In Part 1 of this commentary, we explored the idea of the retirement spending smile — how retirees tend to spend more in the early years, taper off through mid-retirement, and then see spending rise again in later years as health and care needs grow. If that picture is accurate, it raises a natural question: how well do traditional withdrawal strategies, like the famous “4% rule,” hold up against this reality?
The short answer: not very well.
A Quick Refresher on the 4% Rule
The 4% rule was born in the United States in 1994, when financial planner Bill Bengen published his seminal study on “safe withdrawal rates” [1] . By analyzing historical U.S. stock and bond returns, Bengen concluded that retirees could withdraw 4% of their investment portfolio in the first year of retirement and then adjust that dollar amount each year for inflation, with the highest degree of confidence that their money would last at least 30 years.
Key Challenges
- Flat Spending Assumption- The rule ignores the Spending Smile. Retirees risk underspending early and foregoing opportunities in the “go-go years” while potentially having more income than required for their later years.
- Over-Simplified Portfolio Assumptions- The rule assumes a 50/50 U.S. large cap stock/bond portfolio. As you will recognize, we focus on ensuring that all our clients have a properly diversified portfolio of globally based investments—after all, it’s the only free lunch in investing—and evidence shows diversification increases the safe withdrawal rate.
- Misunderstanding the Context- Bengen used actual market data and designed the rule to survive the worst 30-year period in market history. So, anyone who retired in October 1968 was the unluckiest retiree ever. However, even then, using the 4% rule meant those unluckiest of retirees wouldn’t have run out of money 30 years later! I ask you to consider whether taking the absolute worst-case scenario is the right approach to determining your own personal withdrawal rate.
We don’t want to give you the wrong impression, Bengen’s work is very well done. But, last month, Bengen updated his work with a completely new edition subtitled “A Richer Retirement”. Bengen now concludes the safe withdrawal rate could be as high as 4.7% in worst-case scenarios and 5.25%–5.5% in normal conditions [2]. As Nick Maggiulli writes, “if you used a 5% withdrawal rate, you wouldn’t run out of money in 98.5% of all 30-year periods from 1926-2022 and this assumes you withdraw 5% initially and adjust for inflation every year, like a robot”. [3]
Why This Matters
Following the 4% rule is a great starting point. However, applying it too rigidly can have consequences:
- Lifestyle risk: You may spend less than you comfortably could in your 60s and 70s, leaving too much unspent wealth at the end of life.
- Mismatch risk: You may not model the higher costs of late-life care, leading to stress or forced adjustments just when flexibility is hardest.
- Portfolio mismatch: If your portfolio isn’t the exact 50/50 assumed in the original study, the “safe” number may not apply to you.
- Tax inefficiency: The 4% rule doesn’t consider Canadian tax structures. In practice, the order of withdrawals — RRSPs/RRIFs, TFSAs, and non-registered accounts — has a huge effect on sustainability and after-tax income.
Alternatives
There are alternatives to the 4% rule…everything from cash wedges, to guardrails, to ratcheting, to variable percentage withdrawals [4] . Each of them has their strengths and weaknesses.
Our Opinion
The ‘5% rule’ remains a useful starting point, but Canadians need more flexible, tax-aware, and realistic strategies that reflect how retirement is actually lived. We construct each client’s withdrawal strategy with the following factors in mind:
- What are your actual income needs? How much of it is essential and how much is discretionary spending?
- What assets are being used to create that income (for example, how can we optimize OAS and CPP; do you want to liquidate real estate at some point in the future)?
- What is your actual withdrawal rate relative to your since inception annual rate of return?
- What asset allocation do you have in your portfolio?
- What order should we use to liquidate the portfolio most effectively?
- How are we going to deal with one off capital expenses (like the new car or a roof replacement)?
Creating a retirement cash flow plan is a vitally important and complex exercise. There is absolutely no chance that it will unfold as per the plan, but we like to remind ourselves of a quote from Dwight D. Eisenhower:
“In preparing for battle I have always found that plans are useless, but planning is indispensable.”
As always, we are happy to talk about this topic in greater detail if you wish. Please don’t hesitate to call or email with any questions.
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[1] Bengen, W. (1994). “Determining Withdrawal Rates Using Historical Data”. Journal of Financial Planning. [2] Bengen, W. (2024). “A Richer Retirement”. [3] Maggiulli, 2025. “Why the 5% Rule is the New 4% Rule”. [4] Finiki, 2024. “Variable Percentage Withdrawal (VPW) method”.
