In Practice April 1, 2025

Does the 4% Rule Still Stand?

The spending rule has been around for 30 years, but experts are rethinking traditional drawdown approaches in light of longevity and economic realities.
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Since its creation more than three decades ago, the 4% rule has been cited as a simple guide for retirement withdrawals. The approach to finding a “safe” initial withdrawal rate involves pulling 4% of your retirement savings in your first year of retirement, then continuing to do so each subsequent year while adjusting for inflation.

When the 4% rule was published by Bill Bengen in 1994, it was groundbreaking, says David Blanchett, head of retirement research for PGIM DC Solutions. It remains a novel piece of research in the retirement industry.

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“It was and is still relevant today,” Blanchett adds.

But given the rule’s age, it is important to ask how some of its key assumptions can be improved upon to make it more relevant. In today’s economic climate, retirees are facing market volatility, inflation and increasing longevity—and industry experts are rethinking traditional drawdown strategies.

The State of the 4% Rule

In past years, when interest rates were so low, Wade Pfau, author of the “Retirement Planning Guidebook” and a professor of practice at the American College of Financial Services, says he was concerned about the viability of the 4% rule. But he now feels more comfortable with its ability for success.

“Today, with interest rates being higher, if you wanted 30 years of inflation-adjusted spending, you could build a 30-year TIPS ladder,” he says, referring to Treasury inflation-protected securities. “Right now, with interest rates, that would support about a 4.6% withdrawal rate.”

But interest rates fluctuate, and if they do drop, the sustainable withdrawal rate could fluctuate every day. In short, the 4% rule is a “research simplification,” Pfau explains. It does not take into account variations in cash flow—including whether Social Security has kicked in for a retiree yet—or taxes, which do not grow with inflation. The rule also maximizes sequence-of-returns risk because retirees never adjust spending in relation to how their portfolios are performing.

Those who implement the rule also need to account for its assumptions, including that it is specifically designed for a 30-year retirement.

“The 4% rule is a reasonable starting point,” says Amy Arnott, a portfolio strategist for Morningstar. But, she says, it won’t make sense for everyone.

Flexible Spending Methods

When Morningstar published its most recent “State of Retirement Income” report, the firm recommended people be slightly more conservative: a 3.7% withdrawal rate for those who want to follow a steady-state approach, withdrawing the same amount each year and adjusting it for inflation.

But Arnott says there are other approaches retirees can take that boost that figure. She and the other authors behind Morningstar’s report looked at four different flexible spending methods. They estimated that on one end, the safest withdrawal rates for the basic approach, in which anytime the portfolio value is down, a retiree skips the inflation adjustment the following year, was 4.2%. On the other end was the guardrails approach, where retirees compare the estimated withdrawal rate with the portfolio balance each year and make adjustments if that portfolio performs outside a certain level, with a safe withdrawal rate of 5.1%.

When it comes to deciding which withdrawal method makes sense, Arnott says retirees should consider what is important to them: Is it having a consistent level of income or maximizing the amount they can take out, especially early in retirement? Do they really want to leave a legacy behind for family members or charity, and are they comfortable with variations in cash flows from year to year?

“Another thing to think about is how much uncertainty you’re willing to live with,” she says, adding that Morningstar is “very conservative” in its estimates and uses a 90% probability of success that some savers may be willing to bump down. She also recommends considering guaranteed income, including Social Security income or a pension or the possibility of purchasing an annuity to support part of retirement spending.

Guided Spending Rates

Blanchett says PGIM uses an approach in line with the research behind the 4% rule, but based on a different model: guided spending rates. The approach uses forward-looking returns (instead of historical returns, which the 4% rule uses) and allows for savers to take into account their perceived level of flexibility. The spending rates have three levels—conservative, moderate and enhanced—that tend to be approximately 4.0%, 5.0% and 5.5%, respectively, according to PGIM’s 2024 report on guided spending rates.

The research supporting the 4% rule—and many financial planning tools—determines the “safe” withdrawal rates by focusing on whether the retiree’s goal is accomplished in its entirety, which does not leave room for considering the total amount of the goal accomplished and potential implications if there is a shortfall, according to the report.

“The problem with that is: What if you want to have $100,000 a year in retirement for 30 years, and then in the 30th year, you fall $10 short? That would be considered a failure in that kind of model, but it’s not a failure; you’ve accomplished all of your goals,” Blanchett says. “So we’re thinking about outcomes, more than just success rates.”

Most American retirees have lifetime income to cover most of their essentials, which means the implication of making a change are not as dire as analyses that use success rates and treat a $1 shortfall as failure, Blanchett says.

“You don’t want to go broke when you’re alive, but you also don’t want to get to the age of 80 and think, ‘Gosh, I could have done all these cruises and really cool stuff when I was a younger retiree,” he adds.

More Alternative Approaches

The 4% rule is an appropriate starting point for somebody more comfortable relying on portfolio growth and market growth to fund retirement expenses, Pfau explains. But starting there dismisses the bucketing approach, which involves allocating money to three separate buckets, each of which corresponds to a different time period in retirement, as well as income-protection approaches.  

“A lot of people will be more comfortable having more protections built in,” Pfau says. “The 4% rule really is just taking the pre-retirement investment management and just applying that post-retirement as well.”

More on this topic:

What to Know About Adding Income to a Plan Lineup
Understanding and Evaluating Retirement Income Solutions
Comparing Insured and Non-Insured Payout Options
Beyond the Annuity Puzzle: Rewiring the Psychology of Lifetime Income
Products & Services April 1, 2025

What to Know About Adding Income to a Plan Lineup

How the regulatory landscape dictates the selection of a retirement income solution—and how advisers can frame the discussion with clients.
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As an increasing number of Americans retire and express interest in receiving regular payouts of their retirement savings, more plan sponsors are considering adding income solutions such as annuities to plans. Last year, 20% of the 500 C-suite leaders in finance and human resources—comprised of 225 plan sponsors who offer a 401(k) plan, 225 who offer a 403(b) plan and 50 who offer a 457 plan—surveyed by TIAA said offering guaranteed income for life was the top way employers can improve workers’ retirements. (Guaranteed income was the second-highest choice behind increasing an employer match.) 

But with evolving regulations and fiduciary responsibilities, income solutions must be properly vetted before being added to retirement plans.

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“In the last year or so, there has been a shift from the ‘why’ to the ‘how’ when it comes to incorporating annuities or guaranteed income into the defined contribution plan,” says Brendan McCarthy, head of retirement investing at Nuveen.

The Regulatory Environment

The regulatory environment has been relatively friendly toward retirement income solutions, in part because products like annuities are often cheaper when offered institutionally in a plan than when offered on their own, sources say. The Setting Every Community Up for Retirement Enhancement Act of 2019 offered lifetime income protections, including the creation of a safe harbor for the selection of annuity providers—shifting the fiduciary responsibility to the issuing companies—and the requirement of lifetime income disclosures.

The SECURE 2.0 Act of 2022 built on the lifetime income-related legislation of its predecessor, including increasing the age at which participants had to take required minimum distributions to 73 from 72, helping the argument for plan sponsors that want to keep participants in plan after they retire. The 2022 law also made it so that participants can have a larger portion of their balance in a qualified longevity annuity contract.

“It’s clear the government, regulators and legislators want participants to have the ability to stay in-plan longer,” says Kevin Crain, executive director of the Institutional Retirement Income Council. He says he thinks that will continue.

But while the regulatory changes have given plan fiduciaries more options when it comes to adding guaranteed income products, adoption is not easy. Every Employee Retirement Income Security Act fiduciary is thinking about their ongoing duty to select and monitor one of these complex solutions.

In general, the existing regulations regarding qualified default investment alternative plan disclosure processes suffice for these types of products. But the plan sponsor and consultant have work to do in modifying the initial processes to accommodate the new products, like annuity target-date funds, McCarthy says. For example, most plan sponsors and their consultants have a strong process in place for the evaluation, selection and monitoring of their plan’s QDIA, a process defined in their investment policy statement or in a specific QDIA policy statement. While there is not necessarily a policy change involved, plan sponsors will want to modify that fiduciary process and document so that they incorporate the annuity TDF selection, he adds. 

Common Challenges

The easiest thing advisers and consultants can do when bringing these solutions to their plan sponsor clients is make them simple, McCarthy says. But that is also one of the biggest challenges. If solutions come across as increasingly complex, administratively burdensome or expensive relative to what is currently in the plan, it will make it harder for the plan sponsor to move down the path of offering pension-like income payouts to their employees.

Retirement income solutions are often complex, lengthening the overall fiduciary relationship and potentially leading to increased cost and the need for more governance and oversight, says Jeri Savage, retirement lead strategist at MFS Investment Management. TIAA’s survey found that 63% of plan sponsors said they are unable to articulate the value and importance of annuities, while 85% of employers said they understand the basics of how annuities work but need a better understanding of how they fit into a plan and portfolio.

Another part of the challenge is navigating the wide array of potential solutions that come to market and assessing which will perform well and survive for years to come. Plan sponsors do not want to sign on to a solution that may not exist in 20 years. Additionally, advisers and consultants are facing the fact that recordkeepers are still trying to catch up with the number of products, which means they are not all available across platforms, McCarthy says. In MFS’ 2024 DC Plan Sponsor Survey, only 14% of sponsors indicated they have specifically added retirement income products to the menu, and waiting for support from recordkeepers is one of the top three reasons some sponsors are not implementing.

Retirement income solutions also may not align with plan sponsors’ overall plan demographics: With a really young workforce, for example, participants do not need retirement income right now. In a workforce with high turnover, it is hard to build out a retirement income solution for participants that will not be there in a few years, Savage says.

Best Practices

The decisionmaking process should be thought of as a framework with which plan sponsors can determine what they want to solve for, as well as the plan’s overarching retirement income solution, Savage says. While solutions may have a wide range of attributes—such as liquidity, flexibility, cost and ease for a participant to understand and a sponsor to monitor—she says it is important to remember that no one product will have every characteristic for which a plan sponsor may be looking.

“There’s always going to be a tradeoff,” Savage says, so creating a framework for evaluations is crucial.

With such complex solutions, how can advisers make them simple enough for plan sponsors to assess and bring to retirement plans?

“The No. 1 rule is to change as little as possible from the current plan,” McCarthy says.

McCarthy says from an investment fiduciary perspective, plan sponsors and consultants should make sure that the new TDF performs as well as its non-annuity TDF counterpart.

“The fact that we’ve embedded the annuity should not increase fees unnecessarily on the broader population,” McCarthy says. “You should not sacrifice cost, and you should not sacrifice performance by moving into this annuity TDF.”

More on this topic:

Does the 4% Rule Still Stand?
Understanding and Evaluating Retirement Income Solutions
Comparing Insured and Non-Insured Payout Options
Beyond the Annuity Puzzle: Rewiring the Psychology of Lifetime Income

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