Does the 4% Rule for Retirement Income Still Work?

Hi there, Stan The Annuity Man, America's annuity agent, licensed in all 50 states. I'm glad you joined me today for a topic that definitely needs to be addressed: Does the 4% Rule Still Work for Retirement Income Planning? We will discuss the 4% rule and how very smart people have factually and academically destroyed it. And I can say that because I used to be on that side of the table. Now, I know what you're thinking: "Stan, what are you talking about? You wear the Stan The Annuity Man logos, hats, and the whole thing."

Well, let me explain. I started with Dean Witter, then went to Paine Webber, Morgan Stanley, and Union Bank of Switzerland (UBS). I love all those firms, but I’m now in the world of contractually guaranteed products. You see, I’ve been in the world of the 4% rule, I understood it, was taught it, and even talked about it. But at the end of the day, I have a different perspective now than when I worked for those ivory tower firms across the country—New York City and elsewhere.

Let’s dive into why the 4% rule needs to be reexamined and why it doesn’t work as well as many think.

What is the 4% Rule?

So, what exactly is the 4% rule? Let’s break it down. In the world of stocks, ETFs, bonds, and markets, financial advisors are often taught, "Don't buy an annuity, don’t buy a contractual guarantee. Let me, the advisor, manage it for you." The idea is to manage the portfolio and then “peel off” 4% of the gains for the income you need. Advisors use tools like Monte Carlo simulations (not the race car), which are statistical models that show how markets will perform over time. But here’s the thing: Life doesn’t work like that. It’s like showing me an exercise plan, but I still have to implement it, which I probably won’t.

The point is, as you approach retirement, you’re in the final laps of your life’s race. The 4% rule works like a charm in a bull market, but when things get choppy, the 4% rule can fail. In volatile markets, you don’t have time to recover from losses. As you get closer to retirement, you’re in a position where you cannot afford to take losses and recover.

Why the 4% Rule Doesn’t Work

I had a conversation earlier today with someone in his 40s who was asking whether he should buy annuities. I told him, “No, you should stick with stocks and growth assets because you have time to recover.” But when you’re getting closer to retirement, the 4% rule simply doesn’t work as it once did. It’s dead because the volatility in the markets can hurt you when you're withdrawing money while markets are down.

If you have one or two years of market losses, the 4% rule works against you because you’re withdrawing money while your portfolio is losing value.

Wade Pfau and the 4% Rule

Don’t just take my word for it. A respected financial expert, Wade Pfau, has factually debunked the 4% rule. He’s been on my Fun With Annuities Podcast, and he’s written books explaining how the 4% rule doesn’t hold up anymore. I highly recommend listening to the podcast if you want a deeper dive.

So, why are people still talking about the 4% rule? Here’s the reality: The people managing your money make a fee for managing it. That’s how they earn a living. The issue is that when lifetime income annuities are implemented, they replace the 4% rule. The problem with annuities is that you cannot charge a fee on Immediate Annuities, Deferred Income Annuities, or Qualified Longevity Annuity Contracts (QLACs). You shouldn’t even charge a fee on Income Riders, although some people do. Lifetime income annuities offer contractual guarantees, and you can’t charge fees on those. This is why they’re not recommended as often—they take assets out of the management fee pool.

Why Annuitizing is a Better Option

I’m not against those "masters of the universe" managing money. Historically, there have been great returns from stock markets, and I have nothing against that. You should keep some money in the markets if that’s what you want to do. But as you approach retirement, it’s time to pivot. This is where the lifetime income floor comes in. By combining Income Riders with Social Security (the best inflation annuity on the planet) and any pensions you might have, you can replace the 4% rule with a guaranteed, predictable income stream.

The Benefits of a Guaranteed Income Floor

Here’s another reason to consider lifetime income annuities over the 4% rule: If you set up a guaranteed income floor with lifetime income annuities, you won’t need to disrupt your investments in down years. With the 4% rule, you have to sell off assets when markets are down to generate income. This creates a cycle of selling low, which is counterproductive to long-term investing.

The great news is that when you set up your income floor with annuities, you’ll know exactly what your income will be regardless of market conditions. This frees you up to be a better investor, as you don’t have to make withdrawals from your investment accounts during downturns. It gives you peace of mind.

How to Structure Your Retirement Income

If you want to figure out exactly how much you need for your income floor, you can use my reverse-engineering quote tool at The Annuity Man. This will show you how to solve for your specific goal using the least amount of money contractually. If you’re worried about inflation in the future, you can run another quote to make sure your income floor keeps up with rising costs.

Conclusion: The 4% Rule is Dead

So, here’s the bottom line: The 4% rule is officially dead. It’s done. It needs to be buried. Replace it with a contractually guaranteed lifetime income using annuity transfer-risk strategies. With A+ rated carriers or better, you’ll have guaranteed income for life and be a better investor because you won’t have to disrupt your investments for income.

Thanks for joining me today. Check out The Annuity Man to run quotes, get free books, or schedule a call with us. I’ll see you next time!