Retirement Planning in a Low-Return World: Why the 4 % Rule May No Longer Hold Up

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  Published in Stocks and Investing on Thursday, December 4th 2025 at 17:40 GMT by MarketWatch
      Locale: UNITED STATES

Retirement Planning in a Low‑Return World: Why the 4 % Rule May No Longer Hold Up

For decades, the 4 % rule has been the gold standard for retirement planners and savers alike. The rule, born from the work of financial‑planner William Bengen in the early 1990s and later refined by researchers such as Alan Bengen and William Sharpe, suggests that a retiree can withdraw 4 % of the initial portfolio value in the first year of retirement and then adjust that dollar amount for inflation each subsequent year without depleting the portfolio over a typical 30‑year horizon. The rule has been embraced by individual investors, financial‑advisors, and even many retirement‑related publications because it offers a simple, data‑driven framework for determining how much one can safely spend each year without risking a shortfall.

But a new report from Vanguard, one of the world’s largest asset‑management firms, throws a wrench into that equation. According to Vanguard’s latest Investment Outlook and a series of press releases, the firm now expects the long‑term average return of the U.S. stock market to hover around 5.9 % – a figure that is noticeably lower than the roughly 7–8 % average that historically underpinned the 4 % rule. The firm’s analysis, which is based on a forward‑looking model that takes into account contemporary macroeconomic conditions, corporate earnings trends, and demographic shifts, suggests that investors may have to adjust expectations for the future.

Vanguard’s Key Assumptions

Vanguard’s report hinges on a number of assumptions that are worth unpacking:

1. Moderated Corporate Earnings Growth – Corporate earnings are expected to grow more slowly in the coming decade compared with the 1950s–1990s period. This means a lower overall return for the S&P 500.

2. Higher Interest Rates and Inflation – If interest rates rise and inflation persists, bond yields will increase but so will bond risk premiums, squeezing the returns that investors can capture from fixed‑income instruments.

3. Lower Asset‑Price Volatility – While the market can still experience volatility, Vanguard’s model projects a modest decline in the amplitude of swings, which, paradoxically, can reduce the chance to “catch a rally” in a retirement portfolio.

4. Greater Demographic Weight in the Economy – With a larger proportion of the workforce aged 55 and older, consumption patterns will shift, further dampening long‑term growth prospects.

By weaving these elements together, Vanguard arrives at the 5.9 % figure, which is roughly 1.1 % lower than the 7‑year rule‑based estimate that many retirees rely on. On the surface, that might not sound like much, but when you consider that the 4 % rule’s safety hinges on a comfortable cushion of returns above the withdrawal rate, even a slight erosion can be consequential.

The 4 % Rule Under a Lower‑Return Scenario

The 4 % rule was derived from historical data that spanned the 1920s to the 1990s. Under those conditions, a 50/50 mix of equities and bonds yielded an average of about 7–8 % per year. Retirees were able to withdraw 4 % and still keep the portfolio alive for 30 years in more than 90 % of simulated scenarios. However, if we plug a 5.9 % return into the same framework, the survival probability drops significantly.

A quick simulation shows that a portfolio that grew at 5.9 % per year and was split 60 % in equities and 40 % in bonds would only have a 70–80 % chance of lasting 30 years under a 4 % withdrawal. And that’s assuming the portfolio is rebalanced regularly and inflation remains modest. In more realistic scenarios, where inflation runs higher or market volatility spikes, the risk of depleting the account increases further.

Why the Rule Is Still Popular

Despite the warnings, the 4 % rule remains popular for several reasons:

• Simplicity – The rule offers a clear, numeric target for how much to withdraw, making it easy for non‑financial professionals to understand.

• Risk Tolerance Calibration – By tying the withdrawal rate to historical volatility, it implicitly incorporates a safety buffer that aligns with many retirees’ risk tolerances.

• Communication Tool – Advisors can use the rule to explain the importance of diversification and asset‑allocation strategy in a language that clients can grasp.

But the rule’s simplicity also means it can be misleading when used as a one‑size‑fits‑all prescription. A key limitation is that it is rooted in historical data that may not repeat in the future. Vanguard’s analysis underscores that point: the world is not the same as the 1920s–1990s period that the rule’s creators studied.

What Retirees Should Do

The article argues that retirees and financial planners should take Vanguard’s forward‑looking data seriously and consider adjusting their strategy accordingly. Some options include:

1. Adopt a Dynamic Withdrawal Strategy – Rather than a fixed 4 %, adjust the withdrawal rate annually based on portfolio performance. A percentage‑of‑portfolio approach can help preserve capital when returns are weak.

2. Re‑balance the Asset Allocation – Shift to a higher bond allocation (or consider alternative fixed‑income options like short‑term bonds or bond funds that may offer higher yields) to cushion against lower equity returns.

3. Focus on Income‑Generating Investments – Explore dividend‑paying stocks, REITs, and municipal bonds that can provide a stream of income independent of stock‑market growth.

4. Plan for a Longer Horizon – A retiree who can afford to wait longer before drawing down a significant portion of the portfolio gains a larger safety net.

5. Re‑evaluate the 4 % Threshold – Consider lowering the initial withdrawal rate to 3.5 % or even 3 % if the portfolio contains a larger share of bonds or if inflation expectations are high.

A Broader Context: Market Outlook and Retirement Advice

The article also points to other MarketWatch coverage that underscores the shifting landscape. For example, in a related piece titled “New research suggests retirees may need to adjust their withdrawal strategy,” the author discusses how behavioral factors, such as loss aversion and liquidity needs, can amplify the impact of lower market returns. Another linked story, “Bond yields on the rise: What that means for retirees,” highlights how higher bond yields can boost fixed‑income returns but also raise the risk of a sudden rate hike that could erode bond principal.

By weaving together these threads, the MarketWatch article paints a clear picture: the retirement community must acknowledge that the assumptions behind the 4 % rule are no longer guaranteed. Vanguard’s forecast provides a forward‑looking lens that challenges the old paradigm and encourages a more nuanced, individualized approach to retirement withdrawals.

Bottom Line

While the 4 % rule remains a useful heuristic, it is not a guarantee. Vanguard’s latest projections suggest that the long‑term average return for U.S. equities may be closer to 5.9 % – a figure that could compromise the safety of a 4 % withdrawal strategy. Retirees and advisors alike should consider dynamic withdrawal strategies, adjust asset allocations, and factor in alternative income streams to ensure that the portfolio lasts through the unpredictable realities of the post‑2020 financial world. In a market where the “rules of the game” are changing, a flexible, data‑driven approach is more important than ever.