Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 54

The 4% Rule for retirement withdrawals may be too high

An Australian paper on safe withdrawal rates from capital at retirement concludes that over 30 years, a 50/50 portfolio with a withdrawal rate of 4% a year would run out of money about 18% of the time. This is despite the excellent returns from Australian equities over the sample period. The study has important implications for financial planning over long retirement periods.

In contrast to academic work on the accumulation phase of investing, a trifling amount of research has been done on the decumulation phase of investing, where accumulated wealth must be managed to fund retirement needs for potentially 30 years or longer.

Twenty years ago, William Bengen, a practising financial planner with an aeronautical engineering degree, set about calculating the rate at which capital could be drawn for a US retiree with a high probability of the portfolio lasting 30 years. Bengen used US investment return data from 1926 to compute a safe maximum withdrawal rate (which he called SAFEMAX) of 4.15% per annum for a 50/50 portfolio of US shares and bonds. He thus suggested that if a US retiree commenced a systematic withdrawal plan drawing 4% of the initial portfolio value, and thereafter that same dollar amount (adjusted for inflation each year), a 50/50 ‘balanced’ portfolio would last for at least 30 years. Subsequent studies confirmed Bengen’s findings, and thus the ‘4% Rule’ was born.

Finsia safe withdrawal rate report

The 4% Rule has come to be the default safe withdrawal rate in retirement planning assumed by planning professionals.  It relies on historical data for the US. How safe is it for other countries? A recently released Finsia report seeks to shed light on the matter.

Finsia’s report is the latest contribution in its Retirement Risk Zone initiative, focussing on the risks in the last two decades of work and the first fifteen years of retirement. The report was authored by Professor Michael Drew and Dr Adam Walk of Griffith University.

In an important departure from previous US-centric studies the authors used a global database of real (after inflation) investment returns for 19 countries spanning a period of 112 years. They focussed their analysis on Australia and a selection of other countries representing the quartile performers (Japan 25th, Netherlands 50th and New Zealand 75th) as well as the worst performer, Italy. The table below provides details of these nations (with the US and UK added for comparison):

Drew and Walk used a simulation process to model the probability of portfolio ruin (retirement capital exhausting) for various retirement timeframes, and for various growth/defensive asset allocations. The results for a 30 year retirement for Australia appear below:

The highlighted row indicates that using a 50/50 asset allocation, the Australian safe withdrawal rate is 3.62% p.a. (real) at a 10% chance of portfolio ruin (SAFEMAX90) over a 30 year retirement.

Whilst Australia has enjoyed the highest equity returns of all 19 nations over the 112 years analysed, its 50/50 SAFEMAX90 real rate of 3.62% p.a. is not the highest. Both NZ (3.97% p.a) and the Netherlands (3.67% p.a.) had higher safe withdrawal rates, owing to superior risk-adjusted returns from their respective bond markets. The two laggards were Italy with a SAFEMAX90 rate of 1.23% p.a. and Japan with a rate of 0.29% p.a.

What conclusions can be drawn from the report?

The report’s authors conclude that there is no ‘silver bullet’ when it comes to retirement planning.  They warn against using the 4% Rule in a deterministic way, instead suggesting that the underlying philosophy of the Rule can be a useful tool in framing retirement conversations and in forming expectations. They note that a retiree couple with a $1 million starting pension balance would need to draw in excess of 5.6% to generate the ASFA comfortable retiree budget.

Perhaps more importantly, the report suggests that asset-liability management needs to be considered more thoroughly in retirement planning. The authors note that, “The conversation is a difficult one in that, for many investors, their focus is on the asset side … of the equation, not the liability. We posit that the first challenge in tipping the scales in the retiree’s favour is to get the framing right, moving from a ‘pot of gold’ (asset) mindset to an ‘income replacement’ focus (liability).”

Scope for future research

Whilst the report is an important step, especially given its Australian context, much more needs to be done to further our understanding of the decumulation phase. The report does not consider, for example, the interaction between personal retirement assets (superannuation), other assets and the age pension. It ignores important personal planning issues such as mortality risk, taxes, franking credits or the bequest motive. Current government statistics indicate that less than 20% of retirees are fully self-funded, and that most Australians will be dependent on some level of government assistance in retirement. With those aged 65 plus estimated to grow in number from the current 3 million to some 4.2 million by 2020, and with pension assets expected to exceed $1.4 trillion (2011 dollars) by 2026, there is a lot at stake. This report shows that even if the future repeats the excellent past returns, the old 4% Rule is little more than a conversation starter.

 

Harry Chemay is a Certified Investment Management Analyst, a consultant across both retail and institutional superannuation and Fellow member of FINSIA. He has previously practised as a specialist SMSF advisor, and as an investment consultant to APRA-regulated superannuation funds.

The full study is, “How Safe are Safe Withdrawal Rates in Retirement? An Australian Perspective”, FINSIA Research Report, Professor Michael Drew and Dr Adam Walk. Available on the FINSIA website.

 

2 Comments
Peter Vann
March 25, 2014

Is 4% too much?

Well a Challenger CPI indexed Lifetime annuity at age 65 pays more, 4.447% (BTW, I have no affiliation with Challenger).

I would say that is a base from which one can assess the financial longevity risk from drawing higher rates.

Kevin
March 21, 2014

It seems to me that the competing demands of passive income requirements during retirement and minimising draw down rates from superannuation will soon become a significant issue for Australians. I find it very frustrating that, on the one hand our government rightly states that as many retires as possible should become self-funded to minimise the cost to tax payers (potentially allowing more funds for education, health etc) yet on the other hand actively discourages workers from becoming self-funded retirees!
As example, we are encouraged to save more in super by the lower tax treatment, but then we are penalised if we try to save too much. Even worse if (like my parents) you are one of the very few who manage to become a fully self-funded retiree (by working hard, living frugally, and making a couple of good investments) the government then “taxes” you via Aged Care Fees.
Whilst I’m all for paying taxes, where those more fortunate help those less so, and I’m certainly all for paying for services provided by the government. But it does seem to me that the asset/income (means) tested Aged Care fees are a tax designed to reduce the independent retiree’s assets and force them to significantly increase their superannuation withdrawal rate.
In fact, during a recent Aged Care fee assessment, we were told by Centrelink not to worry about my parent’s steadily reducing assets (due to the requirement to pay the Centrelink assessed Aged Care fee) as once their assets got below a certain point they’d be eligible for the pension! Is it just me or does this seem like a way of reducing self-funded retiree’s assets prior to their estate transferring them tax free to their beneficiaries?

 

Leave a Comment:

RELATED ARTICLES

Age pension reform and its consequences for financial plans

Putting off that retirement speech

Retirement adequacy: COVID means we need to work longer

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

The 2025 Australian Federal election – implications for investors

With an election due by 17 May, we are effectively in campaign mode with the Government announcing numerous spending promises since January and the Coalition often matching them. Here's what the election means for investors.

Latest Updates

World's largest asset manager wants to revolutionise your portfolio

Larry Fink is one of the smartest people in the finance industry. In his latest shareholder letter, the Blackrock CEO outlines his quest to become the biggest player in private assets and upend investor portfolios.

Economy

Australia's economic report card heading into the polls

Our economy grew by a nominal rate of 7% per annum from 2017 to 2024, but it benefited from the largesse of fiscal and monetary policies, both of which are now fading. We need a new, credible economic growth agenda.

Preference votes matter

If the recent polls are anything to go by, we are headed for a hung parliament at the upcoming federal election. So more than ever, Australians need to give serious consideration to their preference votes.

SMSF strategies

Meg on SMSFs: Tips for the last member standing

It’s common for people as they age to seek more help in running their SMSF if their capacity declines. An alternate director may be a great solution for someone just planning for short-term help in the meantime.

Wilson Asset Management on markets and its new income fund

In this interview, Matthew Haupt from Wilson Asset Management discusses his outloook for the ASX, sectors such as REITs that he likes, and his firm's launch of a new income-oriented listed investment company.  

Planning

‘Life expectancy’ – and why I don’t like the expression

Life expectancy isn't just a number - it's a concept that changes with survival rates over time. This article breaks down how age, survival, and societal factors shape our understanding of life expectancy, especially post-Covid. 

The shine is back on gold, and gold miners

Gold mining stocks outperformed in 2024 and are expected to do well in 2025. At this point in the rally, it's worth considering what has driven gold prices higher and why miners could still have some catching up to do.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.