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- This Retirement Rule Survived Wars, Recessions, and AI — And It’s Still Wrong
This Retirement Rule Survived Wars, Recessions, and AI — And It’s Still Wrong
For decades, the 4% Rule has been whispered in retirement planning circles like gospel:
Withdraw 4% of your portfolio in your first year of retirement, adjust for inflation each year, and you’ll never run out of money.
It’s been touted in financial books, quoted by TV pundits, and adopted by planners from coast to coast.
And for a long time, it worked.
The 4% Rule survived the dot-com crash, the 2008 recession, and even the post-COVID market shocks.
But the 4% Rule was built for a financial world that no longer exists.
And following it blindly today could quietly shorten your retirement by a decade or more.
The World the 4% Rule Was Built For
In the 1990s, when financial planner William Bengen ran his famous analysis, the economic landscape was very different:
Interest rates hovered around 5–7% — bonds actually generated meaningful income.
Inflation averaged 2–3% — a steady, predictable rise in costs.
Stock market valuations were lower — meaning better expected future returns.
Retirees often planned for 25–30 years in retirement.
Under those conditions, the math made sense.
Even retirees who experienced early bear markets could make their money last three decades without drastic lifestyle cuts.
Why the Math Is Failing Now
Fast forward to today:
Low real yields dominated most of the last 15 years, forcing retirees to rely more on stocks for income — and take on more risk.
Higher valuations mean stocks may not deliver the same long-term returns as in past decades.
Inflation shocks (like 2021–2023) can destroy the purchasing power of a fixed withdrawal strategy in just a few years.
Longevity creep — thanks to FEHB and improved healthcare, many federal retirees are living well into their 90s.
If you retire at 60 and live to 95, the 4% Rule’s original “safe” math can break down, especially if the first decade includes a market downturn.
The Federal Employee Twist
For federal employees, pensions and Social Security replace part of your income — but the rest must come from your TSP and other savings.
That’s where the danger lies:
TSP balances may need to stretch for 35–40 years.
FERS pension COLAs often lag behind real inflation, meaning your “guaranteed” income loses buying power.
Many retirees front-load spending (travel, home upgrades, relocation) in the first 10 years, exactly when sequence-of-returns risk is highest.
Smarter Alternatives to the 4% Rule
If the terrain has changed, your map should too. Here are strategies that work better for today’s realities:
Dynamic Withdrawals — Adjust spending based on market performance instead of blindly adding inflation each year.
Guardrails Method (Guyton-Klinger) — Spend more in strong years, cut back slightly in bad years to protect principal.
Bucket Strategy — Keep short-term spending in cash/G Fund, mid-term needs in bonds/F Fund, and long-term growth in equities (C/S/I Funds).
Tax-Smart Withdrawals — Blend Roth and Traditional TSP distributions to minimize taxes over decades, not just this year.
The 4% Rule isn’t “wrong” because the math failed — it’s wrong because the world changed.
For federal retirees, sticking to it without adjustments is like navigating with a 30-year-old road map: you might eventually get there, but you’ll hit a lot of dead ends along the way.
Your retirement income strategy should flex with the economy, your health, and your goals — because your future deserves more than a one-size-fits-all formula from the 1990s.
—FWR