Rethinking retirement: Is the 4% withdrawal rate rule dead?

05 April 2022

Annika Bradley

Annika Bradley is director of manager research ratings for Morningstar. She is responsible for leading qualitative research on Asia-Pacific fund managers (excluding China, Hong Kong, and Singapore) and their funds.

The 4% rule has served investors and advisers well but given our environment of low interest rates and high equity valuations, it is now time to lower this rate. It’s also time to bring other retirement-income strategies mainstream to cater to a wider array of investor preferences.

The 4% Rule—A Convenient Extension of the Accumulation Phase

A study conducted by William Bengen in 1994 was the genesis of the 4% rule—it found that retirees invested in a balanced portfolio could safely withdraw 4% of their original assets, adjusted for inflation, for 30 years and not run out of money. This rule has proved very convenient for advisers and fits neatly into the financial-planning infrastructure in Australia. It effectively takes an investment portfolio constructed for the saving (or accumulation) phase of retirement, tweaks the mix of stocks and bonds, and then “sets and forgets” the level of spending each year. It keeps a very complex problem simple.

The 4% Rule Misses Basic Investor Preferences and the Power of Advice

In insolation, the rule is too simple. It doesn’t optimize for a retiree who may: live for a shorter or longer period than 30 years (longevity risk); wish to spend more in the early years of retirement; be unable to stomach market ups and downs; or hold significant levels of home equity. Exhibit 1 simplistically[1] demonstrates some of its shortcomings. While it ignores the impact of the all-important Age Pension, Exhibit 1 shows that the 4% rule leaves retirees reliant on two main levers: market returns and spending levels. Granted, markets have done a stellar job underwriting most retirees’ spending, but their future path is unknown, and not all retirees can tolerate market risk.

The 4% rule also misses the power of personalised advice and the impact that annually tailoring a retirement strategy can have on the outcome. All advisers know that the individual client experience is unique. If a client’s starting withdrawal level is too low or there are strong market returns early in retirement, the client might underspend and leave a large (and possibly unintended) bequest. This also will occur if the client only lives for part of the 30 years. Conversely, if the client’s starting withdrawal level is too high or there are weak market returns early in retirement, there is risk of running out of money. Again, this will also occur if the client lives longer than the 30 years.

Exhibit 1:  Simplified Scenarios Under the 4% Rule—An Australian Context

Source: Morningstar.

Is the 4% Rule Still Valid?

Morningstar’s U.S. team recently conducted a study – The State of Retirement Income – and found that the level is too high in the current market environment. Instead, the research suggested that a starting fixed real withdrawal rate of around 3.3% per year is more achievable for a portfolio invested in an equal mix of stocks and bonds for 30 years. The study is U.S.-centric, but the conclusions are broadly transferable. In a world of very low interest rates, it is prudent to revise down the starting fixed withdrawal rate. And while a 0.7% starting rate differential seems immaterial, the impact of compounding means that this could be the difference between relying solely on the Age Pension or living a more comfortable retirement.

Exhibit 2:  Projected Starting Safe Withdrawal Rates, by Asset Allocation and Time Horizon

Source: Morningstar Direct. Data as of 31 December 2020.


A Tailored Withdrawal Approach

The study also considered whether a more flexible withdrawal strategy contingent on market conditions could result in a higher withdrawal level. The study found that retirees who are willing to take lower withdrawals in weak markets and higher withdrawals in strong markets could sustain a 4.5% starting real withdrawal rate under some scenarios. However, flexible withdrawal strategies add to the variability of spending in retirement—which may not suit all clients and tends to lead to lower final balances. And varying spending levels annually likely requires a personalised plan and guidance.

Exhibit 3: Comparing Withdrawal Methods: Starting Safe Withdrawal Rate vs. Variability of Annual Withdrawal for a 50% Stock/50% Bond Allocation

Source: Morningstar Direct. Data as of 31 December 2020.

Beyond the 4% Rule

While the 4% rule has historically served many advisers well, it isn’t perfect, and it isn’t for everyone. It has proved to be a neat extension of the accumulation phase, and markets have provided limited impetus for change. But clients in the retirement phase have different preferences, risk tolerances, and wealth levels and are willing to make different trade-offs. With the Retirement Income Covenant, or RIC, looming, surely a wider range of income strategies will move mainstream and be seamlessly incorporated into the advice process—for example, annuities, reverse mortgages, and income-layering strategies, not to mention the RIC-inspired products coming from superannuation funds. With many super funds not-for-profit and with large member pools, they are in a unique position to develop retirement-focused products, particularly those that derive value from risk-pooling. Personalised advice is a powerful lever to give retirees the confidence to spend their savings, but it must be supported by the right infrastructure to cater to a wide array of client preferences.

Copyright, Disclaimer and Other Information
This report has been issued and distributed by Morningstar Australasia Pty Ltd ABN: 95 090 665 544, AFSL: 240892 and/or Morningstar Research Limited NZBN: 9429039567505, subsidiaries of Morningstar, Inc.

To the extent the report contains any general advice or ‘regulated financial advice’ under New Zealand law this has been prepared by Morningstar Australasia Pty Ltd and/or Morningstar Research Ltd, without reference to your objectives, financial situation or needs. For more information please refer to our Financial Services Guide for Australian users and our Financial Advice Provider Disclosure Statement for New Zealand users. These are available at: and You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement.


© The material contained in this document is copyright of Morningstar, Inc., its licensors and any related bodies corporate that are involved in the document’s creation. All rights reserved. Except as permitted by the Copyright Act 1968 (Australia) or Copyright Act 1994 (New Zealand), you may not reproduce, transmit, disseminate, sell or publish this information without the written consent of Morningstar, Inc.


Morningstar and the Morningstar logo are registered trademarks of Morningstar, Inc.


All care has been taken in preparing this report. However, please note we base our financial product research on current information provided to us by third parties (including financial product issuers) which we cannot necessarily verify. While we use all reasonable efforts to obtain information from reliable sources, we do not guarantee the data or content contained herein to be accurate, complete or timely. To the extent that our research is based on information received from other parties, no liability is accepted by Morningstar, its affiliates nor their content providers for errors contained in the report or omissions from the report. Morningstar determines its ratings on information disclosed to it by financial product issuers and on past performance of products. Past performance is no guarantee of future performance.

More Information

If you wish to obtain further information regarding this report, licensing and our services, please contact us on: subscribers  Advisers/Institutions/Others
Tel: 1800 03 44 55 Tel: +61 2 9276 4446
Email: Email:

For further information on our analysts and research methodologies, we recommend you visit:

You may also be interested in