Two of the more common questions Susan, Donna, and I hear as planners are of vital importance for those thinking about their financial future are:
- “How do I know if I have enough saved for retirement?”
- “How much can I safely spend each year without running out of money?”
These are questions without a simple universal answers. But there are two powerful tools that can help: the 4% rule, a well-known rule of thumb rooted in decades of research, and a personalized probability of success analysis, which we build for our clients using financial planning software.
In this article, we want to explain both measures — where each comes from, what it can tell you, and how they can work together to give you a more complete picture of your retirement readiness.
The 4% Rule: A Historically-Grounded Starting Point
The 4% rule was developed in 1994 by financial planner and researcher William Bengen, who set out to answer a question that no one had systematically studied before: what is the maximum amount a retiree can withdraw each year without running out of money?
Rather than guessing about future market returns, Bengen turned to history.
He studied the actual investment returns and inflation data for every quarter going back to January 1926, and reconstructed what would have happened to someone who retired on a specific date, withdrew a set percentage of their savings in their first year, then adjusted that dollar amount for inflation every year thereafter — similar to how Social Security’s cost-of-living adjustment works.
Bengen studied hundreds of historical retirees, asking: what is the highest withdrawal rate that would have worked for all of them, including those who retired at the worst possible moments in market history?
Results of Bengen’s Study
The answer: 4% (and with a more diversified portfolio, up to 4.7%). A retiree who withdrew 4% of their starting portfolio value in year one, then adjusted that dollar amount for inflation each subsequent year, would have maintained their portfolio for at least 30 years regardless of when in history they retired — through the Great Depression, the stagflation of the 1970s, the dot-com crash, and the 2008 financial crisis.
In plain terms, a retiree with $1,000,000 in savings could withdraw $40,000 in their first year. If inflation ran at 3% that year, they would take $41,200 in year two, and so on. According to this framework, they would not have run out of money over a 30-year retirement, even in the worst historical environments.
Here’s something important that often surprises people: the 4% rule was calibrated to the single most difficult retirement outcome in nearly a century of data — a retiree who started in October 1968 and faced both a severe bear market and a prolonged period of high inflation. That one cohort ended their 30-year retirement with essentially nothing left.
For virtually every other retiree in history following the same 4% rule, portfolios not only survived — they grew.
Many retirees ended their 30 years with substantially more wealth, in real terms, than they started with. The long-run average across all historical retirees was closer to 7%, meaning most people could have withdrawn nearly double the 4% rate without running out of money.
What the 4% Rule Does Well
- Grounded in real history, not assumptions about the future
- Provides a quick, memorable benchmark: ff you’re withdrawing less than 4% of your savings each year, you’re in a strong position historically speaking
- Reflects actual worst-case scenarios — the kinds of markets and inflation environments that genuinely tested retirees
What It Doesn’t Capture
Bengen himself is clear that the rule was never meant to be a universal prescription and that treating it as one is itself a problem. Because the rule is calibrated to a single worst-case cohort, applying it universally causes most retirees to spend far less than they safely could.
In a recent Morningstar interview, Bengen described the 4% rule as applying only to a very narrow set of circumstances — specifically, retirees facing both high inflation and very high stock market valuations simultaneously — and stressed that most people can do considerably better with a personalized approach.
Beyond the underspending risk, your retirement situation is unique in ways the 4% rule doesn’t account for:
- Your tax situation. Withdrawals from taxable accounts are subject to capital gains and income taxes that can meaningfully reduce your spending power — potentially requiring a more conservative withdrawal rate.
- Your timeline. If you retire at 60 and live to 95, you need your money to last 35 years, not 30. A longer time horizon calls for a lower initial withdrawal rate.
- Your specific goals. Whether you intend to leave an inheritance, cover long-term care costs, or adjust your spending significantly over time all affect what’s appropriate for you.
- Current market conditions. Bengen’s research shows that safe withdrawal rates are closely tied to stock market valuations. With today’s market valuations on the higher end of the historical range, the future may look somewhat different than the historical average.
A Note on Inflation
Bengen calls inflation “the greatest enemy of retirees”.
Unlike a market downturn, which typically recovers, sustained high inflation forces retirees to take larger and larger withdrawals over time – accelerating the depletion of their savings.
This is one reason why we pay close attention to inflation trends in general, and specifically for your financial plan. It’s also why a regular review of your plan is recommended.
Probability of Success: Your Personalized Financial Plan
While the 4% rule provides a useful starting point, your financial plan is designed to go much further — and its central metric (in the RightCapital financial planning software that we use with our clients) is called the Probability of Success.
How It Works
The Probability of Success represents the percentage of simulated futures in which your plan does not run out of money during your lifetime.
Here’s how it’s calculated: The software runs 1,000 separate simulations of your financial future. Each simulation uses a different random sequence of investment returns and inflation rates, all drawn from historical market behavior.
One simulation might reflect a scenario similar to the 1970s stagflation; another might mirror the strong markets of the 1990s; another might look like a prolonged downturn shortly after you retire.
After all 1,000 simulations are complete, the software counts how many ended with money still in your plan. If 870 out of 1,000 simulations ended with a positive balance, your Probability of Success is 87%.
What Score Should You Be Aiming For?
We typically target a Probability of Success in the range of 80% to 90% for our clients. Here’s why we find that range to be an appropriate outcome:
- A score above 90% is a sign of strength, but it can also indicate that you’re spending less than you could comfortably afford. If your score is very high, it may be worth discussing whether you could increase your spending, give more to family or charity, or retire earlier.
- A score between 80% and 90% means your plan is well-positioned. It has weathered the most stressful simulated environments with a strong success rate.
- A score between 70% and 80% suggests the plan could benefit from some adjustments — whether to spending levels, savings, retirement timing, or portfolio allocation.
- A score below 70% is a signal that more significant changes may be needed.
A plan that succeeds in 100% of simulations is typical one that is very conservative, often meaning you’re spending significantly less than history suggests you could.
We recognize that for some clients, this level of conservatism is preferable. For those clients who have plans with the strongest outcome, though, thinking more expansively about approaches to spending may also merit consideration.
What Makes Your Score Go Up or Down?
Your Probability of Success is driven by the specific details of your plan, including:
- Your annual retirement spending. This is typically the most powerful lever. Modestly reducing planned spending can meaningfully improve the score; increasing it has the opposite effect.
- When you retire. Delaying retirement by even a year or two can improve the score significantly, both by extending the savings period and by shortening the distribution period.
- Your portfolio allocation. The mix of stocks, bonds, and other assets affects both expected returns and the volatility of those returns across simulations.
- Sources of guaranteed income. Social Security, pensions, and annuities all reduce the amount your portfolio needs to provide and tend to improve the score.
How These Two Tools Work Together
The 4% rule and your Probability of Success analysis are not competing measures, rather they complement each other, and each is better suited to a different stage of the planning conversation.
Think of the 4% rule as a compass. Before you’ve built your full financial plan, it can quickly orient you: is your situation in the right ballpark?
A prospective retiree withdrawing 3% of their savings annually has significant flexibility; one withdrawing 7% faces real constraints under almost any methodology. That early directional read is genuinely useful.
Your financial plan — and its Probability of Success — is the detailed map.
Once we know your full picture, including your income sources, taxes, goals, timeline, and spending patterns, we can build a plan that reflects your life, not a historical generalization. The probability score becomes the primary measure we track and revisit together over time.
What Both Measures Agree On
Despite using different methodologies, these two approaches are grounded in the same body of evidence about financial markets and inflation.
Bengen himself notes that his historical approach and Monte Carlo simulation generally produce similar conclusions — which is reassuring, since they’re studying the same underlying dynamics.
Both measures also point to the same warning signals:
- A sustained rise in inflation is the condition most likely to require a meaningful reduction in withdrawals. Unlike a temporary bear market, persistent inflation continuously forces higher withdrawals, accelerating portfolio depletion.
- A significant market decline early in retirement can have an outsized impact on the long-term health of a plan — which is why we pay special attention to portfolio construction and risk management in the years just before and after retirement.
What This Means for You
Our goal in building and maintaining your financial plan is to give you clarity and confidence — the freedom to spend, give, and live in retirement without unnecessary anxiety about money.
One of the most important things that a personalized plan can reveal is that you might have more flexibility than a simple rule of thumb suggests. Both the 4% rule and your Probability of Success are tools in service of that goal.
Here’s what we recommend for our clients:
- Review your plan at least annually. Markets change, your spending changes, and your goals evolve. Your Probability of Success should be re-evaluated regularly in light of these changes.
- Don’t panic at temporary market declines. History shows that most bear markets recover, and plan adjustments made in the heat of a market downturn often do more harm than good. We’ll help you assess whether any action is truly needed.
- Take inflation seriously. If the inflation environment changes meaningfully, it’s worth a conversation about your withdrawal plan.
- Think about your full-time horizon. Many people underestimate how long their portfolio may need to last. We encourage our clients to build in a margin of safety by planning for a longer retirement than average life expectancy.
If you’d like to review your current Probability of Success, discuss your withdrawal strategy, or simply talk through how your plan is positioned for the environment ahead, we’d love to hear from you. That’s exactly what we’re here for.
-RK