will live until 95.

Pfau offers his own financial advice for retirees:

The initial withdrawal rate [should be] between 4.8% and 6%, based on the stock/bond mix. At the end of each year, the retiree takes the preceding year’s withdrawal amount [in dollars] and adjusts it for inflation. But there are guardrails against big market swings: If that amount divided by the current portfolio balance equals a withdrawal rate of 20% more or less than the initial rate, the retiree adjusts the amount they withdraw that year. No annual withdrawal is more than 10% more or less than the year before.

According to Time, Pfau also believes 3% is a better safe withdrawal rate.

Jumping into the blogosphere, the Financial Samurai chimed in that the appropriate safe withdrawal rate should be based off of the 10-year government bond yield instead.

I encourage everyone to adjust their annual withdrawal rate based on the average rate for the past 12 months. You can easily check where the latest rate is by checking on Yahoo Finance.

Or the S&P 500 Dividend Yield:

The current S&P 500 dividend yield is roughly 2% in 2015. Dividend yields can rise when dividend payout ratios increase or the market tanks. If what you are mainly focused on is income, then withdrawing at the rate of the market’s entire dividend yield will mean that you will never touch your principal.

The opinions are nearly limitless, and that’s cool. People have their own differing points of view about both the 4% “rule” and safe withdrawal rates in general.  What’s the problem?  Quite honestly, there isn’t one.  Opinions are wonderful and we are all entitled to hold and espouse them.  In fact, I believe the conclusions that both Pfau and the Financial Samurai have reached are entirely reasonable and quite sound.

And to be perfectly truthful, I am not necessarily defending the 4% rule either.  I am, however, setting the record straight on how the typical retiree uses the 4% rule.

Is the 4% SWR the gospel of early retirees?

Though I retired at 35, do not know everybody within the early retirement community.  But, contrary to popular critique, the 4% safe withdrawal rate is not some one-size-fits-all approach that people – come hell or high water – must blindly and stubbornly adhere to for the duration of their retirements.

Doing so would mean that we humans are purely robots, programmed to aimlessly march forward using the same infantile cognitive powers that we have always had, unable to think for ourselves, make our own choices and adjust to the changing times.

Instead, a large majority of us are using the 4% rule as a guideline.

Meaning, we choose a number that we believe to be a reasonably safe withdrawal rate and start into our retirements by withdrawing from our investments that amount of money.  But, as well-known personal finance and early retiree blogger Mr. Money Mustache writes (and one who happens to believe in the 4% principle), there are no guarantees in life and we should always adjust our expenditures based on economic conditions.

From MMM: So there’s no need to debate. 4% is a perfectly good answer, which means 25 times your annual expenses is a perfectly good goal to save for. Along the way, you might find your annual expenses melting away, which makes things ever-more-attainable

Another popular early retiree who believes in the 4% rule, Go Curry Cracker, offers the same advice, arguing “But to be reasonable, remember the 4% Rule is a Rule of Thumb based on experience, not a Law of Nature.  It is the base of a plan”.

This is even more true with early retirees, as they’ve managed their money throughout their working years and have a good enough grasp on personal finance to manage their money and make it last by living cheaply and, most importantly, adjusting to market conditions – especially after the dependable paycheck stops rolling in from full-time work.

Mr. Money Mustache believes that the 4% number from the Trinity Study is a perfectly good answer, while Financial Samurai believes something in the neighborhood of 2 to 3% is a better answer (at the present time).  Pfau holds that starting out by withdrawing a larger percentage of investments and, each year, re-calculating your magical withdrawal number for the following year, is an even better answer.

Whatever you happen to believe, most early retirees do not believe ANY of these withdrawal techniques to be “one-size-fits-all” – at least none of the retirees that I’ve met, read or converse with.

Instead, most retirees are gumby-like humans, capable of moving, twisting and contorting to position themselves to accurately confront economic conditions.  If a retiree’s portfolio losses 30% of its value – as many did during the housing market crash of 2008, most adjust their spending habits and lifestyle – like good little human beings capable of making sound adjustments.

Picture this: you’re standing in the middle of the road and there’s a fully-loaded semi-tractor trailer barreling in your direction.  The tractor trailer, in this case, is analogous to a looming recession.  At first, you’re enjoying your position in the middle of the road and stay put.  After all, it’s entirely possible that the trailer will turn and instead head down one of the side roads before it hits you.

It is also possible that the trailer will simply stop, stare you dead in the face but not actually approach your position.  Maybe it’ll suffer a flat tire and be forced to the side of the road. Who knows – the trailer may not hit you.

But eventually, that trailer gets closer to you.  250 yards.  150 yards.  50 yards.  Okay, this thing isn’t stopping.

What happens at this point?  Naturally, we move our asses off the road and let the trailer pass us by, suffering dust inhalation as it passes and maybe a thrown pebble or two.

We don’t, on the other hand, stand there like idiots and let this thing plow into us.

We adjust like brain-powered human beings, and our financial situation is no different, especially after retirement when the paychecks stop floating in.  We take our initial position and enjoy it.  We notice an oncoming threat and we move if it gets close.  If we haven’t seen a threat in 6 months, we might lay down and spread out a bit.

You get the idea, and I hope the critics of the 4% safe withdrawal rate do too.

I am not asking anyone to actually agree with the Trinity Study and the 4% withdrawal rate.  However, the assumption that the 4% withdrawal rate is nonsensical because people could fail by blindly adhering to it is, in and of itself, nonsensical.

In the end, most retirees know that applying ANY financial plan is only as good as the economic conditions in which it exists.  If things change, so does your plan.

We track our net worth using Personal Capital


22 responses to “Do retirees need to rethink the Trinity 4% SWR rule?”

  1. Great insight. I think 4% SWR is a great baseline. But in years where your investments are down, maybe you need to curb your withdrawals. In my calculations of FI, I’m not planning on earning any income post FI years. But that will most certainly not be the case. Therefore I feel more safe about 4% with the padding coming from any extra income I earn. Flexibility is key!

    • Steve says:

      Hey Fervent,

      Like you, my wife and I aren’t counting on any income post-retirement either, but I would be surprised if that actually turns out to be true. Any income will, of course, help keep your SWR as low as possible, and this is all far, far before social security kicks in.

      Flexibility wins the game, every time. 🙂

  2. Like you, we’re huge believers in staying flexible. I wonder if the hubbub around the 4% rule is more focused on traditional retirees who might think, “I need to know exactly how much I have to spend every year, and I don’t want that amount to decrease.” If you take that approach to the 4% rule, then yes, it’s super risky. But most of us in FIRE land, as you noted, Steve, are optimizers, and aren’t going to blindly cash out the same amount each year (or more, adjusted for inflation) when the markets aren’t performing. In our case, we have a retirement budget amount that we believe will work well for us, and is attainable by the end of 2017 (assuming the markets don’t keep falling!), but we also believe we can cut that by as much as 50% in a year and still be fine. We’ll have to travel less and be careful about things like grocery spending, but we won’t go hungry, and we won’t cease to live an enjoyable existence! So for us, it’s really a range that we hope to live on each year, with an extremely conservative lower end, and an only very slightly aggressive upper end. And you know what — we wouldn’t have had anything to base our plan on without the 4% rule! 🙂

    • Steve says:

      We largely agree – and the 4% rule was the baseline that we used to determine our safe withdrawal rate as well (which stands at about 3.5%). We don’t anticipate the stock market “correction” of this week having a huge impact, but of course, you never know.

      It’s going to be a fun run-up to retirement, I think, for both of us. It would seem that we’re heading into a period of time of “relative” market stability after the correct settles out…let’s hope, anyway.

  3. Maggie says:

    Isn’t the ideal financial independence plan one that has the ability to earn money doing something you love on the years a 4‰ withdrawal rate might not be a great idea? That’s our current plan. Flexibility as you say, is key.

    • Steve says:


      Earning an income post-retirement is definitely helpful, yes. Though I do anticipate a little income after my wife and I retire, I am certainly not counting on that as we make our plans for retirement. This more conservative financial plan of our future will help ensure that any additional income that we do see is above and beyond our normal monthly expenses, and will make things that much easier for us to manage once the time comes.

      Thanks for reading. 🙂

  4. You stated…

    “Mr. Todd claims that the 4% rule is gospel within the [early] retirement community, and that people are blindly following the rule as if it were a religious tenant handed down to us by some mystical superpower and, therefore, we are reduced to immovable goblets of mush unable to master our own destinies by using our heads and adjusting to the times.”

    This is completely false and unnecessarily disrespectful. It is cute phraseology and a nice exercise in creative writing, but it’s not accurate and should be retracted.

    You might also want to know a bit about the history of that article before you attack so naively.

    That article was penned back before all the other articles quoted here were penned. At that time, the 4% rule WAS standard fare and rarely challenged thus making that research piece a landmark article. In fact, it was quoted by the Wall Street Journal, Investor’s Business Daily, Smart Money magazine, and other media outlets for it’s authoritative analysis, and it was one of the only non-scholar articles to be published in the academic peer-review research journal in 2012 “Journal of Personal Finance”.

    And this is your review of it??

    You might want to rethink how you try to bring attention to your work. Inaccurately disparaging other people’s work is more a statement of you as a person than the work itself.

    • Steve says:

      Mr. Todd,

      Thanks for commenting and stopping by! A couple quick points:

      I did not “review your article”, nor did I even place judgment on your particular financial position. Instead, my position is your article misses the point by assuming that retirees believe the 4% rule to be a “one-size-fits-all” approach, as stated in your article. What I am saying is, contrary to the assumption that 4% is *THE* safe withdrawal rate fit for “anyone”, this is merely a guideline that many in the retirement community – and especially EARLY retirement community – follow.

      Like I also said, in the end, we are all saying pretty much the same thing – those who adjust will do the best over the long term. I quoted that portion of your article as well.


  5. Steve,

    I enjoyed the summaries of the various viewpoints on the 4% rule. I might have to rethink my post coming out next week using that as basis of retirement planning! 

    On another note, Wade Pfau has made some big waves with his analysis of how exposed to equities we should be at retirement time. If memory serves me correctly, he states to be near 100% stock and then to slowly ease out over the years. This of course is quite contrary toward all the traditional thinking of moving more toward bonds as your retirement date nears. What will all those target date fund managers to do?

    I liked your point with the truck example: we better damn well be flexible or we will get run over!

    Take care,

    • Steve says:

      Hey Bryan!

      Personally, I do tend to be more of a stock-minded person. They are riskier, but the reward is also greater, and my portfolio has historically performed MUCH better with a high proportion of stocks to bonds. Of course, that’s just my position – others may see different results. But in general, I agree – conventional wisdom dictates that the closer to retirement we get, the greater our bond positions should be. This probably also has a little something to do with the age at which you retire as well. The younger that one retires, the greater the likelihood that he or she will be able to adjust with riskier investments.

      But then again, it’s only “conventional wisdom”. I’ve learned in my 34 years on this earth that this so-called “wisdom” isn’t always what it’s cracked up to be. I’ve gone against the grain a lot in my life and, with proper judgment and an ability to adjust, it’s worked out pretty darn good for me.

      Flexibility is key to success in this game. The more flexible we are, the better we position ourselves for success! 🙂

      Thanks, as always, for stopping by Bryan. Hope you’re enjoying things in beautiful red rock country.

  6. Chris Muller says:

    Nice piece Steve. Like anything else, we can’t assume. The best we can do is plan for FI and adjust as necessary. There are just too many factors at play to say 4% is the “right” number, but as many others have said in your comments, it’s a good starting point. I can’t help but think of a certain “financial expert” who also claims you’ll be getting ~12% return on your investments. I wonder what he’s saying after stocks got smoked last week.

    • Steve says:

      Hehe, yeah – I’ve never really understood Ramsey’s 12% number either. But hell, I don’t see anything wrong with starting off withdrawing 12% either. I would predict that you’ll be adjusting a little sooner than you may like if you do withdraw that much, but hey, flexibility is key in this game. 🙂

  7. Mr. SSC says:

    All hail 4%! Hahaha, kidding, but we use it as a baseline. However, we also use the cFiresim calculator and run multiple scenarios only one of which is the straight 4%. Those results are ok, but can be optimized with some tweaking. Like the scenarios where we withdraw enough to live off of based on market fluctuations. Some years it’s $70k, some years it’s $45k, but it’s flexible to the market, and gets WAY better success rates. We also looked into 3% and other variables. My rambly point is that we plan on flexibility and assume no side income. Like you, we will be more than shocked if that’s what actually happens, as we plan on doing something we’re just not sure how consistent the pay will be.
    Great article though and it brings up some great points, the key we’ve found is for us to be successful we just have to be flexible.

  8. […] tip to Go Curry Cracker and ThinkSaveRetire for inspiring this one. I was originally going to run something even worse today, Thanks fellow FI […]

  9. […] that 4% article from a couple days ago?  Mr. 1500 Days to Freedom added to the madness with his own little rant, […]

  10. Joseph Beckenbach says:

    I’m basing my plans on the 4% SWR, with a twist.

    I “over invest”. My “main” portfolio will use the 4% SWR. I also put into a separate portfolio solely of income-producing stocks and bonds.

    I should be at FI In 8-10 years. The main portfolio draw at 4%, plus the income from the income portfolio, will cover all my expenses (fixed and discretionary) … and one of the fixed expenses is reinvestment into the income portfolio. 😉 Unspent cash of course also will reinvest there, one hopes into securities yielding more than 4%. Eventually the income portfolio will cover all fixed expenses, so that the main portfolio draw can become purely at discretion.

    • Steve says:

      That sounds like an excellent plan – we used the 4% rule as a base as well and we are very conservatively estimating what our finances are going to look like come retirement time. Anything extra that we earn along the way with odd jobs and whatnot will just be a little more buffer for us. Nothing wrong with buffer!

  11. […] Save Retire: Steve is using this rule as a […]

  12. NWOutlier says:

    Each time I see this discussion or debate, I always say to myself inside “it’s not a litteral ‘rule” – it’s a guideline – just as you have outlined. Excellent. 🙂

    With me – there is also the thought of ‘over compensate’ or withdraw less (like the S&P or an arbitrary 3%) – over compensate means, you pick your lifestyle, 30k, 40k, 50k 100k? and push your nest egg so far that you wouldn’t even feel a 30-60% correction… Example; Our favorite Mr. Buffet – I’m sure he adjusts his business when a correction occures, but do yo think his lifestyle is adjusted? I don’t think so, because even with a correction, his investment incomes far exceed his needs.

    Thanks for the article – love it

    Steve (NWOutlier)

  13. […] Luckily for us, these assumptions mean that the 4% withdrawal rate stands a better chance at supporting us through retirement because we, as human beings, make adjustments all the time.  When recessions hit, we cut back. […]

  14. John says:

    Personally I think the 4% is probably fine when you are years away from retirement. It gave me a rough estimate of what I’d need to accumulate to retire. Personally I always considered a rule of thumb….not just a rule.

    As you near retirement, there are very few true “rules” that apply to everyone. What is your age? What is your life expectancy? Married? Kids? Spending plans? Do you have a pension? Are your investments in taxable accounts or IRA’s? You get the point……

    When one is nearing retirement, the rules of thumb need to be replaced with a reality check specific to your situation. For some, 4% may work well. For others, it may be 3%.

    I guess my point is to not put too much stock in any generic rule.

    Great post and discussion!


    • Steve says:

      That’s exactly, 100% spot on, John. The 4% “rule” is a good target to shoot for, but it doesn’t have to be some “be-all-end-all” withdrawal rate to be debated with piles of economic data. Be flexible and we’ll all probably be successful in our early retirement goals. 🙂

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