3572: The 4% Retirement Rule: Why You Can Plan but Not Predict by Chris Reining on Limits Of The 4% Rule

Summary

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Podcast Summary: Optimal Finance Daily

Episode 3572: The 4% Retirement Rule: Why You Can Plan but Not Predict by Chris Reining
Host: Diania Merriam
Date: May 25, 2026

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Episode Overview

This episode centers on the 4% Retirement Rule, exploring its strengths, limitations, and the unpredictability inherent in retirement planning. The host reads Chris Reining’s insightful article, drawing parallels between space missions and financial planning, and concludes with strategies for managing sequence of returns risk. While the 4% rule offers a structured guideline for retirees, real-life outcomes are shaped by elements you can plan for but can't fully predict.

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Key Discussion Points & Insights

1. The Unpredictability of Retirement Planning

• Opening Metaphor: The episode opens with the story of Apollo 13’s near-disastrous mission as an illustration of even the most sophisticated plans being upended by small, unexpected factors.
  • “Arguably the most sophisticated space program in the world, yet defeated by some wire insulation. You can plan but not predict.” (01:40, Chris Reining)

2. Understanding the 4% Rule

• Definition:
  • Withdraw 4% of your investment portfolio in the first year of retirement.
  • Each subsequent year, withdraw the previous dollar amount, adjusted for inflation.
• Clarification:
  • The 4% figure is only for the initial withdrawal. After that, focus on fixed withdrawals plus inflation, not on a running percentage.
  • “Year one withdraw 4%. Year two forget you've ever heard of the 4% rule...” (03:08, Chris Reining)
• Purpose:
  • Designed for the worst possible historical market scenarios, accounting for sequence of return risk (the danger of poor market returns in the early years of retirement).
  • “Withdrawing that initial 4% incorporates someone who retires on the cusp of some financial nightmare...” (04:00, Chris Reining)

3. Common Questions and Sequence of Return Risk

• Sequence of Return Risk:
  • If markets drop sharply soon after retirement, continuing to withdraw the same amount (especially early) can dangerously deplete investments.
  • The 4% rule is intended to protect against such risks, based on historical worst-case scenarios.
• Misunderstandings:
  • Early retirees often worry withdrawals will outpace portfolio returns in recessions but miss that the 4% concept is not recalculated annually.

4. Adjustments and Nuances in the 4% Rule

• Bill Bengen’s Updated Research:
  • For a 30-year retirement, the safe withdrawal rate might be 4.5%.
  • For longer horizons, the safe rate drops: 4.3% (35 years), 4.2% (40 years), 4.1% (45 years).
  • “As your time Horizon increases beyond 30 years, as you might expect, the safe withdrawal rate decreases...” (04:30, Chris Reining)
• Outcomes are Highly Variable:
  • Michael Kitces’ research: most people using the 4% rule finish with more than they started.
  • Example: Two people retiring six months apart in 1968, one’s portfolio lasted 50 years, the other just 30—showing the unpredictability.
  • “So the problem isn't that planning with these rules doesn't work. They've worked for nearly 50 years. The problem is you can't predict what will happen.” (05:32, Chris Reining)

5. Adapting to the Unexpected

• The central message: Planning with evidence-based rules is wise, but you must also be ready to adapt to life’s surprises—just like the Apollo 13 astronauts.
• “At some point you have to be okay with that. Dealing with the unexpected conditions that life throws at you. You adapt just like the Apollo 13 astronauts.” (05:50, Chris Reining)

6. Portfolio Construction and Risk Parity (Post-read Commentary, 08:20)

• Host’s Recommendation:
  • Listen to "Risk Parity Radio" by Frank Vasquez for deeper dives into sequence of return risk and asset allocation.
• Frank Vasquez’s Insights:
  • Sequence of return risk can’t be solved with withdrawal strategies alone—it’s a portfolio construction issue.
  • Holding excessive cash protects only against brief downturns but risks long-term returns.
  • Robust diversification and stress-testing portfolios against long-term scenarios (like the 1970s or 2000s) is vital.
  • “The danger is actually not a three to five year tropical storm downturn early in retirement, it's a decade long multiple dip hurricane downturn...” (08:50, paraphrased from Frank Vasquez)
  • Emphasizes historical and Monte Carlo testing of portfolios.

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Notable Quotes & Memorable Moments

• On the limits of prediction:

  • “You can plan but not predict.” (01:40, Chris Reining)

• On applying the 4% rule:

  • “Year two, forget you've ever heard of the 4% rule and withdraw $40,000 multiplied by the prior year's inflation rate...” (03:10, Chris Reining)

• On the safety built into the rule:

  • “That's the whole point. Withdrawing that initial 4% incorporates someone who retires on the cusp of some financial nightmare...” (04:00, Chris Reining)

• On planning vs. adapting:

  • "At some point you have to be okay with that. Dealing with the unexpected...You adapt just like the Apollo 13 astronauts." (05:50, Chris Reining)

• Host’s closing advice:

  • “It's important to construct a diversified portfolio that historically survives worst-case conditions and then actually test said portfolio with historical data and Monte Carlo simulations.” (09:38, Diania Merriam referencing Frank Vasquez)

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Timestamps for Key Segments

• Apollo 13 Metaphor & Introduction: 00:52–02:00
• Explanation of the 4% Rule: 02:00–04:00
• Bill Bengen’s and Michael Kitces’ Research: 04:00–05:30
• Planning Limits and Need to Adapt: 05:30–05:55
• Portfolio Construction and Risk Parity Advice: 08:20–09:40

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Conclusion

This episode demystifies the 4% retirement rule, showing it as a robust planning tool shaped by decades of market history but also as something that can't guarantee certainty in an uncertain world. Key takeaways are the distinction between planning and prediction, the vital importance of diversification, and the need to continually assess and adapt your financial strategy as life—just like a moon mission—rarely goes exactly according to script.

Transcript

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This is optimal Finance Daily the 4% retirement rule why you can plan but not predict By Chris Reining of ChrisRining.com Apollo 13 was going to be the third time Americans had landed on the moon. But there they were, 205,000 miles from Earth when they heard a loud bang. I knew right away it was not a normal circumstance, said one astronaut. An oxygen tank had exploded, crippling the spacecraft. Operating on limited power, the crew had little heat or water and were forced to rig the carbon dioxide removal system in order to survive. After a nail biting six days, the crew safely returned to Earth. In the investigation that followed, the cause of the failure was determined to be an unlikely chain of events. High temperatures inside the oxygen tank had melted wire insulation, causing them to short circuit and produce sparks, igniting more insulation, which then boiled the liquid oxygen inside the tank, which caused the internal pressure to exceed its limit and blow the bolts right off the tank, arguably the most sophisticated space program in the world, yet defeated by some wire insulation. You can plan but not predict. And if you're planning for retirement, it won't take long before you come across the 4% safe withdrawal rate, which goes something like withdraw 4% of your investment portfolio the first year of retirement and then take that same dollar amount every year, adjusted for inflation. One of the first questions people ask about the rule is what happens when there's a recession and the market drops 30 or 50%? What then? They're asking about sequence of return risk. For example, if you retired with a million, then withdrew your first 40,000, a million times 4%, and then a recession followed. Let's pretend your portfolio dropped to 800,000 based on poor returns. And so in a year or two you're forced to take a withdrawal of 40,000 plus inflation. But you're taking it at the worst possible time. In fact, you quickly calculate that you're not withdrawing 4%. It's closer to 5%. Don't worry, because that's not how you apply the 4% rule. Here's how the 4% rule works. Year one withdraw 4%. Year two forget you've ever heard of the 4% rule and withdraw 40,000 multiplied by the prior year's inflation rate. If inflation was 2%, you withdraw $40,800. In year three, withdraw $40,800 multiplied by the prior year's inflation rate and so on. So the 4% rule only matters for the initial withdrawal and then it doesn't matter anymore. The reason why the 4% rule works during recessions is because the 4% rule is based on the worst possible historical scenarios. That's the whole point. Withdrawing that initial 4% incorporates someone who retires on the cusp of of some financial nightmare. The depression.com bubble, recent recession. In fact, Bill Benjin, who originally developed the 4% rule, is now saying his research shows the rule for a 30 year retirement period has ticked up to 4.5%. He goes on to say, as your time Horizon increases beyond 30 years, as you might expect, the safe withdrawal rate decreases. For example, for 35 years I calculated 4.3%. For 40 years, 4.2% and for 45 years, 4.1%. If you plan to live forever, 4% should do it. In other words, the withdrawal rules work because that's how the rules are designed. In fact, the vast majority of people won't face sequence of returns risk. They'll enjoy decent market returns early in retirement. Their investments will compound. This is why Michael Kitches makes the case that following the 4% rule is mostly unnecessary. His research shows that if you start retirement with a million and use a 4% initial withdrawal, you're more likely to have 5 million after 30 years than ever dip into principal. It's probably okay to use a higher initial withdrawal, but you use the rules because it's impossible to predict how the future unfolds. To highlight this fact, Benjin took two people who retired in 1968. One retired in April and the other in October, six months later, using an initial 4.5% withdrawal, the October retirees portfolio lasted just 30 years, while the April retirees lasted 50. So the problem isn't that planning with these rules doesn't work. They've worked for nearly 50 years. The problem is you can't predict what will happen. At some point you have to be okay with that. Dealing with the unexpected conditions that life throws at you. You adapt just like the Apollo 13 astronauts. You just listened to the post titled the 4% retirement why you can plan but not predict by Chris Reining of

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[B]

with long lasting batteries so you're not

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code OFD if you'd like to go down a rabbit hole on sequence of return risks and withdrawal strategies, I highly recommend you check out the Risk Parity Radio podcast. Hosted by my friend Frank Vasquez. The show explores how to construct portfolios that are robust and can be drawn down on in perpetuity, and to maximize projected safe withdrawal rates regardless of projected overall returns. Frank argues that you cannot solve sequence of return risk with withdrawal techniques because it's a portfolio level asset allocation problem. For example, trying to solve short term sequence of return risk with lots of cash leads to lots of long term failure risk. He also mentions that the danger is actually not a three to five year tropical storm downturn early in retirement, it's a decade long multiple dip hurricane downturn such as experienced in the 1970s or 2000s. So those need to be the baselines to evaluate your portfolio against. What that ultimately means is that it's actually the diversification of your medium to long term assets on five to seven year time frames that matters the most to solve this problem, not just having a bunch of cash or CDs et cetera upfront. That really only takes care of the small flood problem. While guidelines like the 4% rule are very helpful, I appreciate how Frank points out that it's important to construct a diversified portfolio that historically survives worst case conditions and then actually test said portfolio with historical data and Monte Carlo simulations. But that'll do it for the Monday episode. Have a great start to your week and I'll be back tomorrow as usual where your optimal life awaits.