Earning Diary article: Ed Rempel on Why the 4% Rule May Be Holding Back Your Retirement Income

I was recently featured in Earning Diary discussing one of the most common and potentially misleading rules in retirement planning — the 4% Rule.

After analyzing 146 years of market history, my research shows that this rule can actually hold many retirees back.

Here’s what I found:

• Equities are safer long-term than conservative portfolios.
• The more cautiously you invest, the more likely you are to run out of money.
• Applying the 4% withdrawal rule broadly often results in retirees being too cautious.
• The 4% Rule does not work well with balanced or income portfolios.

Retirement planning is too important to rely on rules of thumb. A well-designed, equity-based strategy can provide both higher and more reliable income throughout retirement.

CLICK THE LINK BELOW TO READ THE ARTICLE BY LAKHYAJYOTI:

Why the 4% Rule May Be Holding Back Your Retirement Income

Conventional retirement planning has long relied on a simple formula: withdraw 4% of your savings each year, adjust for inflation, and you should be financially secure for 30 years. But according to Toronto-based financial planner Ed Rempel, this popular 4% rule is more of a guideline than a method, and following it blindly could mean leaving retirement income on the table or running out of money altogether.

Rempel recently conducted a study analyzing 146 years of investment history to determine the most reliable way to withdraw income during retirement.  His conclusions upend much of the traditional advice often given to seniors, including the idea that conservative investing offers the safest path.

His research tested a wide range of retirement start years, withdrawal rates, and portfolio allocations. The success rate was defined as a retiree being able to withdraw income adjusted for inflation for 30 years without running out of money. What he found surprised even him.

“Equities are safer!” he says. “The more conservatively you invest, the more likely you will run out of money. At every withdrawal amount, the more you invest in stocks, the more reliable your retirement income.”

The 4% rule, as originally designed, was tested using a portfolio of 50% large U.S. stocks and 50% government bonds. It was based on a worst-case scenario model—what would happen in the least favourable periods in history. According to Rempel, applying this rule broadly today often results in retirees being too cautious. With equity-focused portfolios, a 4% withdrawal had a 96–97% success rate. In contrast, bond-heavy portfolios saw success rates drop to 47%.

“The risk of stocks is short-term and medium-term market declines. The risk of bonds is long-term low returns or inflation,” says Rempel. His analysis showed that retirees with 100% in bonds would have run out of money more than half the time over the last 90 years if they followed the 4% rule.

Equities have averaged 7%/year after inflation long-term, so withdrawing 4%/year means your portfolio is likely to grow during your retirement. This usually means you can increase your retirement lifestyle by more than inflation after a few years of retirement.

Rempel also questions the advice to hold cash equal to two years of income as a buffer against market downturns. His study showed that holding cash provided no improvement in success rates and, in many cases, made outcomes worse. “In every case, holding cash either had no effect or increased the risk of running out of money. I could not find a single example of a retiring year or withdrawal amount when holding any amount of cash provided a higher success rate than holding no cash.” However, in every case, the estate left after 30 years was less with a cash holding.

While conventional wisdom encourages retirees to lower their equity exposure with age, Rempel suggests that sticking with a high-equity portfolio, even after retirement, can offer the most reliable income. Rempel’s rule of thumb for a safe withdrawal rate is a “2.5% plus .2% for every 10% in equities”.

This means a retiree with 70% in equities could withdraw 3.9% safely. At 75% or higher equity allocation, a 4% withdrawal rate becomes historically reliable. Those with less equity exposure need to adjust their expectations downward. Balanced investors should follow a 3.8% rule, while conservative investors might only safely withdraw 3%. Those holding only bonds or GICs should limit withdrawals to 2.5%.

The role of inflation is also central to Rempel’s findings. Over a 30-year retirement, even 2% inflation will double the cost of living. Historically, inflation has averaged closer to 4%, which would quadruple lifestyle costs. Retirees need income that rises with inflation, and stocks are better positioned to provide this than fixed income. Rempel notes that bonds and GICs are suitable for fixed income, but are killed by high inflation. Most long period of time include a few years of high inflation.

Rempel acknowledges that not everyone is comfortable holding 90–100% in equities. Risk tolerance matters, but he encourages retirees to avoid what he calls the “Big Mistake”, selling or switching to conservative investments during a market crash. 

He recounts how clients who retired in 2008, just before a major market crash, stayed invested and fully recovered within a few years. “In a few cases, we had to reduce income from $100–300/month for a year or 2. In 2-3 years, their investments had fully recovered.” That was the worst bear market since the Great Depression and recent retirees using the 4% Rule as a guideline were fine.

For those willing to manage their retirement income dynamically, Rempel suggests that even higher withdrawal rates (5% or 6%) may be possible using advanced strategies. These require flexible income adjustments and a deep understanding of portfolio behaviour, but have shown 100% success in historical testing.

Retirement planning is too important to rely on rules of thumb. Rempel’s research suggests that equity-based strategies, carefully tailored to an individual’s risk tolerance and supported by real historical data, can provide both higher and more reliable income than conventional wisdom allows.

Ed