The FIRE movement confronts the 4% rule

Should you UNLOCK the 4% spending rule at retirement?

My pun refers to the “Financial Independence, Retire Early” move, as it applies to the standard retirement spending rule that many financial planners have traditionally recommended.

New research has analyzed whether changes should be made to that rule if you’re planning to retire for 50 years – which is the avowed goal of some supporters of the FIRE movement.

Read: Forget retirement, focus on financial independence

That is a significant increase in pension duration compared to the 30-year period assumed by the original research that led to the development of the 4% rule. Do adjustments need to be made to accommodate that longer horizon?

The new research trying to answer this question comes from mutual fund giant Vanguard. entitled “Fueling the FIRE Movement: Updating the 4% Rule for Early RetireesThe company’s research shows that as that horizon gets longer, the likelihood of running out of money increases dramatically.

The accompanying chart shows by how much. At a 30-year horizon, there is an 18% chance that the money will run out. While this is low, it is higher than found in the original study, primarily because Vanguard assumed returns on stocks and bonds would be lower than their historical averages in the future. That 18% failure rate nevertheless provides a basis for measuring the impact of extending the retirement horizon.

At a 40-year horizon, with no further changes in the underlying assumptions, the failure rate rises to 46%. And on the 50-year horizon, that’s 64%. Essentially, Vanguard found that if you retire at 40 and expect to live 50 years, there is a two in three chance that you will run out of money when you use the 4% rule to determine how much you every year takes up further life.

You shouldn’t be particularly surprised by Vanguard’s findings that the risk of bankruptcy grows with the investment horizon. I discussed this phenomenon a few months ago, as you may recall, when I reported on research conducted by Zvi Bodie, who was a professor of finance at Boston University for 43 years. Specifically, he calculated what an insurance company would have to charge for a hypothetical policy that paid off if the stock market was lower at the end of the policy period than it was at the beginning. Bodie found that the premium the insurance company should charge for this policy increases as the policy lengthens.

How to respond?

Of course, the only solution to run out of money is to spend less. But there are strategies to spread that pain over longer periods of time and hopefully make it more bearable. That requires an adjustment to the amount you withdraw from your pension portfolio each year, as opposed to the assumption of the 4% scheme that you withdraw the same (inflation-adjusted) amount each year.

Researchers have proposed some of these so-called “dynamic” spending rules in recent years. The general idea is that you withdraw more in years when the markets have performed well, and less in years when the markets have performed poorly. (Two years ago, I devoted a column in Pensioenweekblad to an early academic study of dynamic spending rules.)

In its recent study, Vanguard analyzed several dynamic spending rules. To illustrate what they found with one plausible rule, consider a hypothetical $1 million portfolio in retirement. In the case of the original 4% rule, that would translate into a withdrawal of an inflation-adjusted $40,000 in each retirement year – until you ran out of money, in which you would have nothing left to live on. For the dynamic spending rule Vanguard analyzed, the worst year (worse than 95% of all years) led to an inflation-adjusted $24,709 — and you’d never run out of money.

There is no doubt that this smaller amount represents a large reduction of $40,000. But it’s a lot better than zero.

But if that reduction is unbearable, you’ll need to build a bigger portfolio if you plan to retire at age 40 or work longer before you retire.

Mark Hulbert is a regular contributor to MarketWatch. Are Hulbert Reviews follows investment newsletters that pay a fixed fee to be audited. He can be reached at