The 4 Percent Rule: Is there a new normal for Canadian retirees?

By Dale Roberts

Special to the Financial Independence Hub

Those two questions are certainly related, or let’s say one can determine the other. If you can earn a 7 percent annual return from your investments that will generate much more income compared to investments that only earn a 1 percent return. A $500,000 portfolio generating that 7 percent return could pay out $35,000 per year and maintain the original portfolio balance. You get ‘paid’ that $35,000 and you still have your initial $500,000.

A 1 percent return on your portfolio will only deliver $5,000 per year. Of course you could simply take out the $35,000 per year from your lower yielding portfolio, but over time the money will disappear.

So how much can you ‘safely’ take out of your retirement investment portfolio?

The financial gurus would suggest that spending 7 percent of your portfolio is much too aggressive. The gold standard retirement studies suggest that you can take out 4 percent – 4.5 percent of your portfolio value, inflation adjusted (2-3 percent annual increase in spending) and you will have a high probability of success over a 30 year period. You are creating perpetual income, just as would a pension. In fact, if your investments are positioned sensibly you are mimicking a pension – you are creating your own pension.

It’s an industry standard so much so that they call it – The 4 Percent Rule. 

The 4 Percent Rule: A Safe Withdrawal Rate in Retirement

The 4 percent rule is based on the work of Bill Bengen. The rule has been challenged and studied perhaps more than any other research in the retirement landscape. Mr. Bengen also took another look and challenged his own 4 percent rule in this 2012 article for Financial Advisor Magazine, How Much is Enough? 

Here’s the final thought from Mr. Bengen in that article. While there are no guarantees in life, and in investing, the rule of thumb has held up.

In summary, the 4.5 percent rule (and its infinite variations for time horizon, tax bracket, current market valuations, etc.) may be challenged in coming years. However, it appears to be working now.

The sensible retirement portfolio (pension) will typically consist of two components, a growth component (stocks) and a risk reducing agent (bonds). Durable income is created from enough growth in the stocks in a lower risk or lower volatility arrangement. Investing can be quite simple, even in the more ‘complicated’ retirement funding stage. Once again, we’re back to that simple mix of stocks and bonds. As always, we want to keep our fees as low as possible. This is no time to be paying ‘others’.

But is that 4 percent rule dead? Many think so. The reason for that is that the bond component of the portfolio, well, it kinda stinks these days. Or at least the yield or income from the bonds is nothing to write home about.

Challenges with the 4 Per cent Rule

Go back a couple of decades and your basic lower risk investment grades bonds would pay retirees 6-7 percent. The bonds on their own were enough to create durable income in a lower risk environment. Retirees did not need to take on much or any stock market risk. These days it might be difficult to generate more than 3 percent from your bond component. The yield on Canadian Bond Universe Exchange Traded Fund (ETF) XBB from iShares is 3.18 percent.

Yields have started to creep up over the last year, but they are still historically low. And bond yields can stay low. They do not have to go up just because they are down. Bond yields can and have in the past stayed very low for decades. We should always keep in mind that we do not know where bonds will go over time, just as we do not know where stock markets will go over the near term.

And speaking of those stocks, it appears that retirees need some of that growth potential if they’re going to be spending at that 4 percent rate, inflation adjusted. The problem there is that many write that stocks are ‘expensive’. We’ve had a long stock market run (at least in the US where we’re in the midst of the second longest stock market run in history) and those stocks also might not deliver ‘like they used to’. Vanguard suggests we might only see 3-5 percent returns for portfolios over the next decade or more.

While inflation is expected to remain low, investors should expect the nominal rate of return on their investments to be in the range of 3 to 5 percent, compared with historical averages of 9 to 11 percent, a panel of Vanguard economists said.

So, we’ve got bonds that might not do their thing. We’ve got stocks that might not do their thing. Yikes! So much for that 4 percent rule, or are too many of the experts crying wolf? I checked in with James Gauthier, the Chief Investment officer at JustWealth, one of the leading Canadian robo advisors.

Here’s what James had to say…

“… we review our longer-term forecasts annually, and our estimates for longer-term equity returns is 7 percent – this is below historical returns (if you go back far enough), but has been a pretty consistent estimate for us over the past few years. Our estimate for bonds is 3% which is again below historical returns, but it has moved up modestly from previous years as yields have begun to creep up off their lows established a few years ago.”

I’d have to agree that stocks might continue to ‘do their thing’. There is decent economic growth in Canada, the US, and around the globe. We should keep in mind that many of the stock market naysayers are referring to those US markets. The Canadian stock market (TSX) has not experienced that mostly uninterrupted roaring bull market run. Many will write that the Canadian and International markets are poised to outperform the US markets over the next several years.

Once again, we’re back to simple portfolio construction; that’s why we hold Canadian companies, US companies and International companies, and we manage the risk with bonds.

When you buy a stock or stock market fund or ETF you are buying a current yield, just as a bond delivers a yield. Today, the Canadians companies are ‘making you more’ (current yield) than those US companies. And that basket of International companies is making you more than the US basket.

Embracing the 4 Percent Rule

I would suggest that Canadian retirees still embrace that 4 percent rule. That means for every $100,000 that you hold in your portfolio(s), you might withdraw and spend $4,000 – $4,500. That 4 percent rule or guideline will also allow you to estimate how big a portfolio you might need in retirement to reach your spending needs or goals.

There’s no guarantee of success of course in anything that is investment related, but based on stock and bond market history, there is a very decent ‘chance’ of success. And here’s the thing, as a retiree you don’t have to sign on to the 4 percent rule in stone. If the stock markets do all tank in concert for many years, and the bonds are not offering enough support, you can adjust your spending plans – and spend less.

As always, I’d suggest that retirees and near-retirees consult with an advisor to ensure they they’re on track and to check that the portfolio is set up in favourable fashion to create durable income. You can use a fee-only advisor, meaning that you can pay a one time fee for the advice that you need, and then you can move on to self direct your investment portfolio. An advisor will also ensure that you are set up to withdraw your funds in the most tax efficient manner.

Thanks for reading. Happy investing. Happy retiring.

And thanks to Robb [Engen] for allowing me to share some thoughts with readers of Boomer and Echo.

Dale Roberts is a still-recovering former advertising writer and creative director. He then moved on to become an advisor on lower fee index funds. These days Dale helps Canadians find the many sensible lower fee investment options available by way of his site, This blog appeared on the Boomer & Echo site on August 20, 2018 and is republished with permission. 

One thought on “The 4 Percent Rule: Is there a new normal for Canadian retirees?

  1. Interesting read about issues with the “4% Rule” for retirement income.

    The truth is that that the “4% Rule” does not work for most retirees – especially now. The 33-year bond bull market from 1982-2015 is completely different now that interest rates have stopped falling.

    The 4% Rule suggests you can make a safe retirment income by withdrawing 4% of your investments every year and increasing that by inflation.

    The problem is that most retirees invest conservatively. They often use the “Age Rule” (your age is the percent of bonds in your portfolio), which directly conflicts with the “4% Rule”.

    In the last 150 years, using the Age Rule and the 4% Rule, 31% of retirees would have run out of money. Few people would feel safe with a 1/3 chance of running out of money during retirement.

    Retirement is long and bonds can be killed by inflation. Stocks are much more risky than bonds short term, but are more reliable long term (20+ years).

    The “4% Rule” should be replaced with a less catchy but reliable: “2.5% + .2% for every 10% in stocks Rule”.

    For example, the “4% Rule” has been reliable 97% of the time in history for retirees that invested 70-100% in stocks. ( )


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