Why the 3.5% Rule May Be Safer Than the Classic 4%

The 4% rule has dominated retirement planning conversations for three decades. Financial planner William Bengen introduced it in 1994, and it quickly became gospel in the FIRE community. But here’s the thing: the assumptions behind that original research don’t quite match today’s economic reality.

A growing number of researchers and financial advisors now argue that 3. 5% offers a more reliable path to portfolio longevity-especially for early retirees facing 40, 50, or even 60-year time horizons.

The Original 4% Research and Its Limitations

Bengen’s original study analyzed rolling 30-year periods from 1926 to 1992. He found that retirees who withdrew 4% of their initial portfolio (adjusted annually for inflation) never ran out of money during any historical 30-year period. The Trinity Study in 1998 largely confirmed these findings.

But there’s a catch.

Those studies assumed a traditional retirement starting at age 65. Someone retiring at 35 through FIRE needs their money to last potentially twice as long. The math changes dramatically over extended periods.

Michael Kitces, a well-known financial planning researcher, has pointed out. The 4% rule actually succeeded because it was tested during periods with some of the highest real equity returns in market history. The sequence of returns from 1982 to 2000 was exceptional. Planning around exceptional outcomes isn’t planning-it’s hoping.

Why Sequence of Returns Risk Matters More Than Average Returns

Most people focus on average annual returns when projecting retirement success. This approach misses a critical danger: sequence of returns risk.

Consider two retirees who both experience 7% average annual returns over 30 years. One gets poor returns early and strong returns later. The other gets the opposite pattern. Despite identical averages, their outcomes differ wildly.

Wade Pfau, a professor at The American College of Financial Services, has published extensive research showing that the returns during the first decade of retirement essentially determine success or failure. A bear market in year two or three can devastate a portfolio that’s already being drawn down.

The 4% rule worked historically because truly catastrophic sequences were rare. But “rare” isn’t “impossible. " And for someone with a 50-year retirement horizon, the probability of encountering at least one devastating sequence increases substantially.

The Interest Rate Problem No One Wants to Discuss

Bengen’s research occurred when 10-year Treasury yields averaged around 6-8%. Bond returns contributed meaningfully to portfolio growth while providing stability.

Today’s environment looks different. Even after recent rate increases, we’re operating in a structurally lower-rate world than the one that generated the 4% rule’s historical success. The 10-year Treasury yielded 4. 2% in late 2024-better than the near-zero rates of 2020-2021, but still below historical norms.

Big ERN (Karsten Jeske), who runs one of the most rigorous FIRE blogs, has calculated that current CAPE ratios and interest rates suggest a safe withdrawal rate closer to 3. 25-3 - 5% for 50+ year retirements. His Safe Withdrawal Rate Series includes over 50 detailed posts analyzing this question from every angle.

The math isn’t complicated. Lower expected returns mean smaller safe withdrawals. Pretending otherwise doesn’t change the arithmetic.

What 0.5% Actually Means in Practice

The difference between 4% and 3. 5% might sound trivial - it isn’t.

On a $1 million portfolio:

4% withdrawal: $40,000 annually
3.5% withdrawal: $35,000 annually

That’s $5,000 less per year-roughly $417 monthly. For some budgets, this gap requires meaningful lifestyle adjustments. For others, it’s manageable with minor tweaks.

But here’s the flip side. The same $1 million portfolio has dramatically different survival probabilities:

According to Pfau’s research, a 50/50 stock-bond portfolio over 40 years shows roughly:

4% withdrawal: 85-90% success rate
3.5% withdrawal: 95%+ success rate

That 10-point difference in success probability represents real people running out of money in their 80s. The question becomes: is $5,000 per year worth a meaningfully higher chance of portfolio failure?

The FIRE Community’s Unique Vulnerability

Traditional retirees have Social Security as a backstop. Someone retiring at 65 starts collecting benefits almost immediately, reducing portfolio dependence.

FIRE retirees face decades before Social Security kicks in. They’re entirely dependent on portfolio performance during their most vulnerable years-the early retirement period when sequence of returns risk peaks.

early retirees often lack the option of returning to work if markets tank. Skills atrophy - industries change. A 55-year-old who retired at 40 can’t easily re-enter the workforce at their previous income level.

This asymmetric risk profile argues for more conservative withdrawal assumptions. The downside of being too conservative is working an extra year or two. The downside of being too aggressive is poverty in old age. These outcomes aren’t equivalent.

Practical Strategies for useing 3.5%

Accepting a lower withdrawal rate doesn’t mean accepting a worse retirement. Several strategies can help:

**Build a larger portfolio - ** The most straightforward approach. At 3 - 5%, you need roughly $1. 14 million to generate the same $40,000 that $1 million produces at 4%. That might mean an extra 2-3 years of work, depending on savings rate.

**Maintain flexible spending. ** Research by Guyton and Klinger shows that retirees willing to reduce withdrawals by 10% after down years can safely withdraw higher initial amounts. Flexibility provides insurance against bad sequences.

**Keep some income streams. ** Part-time work, rental income, or small businesses can supplement portfolio withdrawals. Even $10,000 annually reduces portfolio dependence by 25% on a $40,000 spending need.

**Use guardrails. ** Set portfolio value thresholds that trigger spending adjustments. If your portfolio drops below 80% of its starting value, reduce spending by 10-15%. If it grows above 120%, allow modest increases.

The Psychological Dimension

Numbers only tell part of the story.

Retiring with a 95%+ success probability produces different psychological outcomes than retiring with 85%. The peace of mind affects daily experience. Retirees with larger margins of safety report less financial anxiety and make better decisions during market downturns.

Conversely, someone white-knuckling through retirement with a thin margin lives a different life than someone with comfortable buffers. The extra few thousand dollars annually might not compensate for that stress.

The FIRE movement often emphasizes reaching financial independence as quickly as possible. There’s wisdom in that urgency-life is short, and corporate work has real costs. But the race to retirement can encourage aggressive assumptions that backfire later.

When 4% Might Still Work

Not everyone needs to drop to 3. 5%.

**Shorter time horizons. ** Someone retiring at 55 with a 35-year horizon faces better odds than someone retiring at 35 with a 55-year horizon. The original 4% research remains more applicable for traditional retirement ages.

**Flexible spending floors. ** Retirees who can cut spending 30-40% if needed can take more risk. If your baseline budget is $50,000 but you could survive on $30,000, you have built-in insurance.

**Other income sources. ** Pensions, rental properties, or Social Security benefits (even if decades away) provide floors that protect against portfolio depletion.

**Higher equity allocations. ** Research suggests that portfolios with 70-80% equities actually have higher success rates over very long periods than more conservative allocations. The volatility is brutal, but the returns matter over 50+ years.

The Bottom Line

The 4% rule was a tremendous contribution to retirement planning. It gave people a concrete target and simplified an impossibly complex calculation. That value shouldn’t be dismissed.

But conditions have changed - interest rates remain historically low. Valuations sit at elevated levels. FIRE retirees face time horizons the original research never contemplated.

Dropping to 3 - 5% isn’t pessimism. It’s acknowledging that margin of safety matters when the stakes are this high. The cost is modest-a bit more savings, a bit less spending, perhaps another year of work. The benefit is sleeping soundly for decades, knowing the portfolio can handle whatever markets deliver.

That trade-off seems worthwhile.