Should You Heed the Wall Street Journal’s Warning About the 4% Rule?

The Wall Street Journal recently ran an article revisiting an old retirement income rule of thumb. “The 4% Retirement Rule is in Doubt. Will Your Nest Egg Last? A well-established strategy for funding our golden years is no longer foolproof. Retirees need to get creative.”

The upshot of author Ann Tergesen’s article, which never names 4% rule originator Bill Bengen, was that today’s high equity valuations and low interest rates bode poorly for future returns and that therefore, 3.3% is the new 4%. (That’s an 18 percent pay cut, by the way.) The rest of the article explores variations on a theme that can boost that rate to between 3.7% and 4.7%, assuming a willingness to be both flexible and put up with more complexity, aging brains be damned (emphasis mine).

I think about all the folks who read that article and who are HIPP like my wife and me. No, not cool. HIPP, as in High Income, Pre-Retired, and Pension-less. For most HIPP folks, Social Security will be the only form of guaranteed lifetime income, and in many cases that income will not replace all non-discretionary income needs of a group used to a solid six figure lifestyle. This in turn may leave some pondering the efficacy of non-guaranteed, probability-based approaches like the safe withdrawal model, which in any form can’t avoid inherent risks. What to do?

That’s why more sophisticated income planning approaches like time segmentation can take some of the risk off the table given that growth assets are typically never being drawn from at the time income is needed –thus reducing sequence of returns risk – instead using those assets as growth fodder for conversion to future cash withdrawal buckets/segments. And time segmentation is product agnostic, so it can include an income floor via an annuity product, but it doesn’t have to - that is up to the advisor and client. Yet many advisors and clients continue to build retirement income plans of all stripes that have no income floor other than Social Security.

Which leads me to an important question for anyone preparing a retirement income plan, whether that plan follows a safe withdrawal strategy, a time segmented approach, income flooring solutions, or some combination of these. What is the cost of being wrong? In other words, what is the cost of that choice if assumptions prove wrong? My biased thesis has always been that the cost of being wrong is far higher and perhaps unrecoverable in some cases for those that choose not to include an income floor with an annuity compared to the cost of being wrong for those who do. And after too many black swans of late (2008, 2020), my cynical self has asserted its belief that no longer are long term market patterns sacrosanct enough to bank on when it comes to meeting non-discretionary needs.

For retirees who started retirement in 1973, 2000, or 2008, I’ll presume that not many anticipated the severe drops that were to come. After all, in the five-year periods that ended before each of those years – those periods ending in 1972, 1999, and 2007, the S&P 500 Index had enjoyed some nice runs, up 43%, 254%, and 82%, respectively. You could not blame these retirees with not worrying about income flooring after runs like those. Yet the first two to three years of retirement in each of these cases saw a different story, with the S&P 500 total return down a cumulative 38 percent in 1973 and 1974, losing 38 percent from 2000-2002, and falling 20 percent from 2008 through 2009. (source:, CAGR of the S&P 500). Those were just calendar years – the peak to trough numbers looked uglier, with 40-60% declines reached. Did the new retirees using a total return withdrawal method shrink their standard of living by either reducing what they withdrew from assets, or stopping withdrawals altogether? Could they afford to?

The cost of NOT having an income floor for retirees who are hit with an ugly and extended decline during the early years of retirement can be both financial and emotional….and financial. Those who are not prepared for it may need to reduce their standard of living. Yet those who are better prepared in terms of having a few years of cash are still not immune from the emotional toll that watching your assets decline will naturally bring for many – and that toll has a cost in the overall feeling of wellbeing. That emotional toll can also have a financial cost if it derails an otherwise thoughtfully prepared, long-term plan. Does anyone truly know how they’ll react if the market evaporates years of accumulation? I’m reminded of a friend of mine, a seasoned financial professional and CPA, who’s own mother begged him to move her equity assets to cash in early 2009, against his pleading advice. But it was her money and move it he did. The emotional toll created a financial toll.

Compare the cost of being wrong by choosing to not install an income floor into a plan, with the cost of being wrong by having one. What is the cost of having an income floor that was properly thought through as part of a larger plan, but is never used due to unexpected circumstances? Those could be fortunate circumstances that deem the annuity unnecessary, or unfortunate circumstances that require its liquidation.

I can’t imagine an income planning scenario that, but for the annuity, would have been unrecoverable. I can imagine such a scenario without an annuity.

Can you?

John Rafferty has spent much of his 30-year career building annuity marketing departments at MassMutual, AIG/American General, and Symetra. He holds a B.A. in economics from Colby College and an M.A. in public policy from Trinity College, and currently operates an annuity sales and marketing consultancy,

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