4% Budget: Why spending flexibility is more important than retirement rates

Since its first introduction in 1994 (see below), the 4% rule – which I like to think of as one more Guidelines– was the subject of both praise and debate. Its simplicity has won support from retirees, and its combination with historical historical market return data has won the support of many advisers and academics. Yet it is the subject of much debate, with many questioning its future applicability given today’s high equity valuations and low interest rates.

One aspect of the 4% rule that demands more attention is what I call the “4% budget”. How a retiree spends 4% is important – perhaps even more important than whether 4% is the best withdrawal rate.

4% rule

The 4% rule is designed to help retirees calculate a safe withdrawal rate at retirement.

By following the rules, you can spend 4% of your nest eggs in the first year of retirement. Then, you adjust the amount of withdrawals at the rate of inflation each year. By following this simple plan, you can expect to receive adequate funding at the time of retirement. Or to put it more clearly, you will die before you run out of money.

Simple as a rule, there are some important subtleties. William Benzene introduced the 4% rule in one 1994 paper Published in Journal of Financial Planning. Although 4% is the number of headlines, the most memorable from Benzene’s article, there are several critical assumptions in its conclusion:

  • He holds a portfolio of 50% to 75% equity. He found that a portfolio of equity allocations outside this range reduced its longevity, sometimes significantly, based on historical market returns. For many retirees, allocating more than half of their portfolio to equity is hard to stomach. This is especially true now, given the uncertainty brought about by Covid-1 by. But some historical perspectives can help. Benzene’s analysis covered markets during the 1929 crash and subsequent Great Depression, World War II, the Vietnam War, the 1970s stagnation, and the 1987 market crash.
  • The portfolio is balanced annually. I mention it because of how difficult it can be. Imagine retiring in early 2009. With their life savings falling by 0% or more in 2008, it will be difficult to buy more equity to balance the portfolio. The same thing can happen today. Yet if they rely on the 4% rule, that’s exactly what they have to do.
  • Benzen thinks market income without fees. He uses historical historical market income in most cases by the ratio of mutual fund expenses or advisory fees. This is a reasonable estimate for DIY investors in low cost index funds. For valuable funds with expensive advisors, however, the 4% rule may not work well.

It is important to note that while Benzene used historical historical market income most of the time, his analysis also included estimates about future income. For those future years, he held 10.3% stock returns, 5.2% bond returns, and 3% inflation. And that brings us to the 4% debate.

4% debate

Many today believe that 4% is very rich. They argue that with higher equity valuations (the price / earnings ratio of the Standard & Poor’s 500 Index still exceeds 20, even after recent market declines) and lower interest rates, we should not expect market returns to reach historical averages. In other words, don’t count a 10.3% return on stocks or a 5.2% return on bonds.

Some financial advisers disbelieve the 4% rule because they say it fails to fluctuate the market for other reasons. Benzene’s rules, however, are responsible for market fluctuations. He spent most of his 1994 articles on the subject, even naming major market revisions after his interest in astronomy, such as calling the 1973-1974 recession the “Big Bang.”

And given the market valuation and interest rates, it is reasonable to believe that we can expect even lower stock and bond returns in the near term. (Exactly when, however, I have no idea. I predicted that interest rates would rise in 2010.) This brings us to an aspect of the 4% budget and the Benzene article that demands more attention.

4% budget

Perhaps acknowledging that no reasonable withdrawal rate is foolish, Benzen praised the benefits of reducing the withdrawal rate, even temporarily:

However, the client has another option to improve the situation in the long run, and that is to reduce the level of withdrawal, albeit temporarily. If the client can handle it without too much pain, it may be the best solution, because it does not depend on the volatile performance of the market, but the client has complete control: its cost.

This realization led me to pay more attention to what the 4% budget says than to trying to understand the perfect withdrawal rate. Retirees should pay attention to how they will spend the money withdrawn each year from their retirement and taxable accounts. Specifically, any portion of the 4% (or whatever amount they take) will be needed, and how much will be needed.

Need vs. sought

It is here that we must acknowledge that not all 4% withdrawal rates are created equal. Imagine 2 retirees at the age of 65, both relying on the 4% rule to show them the way back. At first glance, they seem to be following the same procedure with the same risk and reward.

Now let’s examine their 4% budget. Let’s imagine that the first retiree needs a full 4% to survive. If their withdrawals fall below this level, adjusted for inflation each year, they will have trouble paying their bills.

In contrast, imagine that our second retirees need only 3% of their investment to pay their bills. The remaining 1% goes for travel and hobbies. Such leisure activities may be important from the point of view of living standards, but not for survival.

Now our retirees can’t be any different than this. In Benzen’s article, he showed that at a 3% withdrawal rate, a retiree’s 50% stock / 50% bond portfolio will remain in the market for at least 50 years, including the initial recession year, the 1937-1941 stock market crash, and the “Big Bang.” Thus, a retiree who can survive on a 3% or perhaps 3.5% budget has the flexibility to survive a major market downturn that could theoretically sink a retiree who needs the full 4%.

In fact, the flexibility of reducing annual withdrawals by only 5% can have a profound effect on a portfolio. As Benzen explained:

For example, let’s go back to the 1929 retirement. In the late 1930s, as he was about to withdraw his second annual, the market had already declined by about 30 per cent since the end of 1928 and was showing further problems ahead. If he reduced the withdrawal of 1930 by only 5 per cent, and continued to withdraw at this reduced level at the time of retirement, by 1949 he would otherwise have 20 per cent more assets, which could be passed on to his heirs. After 30 years, wealth is 25 percent higher, and benefits continue to grow over time.


Debt relief before retirement can go a long way in giving a retiree the flexibility to reduce withdrawals in the down market, as we have felt so far this year. Here again, imagine a retiree who has no debt versus a second retiree who spends 25% of his 4% budget on debt repayment. They can both follow the 4% rule, but they are like lightning and lightning bugs (apologies to Mr. Twain).

4% rule and early retirement

Most of my thoughts on the 4% budget came from the Fire (Financial Freedom, Retired) movement. As the steam rises as a result of the fire movement, many quickly noted that it would be foolish to apply the 4% rule to someone who retired in the 30s or 40s. Some have turned it into a direct attack on the fire movement.

Critics are right about whether it is reasonable to apply the 4% rule to someone who has retired at the age of 35 or 40. % Rate. But it didn’t last nearly as long at the 4% withdrawal rate. In rare cases, the 4% rule does not exceed about 35 years.

Yet, here too, the 4% budget is critical in 2 cases. First, can early retirees save only 3% or 3.5% of their savings? Second, do they really plan to survive the next 65 years without earning 65, or do they have the skills that can make them work the way they want to live? The answers to these questions are logically more important than the debate over the 4% rule.

Some may question whether working, even part-time, is actually “leisure”. Perhaps it is not at least by traditional theological values. But as a person who retires twice at the age of 51 and expects to retire at least 3 or 4 times, I feel retired even after typing these words.


All investments are at risk, including the potential loss of money you invest.

Rob Berger’s opinion is not necessarily like Vanguard’s. For information on Vanguard’s leisure spending strategy, look at Wealth from Resources: Goal-Based Approach to Retirement Expenditure.

Berger is a professional finance writer and blogger and not a registered consultant.

We recommend that you consult a tax or financial advisor about your personal situation.

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