Why No One Follows the 4% Rule

Why the 4% Rule Failed (And What Actually Works)

Episode Description:

The 4% withdrawal rule has become retirement planning gospel—but here's the problem: almost nobody actually follows it. In this episode, we unpack why retirees consistently withdraw only 2% of their portfolios annually, despite decades of research validating higher withdrawal rates. More importantly, we reveal what the data shows does work: building portfolios with reliable income streams that give you permission to actually enjoy your retirement wealth.

This episode delivers actionable strategies backed by real research.

Key Topics Covered

The 4% Rule: Origins and Evolution

• William Bengen's 1994 research establishing the "safe max" withdrawal rate
• How the rule actually works (initial withdrawal + annual inflation adjustments)
• The critical distinction: 4% was the minimum worst-case scenario, not a ceiling
• Subsequent research validation (Trinity Study, Wade Pfau's international analysis)
• Morningstar's annual updates (ranging from 3.3% to 4% over the past five years)
• Bengen's own upward revisions over time

The Decumulation Paradox

• Why retirees average only 2% withdrawal rates when 4%+ is considered safe
• The psychology of loss aversion in retirement spending
• Real-world behavior vs. theoretical models
• The emotional weight of "spending down" versus "living on income"

What the Data Actually Shows

• Research revealing retirees with guaranteed income sources withdraw and spend significantly more
• The psychological difference between "withdrawing principal" and "spending income"
• How income-producing assets change spending behavior and retirement satisfaction
• Social Security as a foundational guaranteed income layer

Building a Resilient Income Portfolio

Multiple asset classes for generating reliable retirement income:

• Annuities - Guaranteed income contracts
• Closed-End Funds (CEFs) - Consistent distribution vehicles
• Covered Call ETFs - Systematic income generation from broad market indices
• Master Limited Partnerships (MLPs) - Higher complexity, substantial income potential
• Bonds - Municipal bonds for taxable accounts, corporate bonds for tax-deferred
• Strategic allocation: balancing income-producing assets with growth investments

Key Timestamps

00:00:57 - Introduction: The 4% rule's surprising failure
00:01:31 - Why Americans ignore proven withdrawal rate research
00:02:11 - William Bengen's original 1994 research explained
00:03:09 - How the 4% rule actually works (with inflation adjustments)
00:05:53 - Scientific validation and replication studies
00:06:59 - International market considerations (Wade Pfau's research)
00:08:07 - Morningstar's annual safe withdrawal rate updates
00:12:37 - The decumulation paradox: Why retirees withdraw only 2%
00:14:32 - Research on actual retirement spending behaviors
00:18:53 - The guaranteed income advantage: spending 3x more
00:23:51 - Actionable strategies: Building your income portfolio
00:26:50 - What to do if your income exceeds your needs
00:29:00 - Tax considerations across different account types

The research is clear: Building resilient retirement portfolios isn't just about maximizing returns—it's about creating sustainable income streams that give you both financial security and psychological permission to enjoy what you've built.

Transcript

00;00;20;29 - 00;00;45;27
Brandon
You are listening to the Yield to Reason podcast, where we help you build a bulletproof retirement with a keen eye on investment income. Because Independent Wealth hinges on your ability to pay the bills. We're dedicated to solving Retirement's biggest riddle how to turn your hard earned savings into spendable cash so you can enjoy the retirement you actually want, and the retirement you truly deserve.

00;00;46;00 - 00;00;57;05
Brandon
I am Brandon Roberts. Thanks for joining me today. As we dive deep into the less than resounding success of the 4% rule.

00;00;57;08 - 00;01;31;20
Brandon
The 4% rule has been a bit of a failure, but not because it doesn't work. It's mostly because almost no one actually does it. And that raises an interesting question why, why, why are so many people resistant or just seeming to be aloof about this long standing research and advice? That's the big question we'll dissect today, because the reason so few people actually follow the guidance created over 30 years ago is a fascinating lesson in human psychology.

00;01;31;20 - 00;02;11;09
Brandon
And there's a strategy to take from the research that painstakingly attempted to figure out why Americans mostly ignore it. Let's start by understanding what the 4% rule is and when it started, where it came from. So all the way back in October of 1994, William Benyon published research that he had conducted in the Journal of Financial Planning. This research sought to identify what the appropriate withdrawal rate in retirement would be, to insure against failure to find as running out of money.

00;02;11;12 - 00;02;40;21
Brandon
And the whole idea here was was actually quite intuitive from a from an intellectual standpoint, from a research oriented standpoint. 4% is not just a number that says, hey, just do this. 4% is the minimum kind of worst case scenario withdrawal rate in his eyes. He called it the safe Max. So in other words, there is totally the possibility that somebody withdraw more than just 4%.

00;02;40;24 - 00;03;09;15
Brandon
The problem, though, if you're willing to accept this small problem, is the probability of failure. In other words, running out of money does rise as you increase your withdrawal rate. So if you want the safest, sort of greatest peace of mind scenario, 4% is your number. But if you're willing to accept a little more variability in success rate, well, you could take a higher percentage when you start.

00;03;09;17 - 00;03;43;15
Brandon
And that's that's a critical piece to this. So the 4% withdrawal rate was take whatever your balance is. So for easy numbers let's say you've got a million bucks. That means you would withdraw $40,000 in year one. But the cool thing about this research was every single year you can increase that withdrawal amount by the inflation rate. So if you start at $40,000 and the inflation rate for the following year happened to be 3%, $41,200 would be the withdrawal amount in year two, and then it would continue to compound up from there.

00;03;43;16 - 00;04;19;22
Brandon
And according to the research, the bank did, this would ensure that after a 30 year period, you should be fine. You should not run out of money. Banking. Who was a financial advisor himself, used historical market data that was available to him at the time to arrive at this recommended withdrawal rate. So I obviously research was a bit more painstaking back then than it is today, where we live in the technology age, and we have things that can assist our efforts to compile market data.

00;04;19;23 - 00;04;50;25
Brandon
He ran through the numbers manually, tabulating what real market returns were, using both stock and bond assets to figure out what somebody would be able to withdraw. And in his original research, the allocation of assets was split evenly between stocks and bonds. And he used this research or the result of this research in his own practice. So advising clients that their safe max withdrawal rate was 4%.

00;04;51;01 - 00;05;15;14
Brandon
And he even began employing this whole idea in his own, retirement sort of an air quotes, because there's still some work he's doing even today. Just not in the same context of what he had, years prior. So when he effectively, retired, he did start using his own recommendations as the withdrawal rate that he would use from his own accumulated assets.

00;05;15;16 - 00;05;53;23
Brandon
Now, one of the important things to understand about science is that it is never a one off event. Any time somebody conducts research trying to establish knowledge, they have effectively created a data point, an observation. And in the world of academic research, it's very common to revisit the research and the analysis that is done by others in an attempt to replicate results and further identify the truthfulness of a finding in previous research.

00;05;53;25 - 00;06;22;22
Brandon
And that effort has been attempted by others, not Bengtsson himself, to support or reject the notion of this 4% safe, max withdrawal rate. And the results are somewhat mixed, but I think mostly favorable to the initial findings. So we have academics that have, replicated this research from Trinity University that said, for the most part, yeah, this this makes sense.

00;06;22;22 - 00;06;59;06
Brandon
The 4% withdrawal rate is, pretty sustainable when it comes to insuring success against failure, again defined as running out of money over a 30 year period. Some more recent ish research, conducted largely by, Wade Fowler, who is a professor at the American College of Financial Services, has again reinforced some parts of this to say, well, yes, data from markets inside the United States and a few other countries does support a four ish percent withdrawal rate.

00;06;59;06 - 00;07;38;08
Brandon
But if you live outside of those territories or you invest heavily in markets outside of those territories, 4% may be exceedingly high, to ensure that sort of success. And I realize that if you are a retiree in the United States, you may then say, well, I guess that doesn't matter, but I would I would encourage you to to consider that if your investments are outside of the U.S., if you're trying to gain international exposure, that may warrant some hesitation or at least revisiting the soundness in the 4% as the safe max withdrawal rate, because you may have exposures that could go very well, but could also impair your portfolio to the degree that

00;07;38;08 - 00;08;06;27
Brandon
4% may be too high. In addition to that, Morningstar has taken to publishing annually the safe maximum withdrawal rate for retirees starting in that particular year. So, in essence, Morningstar announces that in 2025, the safe minimum withdrawal rate that you should, pull from your your portfolio if this is the year you're going to retire is X.

00;08;07;02 - 00;08;33;15
Brandon
And, over the course of the past five years, that number has fallen below 4%. For of those five years, the lowest, lowest recommendation came in 2021 at 3.3%. And the highest was 2023 at 4%. Exactly. And again, that is a starting withdrawal rate that will be adjusted for inflation throughout retirement. And Morningstar's target for success is 90%.

00;08;33;22 - 00;08;59;20
Brandon
So if you follow their guidance, their math would suggest that 90% of the time you will be just fine, which would unfortunately indicate for the extremely conservative out there that, you've got a withdrawal some rate below their recommended rate to increase the probability of success. Now, Bengt himself has revisited the safe max withdrawal rate a few times, and he has adjusted it upwards pretty much every single time.

00;08;59;22 - 00;09;29;17
Brandon
He published a book, a Richer Retirement, in 2025, suggesting that 5% is now the new safe max number. Now, interestingly, something that has tended to take place over the course of is revisits to the safe. Max withdrawal rate is the composition of stocks in the portfolio. Seems to be increasing as time goes on. So back in the mid 90s it was a 50% stocks, 50% bond portfolio.

00;09;29;24 - 00;09;58;05
Brandon
But since then, revisiting this subject has tended to push the composition of stocks higher. So more stocks representing the portfolio, fewer bonds. That probably has a lot to do with the fact that yields on bonds have fallen pretty substantially since banking did his original research, which would then suggest that the the support of that 4% number is not as great among bonds, because the yield simply isn't high enough to support that original withdrawal rate.

00;09;58;07 - 00;10;26;28
Brandon
Now, there are a few other concerns or a few other issues. People have raised about the 4% recommendations. First, there is zero empirical data that people do this and achieve success. Nobody has conducted a longitudinal study that has looked at real retirees, actually using the 4% recommendation in assessing what their success or failure rates are. And it would be incredibly difficult to conduct that style of research.

00;10;27;01 - 00;10;54;24
Brandon
So we're left with modeled data. So hypotheticals that say, all right, if you retire on this date and you have a portfolio that is comprised of these assets, and we use historical returns for those assets, we can figure out whether or not you would have no money or some money by the time you reach 30 years out. That's the best we've been able to do, which is okay.

00;10;54;27 - 00;11;27;23
Brandon
But there are a lot of variabilities that can happen in real life that may alter the success or failure of this idea. So that does not mean it won't work. It does mean that the data that supports it is not the highest quality data we would generally want when it comes to research and making definitive statements like this is what you can do to insure your success.

00;11;27;25 - 00;11;56;02
Brandon
Unfortunately, when it comes to financial planning and retirement, we rarely, if ever, have that style of highest quality to your data to make inferences and therefore recommendations. And there's also a small part of possibility here that we are kind of mis applying the data when it comes to what historical numbers bear out and what your results would be.

00;11;56;05 - 00;12;34;14
Brandon
So sometimes people will use historical rate of return over long periods of time to justify their position about their assumed rate of return moving forward. Financial advisors sometimes will tell you something like the average return or even the or the compound annual growth rate of the S&P 500 for the last 80 years was, let's say, 9.5%. So therefore, you should assume that you will probably achieve something like 9.5% over your accumulation years or over your retirement period.

00;12;34;17 - 00;13;03;17
Brandon
But the problem, the problem with that inference is when we're using really long timelines for data, there is a certain smoothing that takes place to the higher variability. So the really high highs and the really low lows become less impactful over those super long periods of time. When we condense the time frame, those really high highs or really low lows become much more impactful on the real results.

00;13;03;20 - 00;13;29;25
Brandon
So it's not always great to look at an 80 year or 100 year or even 60 year result in an investment like the S&P 500, and infer that your 20 years left before retirement will look anything similar, or your 30 years in retirement will look anything similar. We have to use realistic time frames to what you would be expecting.

00;13;29;26 - 00;13;50;25
Brandon
So if you're looking at a 30 year retirement, we want to know what 30 years in something like the S&P 500 actually look like. And ideally, we want multiple 30 year periods so that we can get a grasp of what the probability of a certain rate of return would be. I'm not saying that's not taking place in all instances here.

00;13;50;28 - 00;14;13;03
Brandon
I'm just pointing out that a lot of times we try to use really long data sets because we think that's better. It gives us more, confidence in what the actual rate of return is. But there is strong variability that comes when we consolidate the time period. And that's important for people who are looking at periods of shorter time frames.

00;14;13;05 - 00;14;41;05
Brandon
Having said all of that, here is the big head scratcher about the 4% rule. It's existed for over 30 years now. It was originally published in 1994. It's currently 2026. We've had a lot of time for it to exist and for the awareness campaign to to do its thing. A lot of financial advisors talk about it, but not a lot of people, but not a lot of laypeople necessarily are familiar with it or even how to apply it.

00;14;41;07 - 00;15;18;14
Brandon
Some people might have a vague understanding that some suggestion that maybe 4% is the right number, but exactly how they execute the 4% safe max in its original context is pretty, underwhelming, if you were to ask just anybody how that works. Understandably, people who don't spend their time in retirement planning may be less familiar with it. But when we zoom out and we look at data research that is done to try and arrive at what Americans are actually doing with their retirement assets, what we discover is nobody follows the 4% rule.

00;15;18;16 - 00;15;53;03
Brandon
The average withdrawal rate among retired Americans is around 2%. It's it's slightly higher if you're married, a little bit lower if you're single. But in both cases, very, very close to a 2% withdrawal rate. And what this research further identifies is the fact that this 2% withdrawal rate is obviously going to increase the probability of success as defined by having money when you die or after a 30 year period.

00;15;53;04 - 00;16;25;03
Brandon
Because if 4% is perhaps more the right number, then half of that is only going to increase the probability of not running out of money. But what we also are discovering is that people are ending up at end of life with more money than they ever intended to have. Even those who say they they have no desire or no plans to leave money behind to someone or something.

00;16;25;05 - 00;17;02;28
Brandon
In fact, the average retiree who passes away now, who has accumulated money in something like a 4 or 1 K, dies with a couple hundred thousand dollars and that is true for people who want to leave money behind and those who don't want to leave money behind. So the conservativism in the way Americans have approached withdrawal rate is showing us that they could use more of their assets to enjoy their retirement, but they're not.

00;17;03;01 - 00;17;34;04
Brandon
And there is a big question out there about why that is. And there are a multitude of reasons that are identified in surveys, but they really boil down to two major categories. The first one is fear of needing the money later. So these are driven by things like, well, what happens if there's a market downturn and I need some hedge because I won't have as much money and I want to keep withdrawing the same amount.

00;17;34;07 - 00;17;59;11
Brandon
Medical expenses keep a lot of retirees up at night. The rising cost of health care and what they might need to reach into their pocket to pay for as they age. And very closely related to that is the need for long term care. So either at home nursing or going to a nursing home, it's generally, looked at as a very, very expensive proposition.

00;17;59;14 - 00;18;34;08
Brandon
And a lot of people are worried about how exactly they will go about covering that expense. And then in general, cost goes up over time. Inflation has been a big topic for a lot of people, and there are concerns that inflation will ultimately disrupt the withdrawal rate and the income that that Americans are taking from their assets. The second category is the difficult shift from being a saver oriented person to a spender oriented person.

00;18;34;11 - 00;19;02;21
Brandon
If you accumulate a decent number of assets in your 400 and K, your IRA, or just a brokerage account wherever it is, generally you've adopted a certain amount of a certain behavior pattern that is in conflict with the idea that now you just spend money, and when you have to spend money in the fashion of I'm simply going to sell some assets and deduct from this balance and then take the money and go do something with it.

00;19;02;23 - 00;19;34;20
Brandon
That's hard mentally to shift into. And there's a number of additional emotional and psychological aspects to this. A lot of people feel guilt about spending money and when they are very saving oriented, that guilt rises a lot. There's a virtue for a lot of people in the idea of thriftiness. So if we forego the satisfaction of that and we save the money, that is the virtuous thing to do.

00;19;34;20 - 00;20;05;10
Brandon
That is the thing that people should praise me for doing. But if instead I just go and spend the money on vacation or a nice car or a home renovation, well, then that's that's not as praiseworthy. And it's very difficult to decide. The time has arrived where I don't worry about the virtues of saving, and I now start worrying about the the hedonism of spending my money on the stuff that that I want to spend my money on.

00;20;05;12 - 00;20;37;07
Brandon
The additional paradox that has been identified within the efforts to figure out what Americans are withdrawing from their assets, and why they're doing it, is the fact that those who have higher degrees of guaranteed income withdraw more from their assets than those who do not. Now, this seems very counterintuitive. If you have higher degrees of guaranteed income, you should, in theory, need to withdraw less from your assets.

00;20;37;10 - 00;21;08;14
Brandon
So we would expect that withdrawal rate to be less. But it's not. The data shows us it's more. And the big explain explainer behind this is these people feel safer. They have a level of guaranteed income that frees a lot of the worry about needing that other money some time later, and they feel much more empowered to withdraw a higher amount and spend it on whatever it is they want to go out and spend it on.

00;21;08;16 - 00;21;36;23
Brandon
This raises an interesting question as a thought experiment, could people make more use of their savings if they transitioned more of it into income style assets? Back in 2024, the Retirement Income Institute, which is part of the Alliance for Lifetime Income, which is to put the bias out on the table, an institution formed by the insurance industry.

00;21;36;29 - 00;22;16;24
Brandon
So it's very focused on justifying the use of annuities. Their research suggested that people who annuities their wealth end up spending double the amount in their retirement versus people who do not annuities their wealth. But and this is the important part, have the exact same level of wealth. So if you got $1 million in you annuities, it where you got $1 million and you just try to do a withdrawal, the annuities crowd goes out and spends double the amount of money over their retirement versus the crowd that just tries to take a safe withdrawal rate against it.

00;22;16;26 - 00;22;45;09
Brandon
The argument that the researchers in this case made was that Americans are probably vastly under utilizing their wealth in retirement because they could use income focused assets. In their case, they're talking about annuities. But I'm going to tell you that there are other ways you could do it. I'm not saying you shouldn't buy annuities. I'm just saying that you you could approach or you could accomplish something similar to what they're advocating for without buying an annuity.

00;22;45;11 - 00;23;23;00
Brandon
So if they were to focus at least some of their asset on the sake of generating consistent income, that would increase the amount of of spending or consumption or utility or satisfaction that they would derive from the assets that they accumulated for the sake of being retired. Because people who don't do this, and they simply plan to withdraw some amount from their assets as they need it, tend to be overly conservative about the withdrawal rate, and they tend to cut expenses in an aggressive manner.

00;23;23;02 - 00;23;51;07
Brandon
That leaves them in a position where they simply don't get to enjoy a huge percentage of the wealth they worked to accumulate throughout their life. So what's the actionable step from all this? The answer is incorporating income in your portfolio and in your retirement plan. And there is a host of different ways you can do that. Annuities are one of them, but closed end funds are great for distributions.

00;23;51;07 - 00;24;24;26
Brandon
Yield. You could go out and purchase, certain ETFs that primarily operate by writing covered calls against broad index, or indices rather. And that could give you income that is very consistent. Master limited partnerships are another option, little more complex. So, more, more geared toward, somewhat sophisticated investors. I would, I would argue, bonds in some cases, muni bonds are, one that that seem to be very popular among, large crowd of people.

00;24;24;28 - 00;24;55;01
Brandon
Not so much in IRA play, but, definitely one that that retail investors have a little more access to than that. Corporate bonds, for example. And of course, annuities as we covered, are another way to establish a certain guaranteed or near guaranteed income that you can use to just go live life in retirement. And the research is quite clear in telling us that people who do these sorts of things enjoy more of their money.

00;24;55;04 - 00;25;23;05
Brandon
And perhaps part of this is because they're forced to recognize some of their wealth as income, versus having to make the day to day or month to month decision on how much they're actually going to withdraw. And I can tell you from experience that the people who just have a sum of money and they have no income plan with that money, they have a very hard time figuring out what the right amount is to withdraw and use for.

00;25;23;09 - 00;25;52;00
Brandon
Let's say, frivolous style spending, even though a lot of the times it's not that frivolous. So if you are somewhat more forced to recognize a certain portion of your wealth as income, you've earmarked it. You have a certain change in thinking about that. There's a peace of mind saying that, well, we know every single month or quarter we're going to receive this distribution or this income from the asset, and we can spend that to our heart's content.

00;25;52;02 - 00;26;19;11
Brandon
And nobody is telling you you should take all of it and do that. You can allocate a certain percentage and then have the other money invested in the market and hopefully growing with all of the booms that take place and in the economy and just growing wealthier from there. But for sure, the data clearly tells us those with an income plan are much more likely to spend the money and enjoy their retirement.

00;26;19;11 - 00;26;50;19
Brandon
And you might even find that your hesitation to withdrawing the non income focused money is not as impeded because you're not as worried about, well, what if this or what if that, because that is already covered by the income that you're generating from the income style asset. Now inevitably in the context of this discussion, somebody always asks, but what if the income that is produced by the assets is in excess of the income that I need?

00;26;50;21 - 00;27;11;27
Brandon
Two things. One, I wouldn't blindly just buy income for the sake of income unless you like the collection of income. So there's there's certainly a group of people who decide, I want the majority of my assets in income style things. But those people aside for just a second, because there's a part two to this. Hey, what you would ideally do is back into I need X amount of dollars per month.

00;27;12;03 - 00;27;52;00
Brandon
So I need to put together the portfolio of assets that are going to produce X amount of dollars per month. And don't overlook Social Security, because Social Security is absolutely a guaranteed income source. So that in addition to the income produced by your assets, is the winning sort of strategy for most people. But if you find yourself in a position where you're capable of producing more income with your assets than you need to, either because you just happen to allocate too much to the income side of the portfolio, or you decided, I really like these income style assets, and I want as many of them as I can get.

00;27;52;03 - 00;28;11;16
Brandon
You don't have to spend all of the income that your assets produce, and you are totally free to take the excess income and reinvest it in more assets, either for growth or for income, all on its own. That will further compound your wealth building efforts and put you in an even safer position when it comes to the future.

00;28;11;16 - 00;28;35;25
Brandon
And whatever risks, financially speaking, that may bring. And when you invest for income, you will start to get a very good handle of what your monthly or quarterly income is from the assets that are specifically held to produce income, and that will give you a good idea of one what you can spend money on, or two what sort of reinvestment opportunities you're going to have.

00;28;35;27 - 00;29;00;04
Brandon
Some of this is, of course, circumstantial to the account style. So IRAs make the taxes a little bit more simplified because you don't have to recognize the income that's provided from various assets in the month or the quarter that they take place. Brokerage style accounts, on the other hand, are going to create potential income tax liabilities even if you don't spend the money, but you rather reinvest it.

00;29;00;07 - 00;29;31;19
Brandon
So there is a little bit of care that has to be taken to how you address or deal with potential income tax issues. But believe me, I've never met anyone who produces a lot of investment income and is really, really upset by the fact that it created some degree of an income tax liability. Very truthfully, there is no one way to do this, and your preferences and your risk profile are going to dictate your best approach to building any kind of portfolio for growth or income.

00;29;31;22 - 00;30;04;23
Brandon
But I can tell you that having a pretty consistent amount of distributions that are being paid to you from your assets on a consistent basis comes to mind considerably, versus somebody who just happens to own a bunch of assets, and they are hoping that they're going to withdraw the right amount and not run out of money. None of this is to say that the 4% rule, as it was originally conceived and adjusted as time goes on, won't work.

00;30;04;25 - 00;30;33;10
Brandon
I'm not saying that at all because I don't believe that. But what I do know from the data is that a lot of people don't like it or don't want to do it, and they won't. And I know from other data that there are other ways people can do this and be much, much more peace of mind or have much higher peace of mind, rather, and feel far safer in their pursuit.

00;30;33;12 - 00;30;54;28
Brandon
And I'm not saying the probability is zero that you could buy an asset that produces income and it would cease to exist and you'd lose all your money. But I have yet to find anybody who purchased some of the assets that I mentioned earlier, who has lost all of their money, even in that one individual asset that they allocated.

00;30;54;28 - 00;31;15;19
Brandon
So if 5% of their their portfolio went to this, that or the other ETF closed in a fund master limited partnership, I don't know many people who have lost all of that initial investment. So when you're collecting distributions, value of the asset can definitely bounce around. But I don't know many that have gone all the way to zero.

00;31;15;22 - 00;31;31;08
Brandon
That is everything for today. Thanks so much for stopping by. We will be back next week. In the meantime, check out Yield to Reason. At YouTube. And until we meet again, please remember real wealth doesn't just add up. It writes checks.