When it comes to retirement planning, the 4% rule has long been a popular guideline. But does it truly reflect how retirees spend money in the real world?
In this article, we’ll introduce a better framework—the Retirement Distribution Hatchet—that addresses the limitations of the 4% rule and incorporates tax strategies, income timing, and real-life spending patterns.
The 4% rule, developed by financial advisor William Bengen, suggests that retirees can withdraw 4% of their initial portfolio balance in the first year of retirement and adjust that amount for inflation annually. It was designed to provide a high probability of not running out of money over a 30-year retirement, based on historical data of a 60/40 stock and bond portfolio.
While the rule offers a simple starting point for retirement income planning, it has some critical flaws:
These gaps can lead retirees to underspend in their early years or take unnecessary risks later.
The Retirement Distribution Hatchet offers a more realistic and personalized approach. Instead of assuming flat withdrawals every year, it reflects how income needs—and sources—change over time.
Imagine a chart of your retirement withdrawals over time. In early retirement, you may be pulling heavily from your investment portfolio before Social Security or a pension begins. Then, as those guaranteed income sources kick in, your need to tap the portfolio decreases.
That curve—starting high and tapering off—resembles the shape of a hatchet, hence the name.
The Retirement Distribution Hatchet takes into account:
By recognizing that withdrawals aren’t linear, this strategy creates a customized retirement income plan that aligns better with how retirees live and spend.
Research has shown that inflation-adjusted spending tends to decline over time in retirement. This pattern, known as the retirement spending smile, means retirees often:
The 4% rule doesn't account for this natural curve in spending. The Hatchet model does—by front-loading withdrawals when spending is higher and tapering them as expenses decrease.
This not only better reflects real life but also allows for more flexible tax planning opportunities by shifting when and how withdrawals are taken.
A crucial advantage of the Hatchet model is its ability to optimize for taxes. Timing matters, and taking large withdrawals before other income sources begin (like Social Security) can help reduce taxes in several ways:
In contrast, blindly following the 4% rule can lead to suboptimal withdrawals from a tax planning perspective, increasing lifetime taxes and reducing net income.
To calculate the personalized withdrawal levels for each retiree’s “hatchet,” a method called risk-based retirement income guardrails can be used.
Here’s how it works:
Rather than relying on a fixed historical scenario, Monte Carlo simulations run 1,000+ potential market return sequences to estimate the probability of success across various withdrawal rates.
The result is an initial withdrawal amount with an 80% confidence level of success (meaning your money is expected to last through life expectancy in 80% of scenarios).
Unlike the 4% rule, which remains static, this approach adjusts over time. If market returns are strong, you may be able to increase your spending. If markets perform poorly, the model tightens the spending “guardrails” to preserve your portfolio.
This process:
In short, it’s a retirement income strategy that adapts as life—and the markets—change.
For retirees serious about planning, the Retirement Distribution Hatchet and guardrails approach offer:
Instead of being locked into an outdated rule, you can have a dynamic plan that works with your life—not against it.
The 4% rule served its purpose as a basic guide for retirement withdrawals, but today’s retirees need more. The Retirement Distribution Hatchet, paired with a risk-based guardrails approach, provides a smarter, more customized strategy that aligns with actual retirement spending, tax planning opportunities, and evolving income needs.
If you’re planning for retirement—or already in it—consider whether your current withdrawal strategy reflects reality or just a simplified rule. You might discover that a more personalized plan helps you spend more confidently, especially in the years when you’ll enjoy it most.
Want to see what this looks like in a real financial plan?
👉 Check out this video where I walk through a real-world case study of a retirement income guardrails strategy in action.
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