The 4% Withdrawal Rate: Why It Is a Guideline, not a Rule

Ken Weingarten |

One of the most common questions raised when talking about retirement is ‘Will I run out of money?’ Many retirees have looked to the “4% rule” for guidance. In essence, this theorizes that a retiree can expect to safely draw down their assets by 4% of total savings on an annual basis and then adjust for inflation each for year for 30 years and hopefully not run out of money.

While it is not a guarantee that you will not run out of money, the 4% withdrawal rate has been viewed as a common guideline due its simplistic nature. Many factors can influence how unreliable this withdrawal rate can be. Here, we will go over some of the more common factors.


While the 4% rate does factor inflation, the figure you use may can skew the equation. Using the historical inflation average of 2%-3% can be a good predictor of future withdrawals. On the other hand, using the actual inflation figures can match your income needs to actual cost-of-living adjustments.

Risk Tolerance

The 4% withdrawal rate assumes a portfolio allocation of 60% equities/40% fixed income. Depending on your portfolio’s allocation, whether it is more aggressive or more conservative, it is unlikely you would be making a true apples-to-apples comparison. For example, if a retiree had a 70/30 allocation and needed to withdraw assets during a market downturn, the underperformance of the portfolio would exacerbate the withdrawal rate. On the other hand, making withdrawals during times of market outperformance can lower the annual withdrawal rate.

Tax Rate & Tax Status

Taxes owed upon withdrawal of funds from a tax-deferred account (e.g., IRAs, 401(k), 403(b), etc.) are not properly factored into this equation. If the goal is to have a 4% net withdrawal rate, it is likely you may have to withdraw even more that 4% to cover the tax liability. As we age, Required Minimum Distributions will also start to creep in. Year after year, the IRS essentially forces you to withdraw more which may result in a +4% withdrawal rate.

The tax classification (i.e., tax-deferred, tax-exempt, taxable) as well as size of your accounts across all your savings may affect the net withdrawal rate. If all your assets are in tax-deferred accounts, then the tax component of this equation becomes an important factor. On the extreme end, if your savings were in Roth accounts, taxes may not be of huge importance when withdrawals are made.


While not a perfect science, this simple guideline can initially help with how to approach cash flow needs during retirement. A peek under this hood reveals more complex factors at play. Having a comprehensive financial plan through a fee-only financial advisor can set you on the best path to determine the withdrawal rate that is right for you.

Weingarten Associates is an independent, fee-only Registered Investment Advisor in Lawrenceville, New Jersey serving Princeton, NJ as well as the Greater Mercer County/Bucks County region. We make a difference in the lives of our clients by providing them with exceptional financial planning, investment management, and tax advice.