Is the 4% Rule Safe in a Recession?
According to Kitces, U.S. retirees who began using the 4% rule in 2000—a period bookended by the 2000 tech-bubble crash and the 2008 global financial crisis—saw their portfolios tested early, dipping deeper into principal than anticipated, which raised the risk of their funds not lasting the full retirement horizon. Many held onto the belief that a fixed withdrawal rate would shield them. But in reality, timing mattered more than math. This article explores how recessions impact the 4% rule—and whether its assumptions still hold.
Key Takeaways
- The 4% rule is based on historical simulations, not guaranteed future outcomes.
- Sequence-of-returns risk means retiring into a recession can permanently lower withdrawal potential.
- Inflation during recessions—like in the 1970s—can erode purchasing power even with conservative withdrawals.
- Behavioral missteps like panic-selling can undermine even well-structured income plans.
Why the 4% Rule Exists—And What It Misses
The 4% rule originated from a 1990s study by financial planner William Bengen, who used historical market returns to find a withdrawal rate that wouldn’t deplete a portfolio over 30 years.
His rule: Withdraw 4% of your portfolio in the first year of retirement, then adjust that amount for inflation each year. But the analysis assumed:
- A 30-year time horizon
- A 50/50 or 60/40 stocks-to-bonds portfolio
- U.S. market returns between 1926 and 1976
What it didn’t account for:
- Sustained periods of high inflation
- Low future bond yields
- Extreme market correlations like 2022
- Changing investor behavior
Today’s markets—featuring elevated valuations, mixed asset correlations, and rate-driven volatility—make some of those assumptions harder to rely on.
Recessions Don’t Just Hurt Returns—They Distort the Sequence
Hypothetical: Consider two retirees with identical portfolios and withdrawal plans. One retires in 2010 after markets had mostly recovered from the 2008 crash. The other retires in 2008, right before a 50% drawdown.
Even if long-term average returns are similar, the retiree who began in 2008 faces much greater risk. Early losses combined with ongoing withdrawals shrink the base before markets recover—a problem known as sequence-of-returns risk.
This is why retiring into a recession can have a disproportionate effect—even if total returns eventually rebound.
Recessions also trigger emotional responses. Many investors panic-sell during market dips—locking in losses that can be hard to recover from. This adds behavioral risk on top of sequence risk.
Inflation Recessions Compound the Risk
Recessions don’t always mean deflation. In the 1970s, the U.S. experienced stagflation—a combination of economic stagnation and rising prices. For retirees following the 4% rule, this creates a double bind:
- Portfolios shrink or stagnate
- But withdrawals keep rising annually to keep up with inflation
In those years, bond yields rose sharply—hurting bond prices—and stock performance lagged. A retiree drawing 4% annually may have seen purchasing power fall even if the nominal withdrawal amount increased.
In 2022, the S&P 500 fell 19.4% on the year and the Bloomberg U.S. Aggregate Bond Index fell 13%. Many traditional retirement allocations lost value on both sides of the portfolio.
The Rule Isn’t Broken—But It Isn’t Bulletproof
The 4% rule is a guideline, not a contract. Many financial planners today suggest it as a starting point, not a prescription. Some recommend:
- Lowering the initial rate to 3%–3.5%
- Adjusting withdrawals based on market conditions
- Using dynamic models that respond to real-time portfolio health
Retirees who treat 4% as rigid may run into trouble if markets don’t cooperate—especially in the first 5–10 years.
Conversely, those who build flexibility—by reducing spending during downturns or delaying discretionary withdrawals—often fare better.
So what? The takeaway isn’t to discard the rule entirely—but to treat it as a framework that must flex when real-world conditions shift.
A Sustainable Path Isn’t Always a Straight Line
Many investors want simplicity: one number, one rule, one plan. But retirement spending—especially across volatile decades—rarely fits that mold.
A simple rule can provide clarity. But a sustainable income plan may need:
- Adaptive withdrawals
- Diversified assets beyond stocks and bonds
- Clear behavioral guardrails to avoid panic-driven decisions
Whether someone sticks to 4%, adjusts downward, or uses a dynamic approach, the core goal is the same: avoid running out too soon while living fully today.
