The 4 Percent Rule is Not Safe in a Low-Yield World

15 Pages Posted: 16 Jan 2013 Last revised: 17 Jan 2013

See all articles by Michael S. Finke

Michael S. Finke

The American College

Wade D. Pfau

The American College; McLean Asset Management

David Blanchett

Morningstar Investment Management

Date Written: January 15, 2013


The safety of a 4% initial withdrawal strategy depends on asset return assumptions. Using historical averages to guide simulations for failure rates for retirees spending an inflation-adjusted 4% of retirement date assets over 30 years results in an estimated failure rate of about 6%. This modest projected failure rate rises sharply if real returns decline. As of January 2013, intermediate-term real interest rates are about 4% less than their historical average. Calibrating bond returns to the January 2013 real yields offered on 5-year TIPS, while maintaining the historical equity premium, causes the projected failure rate for retirement account withdrawals to jump to 57%. The 4% rule cannot be treated as a safe initial withdrawal rate in today’s low interest rate environment. Some planners may wish to assume that today’s low interest rates are an aberration and that higher real interest rates will return in the medium-term horizon. Although there is little evidence to support this assumption, we estimate how a reversion to historical real yields will impact failure rates. Because of sequence of returns risk, portfolio withdrawals can cause the events in early retirement to have a disproportionate effect on the sustainability of an income strategy. We simulate failure rates if today's bond rates return to their historical average after either 5 or 10 years and find that failure rates are much higher (18% and 32%, respectively for a 50% stock allocation) than many retirees may be willing to accept. The success of the 4% rule in the U.S. may be an historical anomaly, and clients may wish to consider their retirement income strategies more broadly than relying solely on systematic withdrawals from a volatile portfolio.

Keywords: retirement, systematic withdrawals, 4% rule, safe withdrawal rates

JEL Classification: C15, D14, G11, G17

Suggested Citation

Finke, Michael S. and Pfau, Wade D. and Blanchett, David, The 4 Percent Rule is Not Safe in a Low-Yield World (January 15, 2013). Available at SSRN: or

Michael S. Finke

The American College ( email )

Bryn Mawr, PA 19010
United States

Wade D. Pfau (Contact Author)

The American College ( email )

Bryn Mawr, PA 19010
United States


McLean Asset Management ( email )

8200 Greensboro Dr
# 1150
McLean, VA
United States

David Blanchett

Morningstar Investment Management ( email )

22 W Washington
Chicago, IL 60602
United States
859-492-5637 (Phone)


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