The Cost of Being Too Conservative with the 4% Rule
Why playing it safe can quietly change the outcome
The Rule Everyone Uses
I followed the 4% rule for years without thinking much about it. It’s one of those ideas that’s widely accepted and rarely questioned. It shows up in almost every conversation about financial independence (FI). For many, it becomes the default starting point.
Developed by William Bengen in 1994, it was meant to answer a simple question:
How much could someone withdraw each year without running out of money?
But there’s an important detail that often gets glossed over. It was designed to work during the worst-case periods (the Great Depression and the high inflation of the 1970s). Not average conditions. Worst-case ones.
I’d missed this distinction myself until recently. And that’s when I started to see it differently.
How many of us want a lifelong plan that directly impacts how we live based on the worst-case scenario?
When you build a plan around worst-case scenarios, you’re not just protecting yourself. You’re shaping what your life looks like on the other side of that decision.
What Safety Actually Costs
For a long time, I followed the same thinking. Use 4%. Be conservative. Give yourself some margin. It felt responsible.
But being safe and being right aren’t the same.
Yes, 4% is safer than 5%. And 5% is safer than 6%. Lowering your withdrawal rate will always reduce the risk of running out of money. I’ve seen suggestions of 3%, even 2.5%
Yes, we might experience low portfolio returns for a prolonged period.
Yes, something could happen that impacts our savings or spending.
But does that mean you should plan for something even more conservative than a strategy already built to survive the worst 30-year period ever experienced?
In the short term, maybe. Over the long term, it’s highly unlikely.
At some point, you have to ask whether you’re protecting your future—or limiting it.
Not finding the right balance could be dangerously wasteful.
The Assumptions Behind the Number
The 4% rule maintains several assumptions:
· Your spending stays relatively consistent
· That you won’t adjust along the way (except to account for inflation)
· And that you need to survive the worst financial environments we’ve ever seen.
That level of protection comes at a cost. More years working. More saving. More delaying decisions. All to solve for a version of the future that may never actually happen.
Not a likely outcome. Not even a moderately likely one. The worst-case version.
And it rarely stops at 4%.
The 4% rule doesn’t exist on its own. It gets layered with other conservative assumptions—higher spending estimates, lower expected returns, longer time horizons. Each one feels reasonable on its own, but together, they push the target out more than most people realize.
Many people don’t over-save because they’re disciplined. They over-save because they’re unsure. And while useful, the 4% rule can reinforce that uncertainty.
It Was Never Meant to Be Fixed
To be clear, I’m not saying the 4% rule is wrong. I’ve used it. I’ve referenced it in other posts. It’s simple, familiar, and works well for quick calculations.
But it’s not the only way to think about this.
I only recently started viewing it differently after learning that even William Bengen has updated his own thinking over time. His more recent work points to a higher ‘safe’ withdrawal rate (closer to 4.7%) and suggests higher rates may be worth considering depending on the assumptions.
That doesn’t mean the 4% rule was incorrect. But it does reinforce something important:
It was never meant to be a fixed answer.
Lately, I’ve started using 5% as a baseline in my own thinking. Not because it’s “better”, but because it forces a different conversation. It introduces a little more risk, but it also introduces something else—optionality.
It gives you more room to decide how you want to spend your time and money, instead of locking yourself into a narrower path.
The Impact: 4% vs 5%
Let’s make this real.
Say you want to spend $100K per year in retirement.
At 4%, you need $2.5M.
At 5%, you need $2.0M
That’s a $500K difference.
For a lot of people, that’s not just a number. It’s years of working longer at a point in life where your time starts to feel more valuable.
Or look at it from the other angle. If you already have $2.5M saved, 4% supports $100K per year while 5% supports $125K.
That extra $25K means less hesitation and more saying yes to the things you want to do.
It’s not too hard to imagine which version of retirement feels better.
What Happens in Real Life
In practice, people don’t use fixed withdrawal rates.
They retire with a portfolio and spend what they need. If markets struggle, they adjust. If things go well, they loosen up.
No one needs to follow a fixed withdrawal rate.
I’m not telling you to ignore the 4% rule entirely. It’s still a useful tool. In some environments, it may even be the right one.
But the goal isn’t to always choose the most conservative option. It’s to be realistic about your assumptions and flexible enough to adjust when things change.
Starting closer to 5%, or even above, means accepting more uncertainty. But it also reduces the risk of over-saving for a future that may never happen.
And like everything else in the FI equation, it’s changeable.
If you spend more early or markets don’t cooperate, you adjust. If things go well, you have more flexibility later.
The Other Risk
The risk of running out of money is real, and it should be taken seriously. But there’s another risk that doesn’t get talked about as much:
Spending years optimizing for safety and never actually using the flexibility you built.
A plan can work perfectly on paper but still not translate into a better life.
One way to think about this is where you choose to build your margin. You can lower your withdrawal rate to 4%, or you can keep a higher rate, like 5%, and build that margin somewhere else.
For example, adding a 10% cushion to your spending assumptions is roughly equivalent to targeting about 22 times your expenses instead of 25.
Both approaches add safety. They just do it in different ways.
Try looking at your own situation using 4% and then 5%. Notice how each one changes your timeline and flexibility.
Final Thought
The 4% rule (or even an updated 4.7% version) isn’t inherently bad. But it was designed to minimize failure, not optimize your life.
And when you build a plan around the worst-case scenario, you should be clear about what you’re giving up in return.
Like everything else in the FI equation. Change the inputs and you change the outcome.
— Brad
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