Replacing the 4% Rule For Retirees

September 20, 2018

My article last week cited some of the weaknesses of the “4% rule”, which says that it is probably safe for a retiree to draw an amount every year equal to 4% of the current value of a stock portfolio, rising modestly year by year with inflation. The principal weakness of the 4% rule is that the retiree does not know and cannot easily control the risk that is involved.

The major risk is that the rate of return that will be earned on the retiree’s assets will fall short of the rate that was assumed in calculating how much the retiree could withdraw from the assets each month. An additional risk is that the retiree will live past her expected life span. Either could result in impoverishment at an advanced age.

This article proposes a replacement I will tentatively call the “Retiree Discretion Rule”, or RDR. , which is designed to remove the weaknesses of the 4% rule. The RDR makes the risks explicit and places them under the retiree’s control. Viewed as a tool for advisors, RDR provides a framework for a retirement plan that incorporates the unique needs and concerns of each retiree.

The RDR calculates the initial monthly draw from the retiree’s assets, based on the following inputs.

  • Retiree’s age
  • Retiree’s gender
  • Value of financial assets
  • Annual inflation rate desired
  • Age to which retiree wants monthly draws to last – life span
  • Rate of return on assets

Here is an example. Retiree Smith is a 65-year male, has a common stock portfolio valued at $1 million, wants his monthly draws from assets to rise by 2% a year, wants those draws to last until he is 90, and assumes his financial assets will yield 4% over that 25-year period. RDR indicates an initial monthly draw of $4218. The risk of falling short due to an asset return of less than 4% is estimated at 6.4%, the risk of living past 90 is 18.6%, and the combined risk of a shortfall from either source is 23.8%.

The risk of a shortfall in the rate of return is based on a data base of common stock returns during the period 1926-2012. Over the 673 25-year intervals during that period, the rate of return on common stock was less than 4% on 6.4% of them. The risk of living past any age is based on the mortality statistics used by the Social Security Administration.

If Smith views a risk of impoverishment of 23.8% to be excessive, he can reduce the assumed rate of return, extend the draw period or both. With a 3% rate of return and draw period of 95, the draw amount falls from $4218 to $3210 but the risk of running out of funds falls from 23.8% to 9.4%. 

Another way to use the RDR is to generate a table of outputs that cover the different cases from which the retiree is making a selection. A table for Smith would look like the following.


Application of Retirement Discretion Rule:  Initial Monthly Draw Amount and Risk That it Won’t Materialize For Retiree of 65 With Common Stock Portfolio of $1 Million

Rate of Return Assumed

Target Age of Monthly Draws
















*Assumes 2% annual increase in draw amounts

A critical variable that is easy to overlook is the assumed annual increase in the draw amount. The table assumes that it is 2%. With a zero increase, the draw amounts in the table would be about 20% higher. Most retirees, however, will want the withdrawal amounts to rise over time.


The RDR has been implemented as an Excel spreadsheet ,which is available for free download at on the Spreadsheet page of my website.

In or near retirement? The Professor’s Retirement Funds Integrator (RFI) might enhance your life during retirement.

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