The 4% Rule Was Never a Promise. Here's What It Actually Says.

"Just take 4% a year and you'll be fine."

You have probably heard it from a neighbor, a podcast, or a brother-in-law at Thanksgiving. The 4% rule is one of the most quoted numbers in retirement planning. It is also one of the most misunderstood.

In 1994, financial planner William Bengen published a study in the Journal of Financial Planning titled "Determining Withdrawal Rates Using Historical Data." He looked back at historical U.S. stock and bond returns and asked: what first-year withdrawal rate, increased each year for inflation, would have lasted at least 30 years across the historical periods he tested? His answer was roughly 4%.

That is the whole origin. It was a look backward at history, not a promise about the future.

• A specific historical record of U.S. returns. Future returns may be very different.
• A specific mix of stocks and bonds.
• A 30-year retirement. Some retirements are shorter, and some are longer.
• That you raise your withdrawal by inflation every year no matter what markets do.
• It does not account for your taxes, investment fees, or the timing of big expenses like a roof, a car, or long-term care.

Past performance is not indicative of future results, and no withdrawal rate can ensure that money will last.

Jesus asked, "For which of you, intending to build a tower, sitteth not down first, and counteth the cost, whether he have sufficient to finish it?" (Luke 14:28, KJV).

The 4% rule is a rough way of counting the cost. That is its value. But a rule of thumb is not the same thing as sitting down with your actual numbers.

Proverbs 27:23 (KJV): "Be thou diligent to know the state of thy flocks, and look well to thy herds." Diligence means knowing your own situation, not someone else's average.

Sequence of returns. A decline early in retirement, while you are withdrawing, can do more lasting damage than the same decline later. Two retirees with the same average return can end up in very different places.

Taxes. A 4% withdrawal from a traditional IRA is not 4% of spendable money. Federal income tax comes out first. Required minimum distributions, which our RMD guide explains, may also force larger withdrawals later.

Real life is lumpy. Spending in retirement is rarely a smooth line. Spending patterns often change over the course of retirement.

Generosity. A Christian budget should include giving, not as an afterthought but as a first fruit (Proverbs 3:9).

Treat the 4% rule as a smoke detector, not a thermostat. If your planned withdrawals are far above 4% of your savings, that is worth a closer look. If they are well below, that is also worth reviewing in the context of your full plan. Either way, the next step is a real plan with your real income sources: Social Security, any pension, savings, and the order you draw from each.

Some people adjust withdrawals up or down with markets, rather than always raising them by inflation. Others build a base of predictable income and invest the rest. Each approach has tradeoffs and risks.

If you want to see how your planned withdrawals compare with your actual savings, start with the free Retirement Paycheck Readiness Scorecard at scorecard.matt25capital.com, or call our office at 620-670-9455.

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I'm Will Snodgrass, CFP®, with Matt25 Capital, serving Christian pre-retirees and retirees in The Woodlands, Houston, and across Texas.

• Bengen, W.P. (1994). Determining Withdrawal Rates Using Historical Data. Journal of Financial Planning, 7(4), 171-180.
• Luke 14:28, Proverbs 27:23, Proverbs 3:9 (KJV)