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What is the 4% rule & is it still a reliable retirement withdrawal strategy?

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In today's ever-changing economic environment, it seems as though traditional retirement withdrawal strategies may no longer apply. For decades, most retirees have abided by what's known as the 4% rule—considered a safe and reliable way to ensure income throughout your golden years—but this principle may be a thing of the past. High inflation and stock market volatility are putting pressure on retirement savings, causing many retirees to revisit how much they take out of their accounts each year.

If you want to preserve what you've worked so hard to accumulate, it may be time to cast aside one-size-fits-all approaches like the 4% rule and develop your own personalized retirement withdrawal strategy.

What is the 4% rule?

The 4% rule is a retirement withdrawal strategy that states if retirees withdraw no more than 4% of their retirement assets per year, they could reasonably expect their funds to last 30 years. Financial advisor William Bergen established this guideline in 1994 after studying several decades' worth of statistics on retirement and stock and bond returns. His research also concluded that the lower the withdrawal rate, the longer a retiree's savings would last.

However, nearly 30 years after his original research, Bergen has revisited the 4% rule, saying that even up to 4.5% would be a safe withdrawal rate for retirees—unless there is severe inflation. After soaring inflation rates in 2022, many retirees and those nearing retirement are concerned about a safe withdrawal rate is give this real risk of inflation to their retirement savings.

Does the 4% rule still apply?

As observed over the past few years, the stock market, inflation and cost of living can shift dramatically from day to day—so, sticking to a hard-and-fast rule for retirement withdrawals may be a thing of the past.

Several factors can affect the balance of a person's retirement account, and anticipating how much you'll need to live comfortably each year is an imperfect art. Ultimately, it may not always make sense in practice to stick to an inflexible rule.

Here are a few reasons why the 4% rule might be past its prime.

1. People are generally living longer

Americans today live much longer than previous generations on average. This is known as longevity risk. Today, a 65-year-old man has a 50% chance of living until he is 90; a 65-year-old woman has the same chance of living until she's 92. And while living longer is a beautiful thing, it also has implications for retirement.

Someone who lives well into their 90s could have a retirement that is far longer than 30 years—and the longer the retirement, the longer the money needs to last. If you make 4% inflation-adjusted withdrawals every year and you have a 35-year retirement, it's possible that your savings may run out.

2. Investment risk varies from person to person

Every person has a different risk tolerance when saving for retirement, which is typically illustrated by whether their retirement portfolio has a higher ratio of stocks or bonds. Your portfolio allocation has a significant impact on your returns. This also affects the size of your nest egg—and ultimately how much you can safely withdraw from your retirement accounts.

In 1998, three finance professors from Trinity University published research that explored what a safe withdrawal rate was for different types of portfolios across 15-, 20- and 25- and 30-year payout periods. The Trinity study found that a portfolio with a higher allocation of stocks generally had a higher chance of lasting for the entire payout period.

The authors explain that a portfolio of 100% stocks with a 4% annual withdrawal rate would last whether someone had a 15-year retirement or a 30-year retirement. A 100% bond portfolio had a lower likelihood of sustaining withdrawals over decades, especially if a retiree withdrew more than 4%.

The Trinity study confirmed Bergen's original research that a 4% withdrawal rate would generally last a minimum of 30 years in retirement, but it also shows some of the different dynamics that can affect retirement savings. Your allocation influences the flexibility you have to withdraw different percentages from your retirement savings in a given year.

3. Inflation can reduce your spending power

Inflation causes our wallets take a hit as our money loses its purchasing power—and there's very little we can do about it. In this way, inflation is a silent killer of a retirement portfolio. You're forced to withdraw more money from your account just to maintain the same standard of living. Alternatively, you may choose to reduce your spending (and withdrawals) to preserve more of your retirement savings.

4. Sequence-of-returns risk may impact investment gains

The stock market fluctuates every day. Some years, the market is up. Particularly during recessions, the market tends to go down. Interest rates in the bond market also fluctuate, which means that you may earn higher or lower yields on your investments depending on the economic climate. Because of this volatility, retirees should pay attention to what's known as the sequence-of-returns risk, otherwise called the sequence risk.

Sequence risk involves watching out for the best times to take cash from your portfolio. It's generally a good practice to avoid withdrawing money in a bear market and wait for a bull market—this is when you can earn a higher yield, optimizing your overall return.

You can't control the ups and downs of the stock market, but you can respond to them wisely. If the economy is stuck in a bear market or long-term recession, consider pulling back from the 4% rule: Withdraw less from your portfolio during down years to preserve your retirement savings or consider accessing dollars from an account that experiences less volatility, such as dedicated savings account or certificate of deposits (CDs) that have matured.

5. Taxes can affect your net retirement income

Depending on the type of retirement accounts you hold, you may have to pay income taxes on withdrawals. Factor this into the percentage you withdraw, since it will impact how much you actually net.

  • If your money is held in a tax-deferred account like traditional IRA or 401(k), you'll have to pay taxes on any withdrawals at your current income tax rate.1
  • If your retirement income is held in a Roth IRA, you can make tax-free withdrawals since you initially contributed after-tax dollars to this account. However, earnings may be taxable.2
  • If you have a substantial portion of your retirement savings in a taxable brokerage account, you could pay anywhere from 0% to 20% in taxes on any gains, depending on your taxable income and how long you've owned the investment.

Additionally, if you've decided to continue working in retirement or you have multiple sources of income—like a pension, Social Security payments or assets like investment properties—then be mindful of whether these assets could push you into a higher tax bracket. A higher income tax bracket means retirement withdrawals will be taxed at a higher rate.

In this case, it may not be worthwhile to withdraw 4% from your retirement accounts each year. Further, if you can rely on your other assets for income and delay taxes on your retirement withdrawals, you'll give them more time to increase in value.

Cheerful woman on video call at home
Cheerful woman on video call at home

Systematic withdrawal planning

A systematic withdrawal plan can help you regulate the new cash flow of your lifetime savings. This strategy disburses your money in a way that helps ensure your past investment efforts will last throughout your life. These retirement money management tools are common and relatively easy to set up.

Read more

An alternative to the 4% rule

Sticking to a set percentage for retirement withdrawals sounds good on paper, but it's not always the most effective strategy. Instead, consider dividing retirement income into buckets. A retiree might split their funds between monthly income for essential expenses and investments to build short- and long-term income.

Here's what that could look like.

Guaranteed monthly income

To ensure you have cash month to month, start by reviewing your sources of guaranteed income, like Social Security payments or rental income. You also should try establishing additional guaranteed income sources to fill any gaps. Look into either a fixed or variable annuity—two insurance products that provide regular monthly payments and, therefore, a guaranteed income stream you can use in retirement.

Additionally, consider setting aside three or five years' worth of expenses in a high-yield savings account to weather market storms. That way, you know you're set for at least that length of time. Keep in mind that this money isn't really guaranteed income (especially when there's high inflation). Rather, it's there to help you cover discretionary expenses beyond your everyday financial obligations so you can maintain a certain quality of life in retirement.

Along with savings and annuities, dividend-paying stocks also might be a good source of guaranteed income, as they allow you to live off dividend earnings without having to sell any stocks. This can be an effective approach when the market is underperforming, minimizing sequence-of-returns risk.

Short- and long-term income

Pay close attention to your asset allocation in retirement and decide what level of risk you're comfortable with. A more conservative portfolio may protect more of your retirement savings, but it could lead to lower returns. A more aggressive allocation may maximize your income, but it risks jeopardizing your retirement savings. Decide which approach is best for you to maximize your chances of a comfortable retirement when you're ready to withdraw.

The bottom line

The 4% rule provides a valuable framework for retirees to plan their retirement withdrawals, but it doesn't account for every variable. Therefore, you should be flexible about your withdrawal rate. A 4% annual withdrawal may not be the right approach in every case. In some years, a safe withdrawal rate may actually be 3% or 6%, depending on what's happening in the market, your current expenses and whether you have other assets you can lean on for income.

As you create a retirement withdrawal strategy for your unique needs, consider talking to a financial advisor who can walk you through all the different scenarios and create a strategy tailored to the future you envision.

1 Withdrawals made prior to the age of 59½ may be subject to a 10% federal tax penalty.

Distributions of earnings are tax free as long as your Roth IRA is at least five years old and one of the following requirements is met: (1) you are at least age 59½; (2) you are disabled; (3) you are purchasing your first home ($10,000 lifetime maximum); or (4) the money is being paid to a beneficiary.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

Thrivent financial advisors and professionals have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration.

CDs offer a fixed rate of return. The value of a CD is guaranteed up to $250,000 per depositor, per insured institution, by the Federal Deposit Insurance Corp. (FDIC). An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. A money market fund seeks to maintain the value of $1.00 per share although you could lose money. The FDIC is an independent agency of the U.S. government that protects the funds depositors place in banks and savings associations. FDIC insurance is backed by the full faith and credit of the United States government.

Guarantees based on the financial strength and claims paying ability of Thrivent.

Dividends are not guaranteed.

Holding an annuity inside a tax-qualified plan does not provide any additional tax benefits.

Investing involves risk, including the possible loss of principal. The prospectus and summary prospectuses of the variable annuity product and its underlying investment options contain information on investment objectives, risks, charges and expenses, which investors should read carefully and consider before investing.  Available at