J.P. Morgan: 4% rule falls short for retirement withdrawals

For decades, fixed withdrawal strategies like the 4% rule have served as a cornerstone of retirement planning, offering a simple, linear roadmap for decumulation. New research from J.P. Morgan suggests that that static approach may be fundamentally misaligned with how retirees actually spend money, potentially leaving clients ill-prepared for the financial realities of life after work.

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Rather than rely on theoretical models, researchers examined real-world saving and withdrawal behaviors of over 12 million participants through the Employee Benefit Research Institute (EBRI) database. To capture a complete picture of financial life, the study also tracked the actual spending patterns of more than 5 million households using Chase credit card and banking transaction data.

Researchers found that retirement spending is far from the flat, inflation-adjusted line often assumed in traditional financial models.

Instead, real spending tends to decline significantly with age, dropping by more than 30% on average between ages 60 and 85. As retirees age, expenditures on categories like travel, apparel and food contract steadily, with only health care and charitable giving tending to resist the downward trend.

However, while the long-term trajectory points downward, the immediate transition into retirement is marked by extreme volatility. The study found that 60% of new retirees experience annual spending fluctuations of 20% or more during their first three years post-work.

The data suggests that static withdrawal strategies may fail retirees on two fronts: overestimating capital needs for late retirement while dangerously underestimating the liquidity required for the “lumpy” spending shocks common in the early years of life after work.

Financial advisors like Donald LaGrange say that finding isn’t entirely new.

“This concept has been around a while,” said LaGrange, a financial advisor at Murphy & Sylvest Wealth Management in Rockwall, Texas. “Michael Stein gave a bit of a structure to it in the late ’90s — three phases: ‘go-go,’ ‘slow-go’ and ‘no-go,’ which is the terminology I like to use for clients who want to adopt that planning philosophy.”

A clear flaw and a hazy solution

Despite widespread recognition of the shortcomings of tactics like the 4% rule, advisors have yet to coalesce around a clear alternative to fixed-rate withdrawal strategies.

Many advisors use some variation of a bucketing strategy, which allows for flexibility while protecting against certain market risks.

Scott Bishop, partner and managing director at Houston-based Presidio Wealth Partners, said that he typically uses a “straight-line planning approach” for clients who are more than five years out from retirement, but begins to fine-tune their budgets as they approach retirement.

“This helps us identify cash flow needs and plan for tax implications, especially if withdrawals will come from IRAs or 401(k)s, where every dollar is taxable,” Bishop said. “I also incorporate a bucket strategy, ensuring at least three years of spending is readily accessible in conservative investments. That way, clients aren’t forced to sell equities during a bear market. While spending often declines later in life, early retirement years can be volatile, so we build flexibility into the plan rather than assume a static model.”

At Life Planning Partners in Jacksonville, Florida, founder Carolyn McClanahan takes a more periodic approach. McClanahan and her team review each client’s spending annually, separating essential expenses from discretionary ones, while factoring in bucket-list goals before running cash-flow projections based on a reasonable, client-specific life expectancy and moderately conservative return assumptions. 

“If they are doing fine, we encourage early spending. If not, we help them see how they can adjust,” McClanahan said. “But the most important part? We review spending and financial goals every year. If the market has done well and they are doing well, we encourage them to keep doing what they want. If not, we help them adjust.”

Other advisors take an even more granular approach to planning around spending over the span of retirement, breaking out individual costs like long-term care and Medicare premiums.

“For health care, I prefer to separate those costs from other expenses,” said Justin Pritchard, founder of Approach Financial Planning in Montrose, Colorado. “Health care gets a different, higher inflation rate. Plus, we aren’t certain if LTC expenses will arise, so we look at different what-if scenarios. And even Medicare premiums need to be separate because those can vary, depending on the client’s income.”

Spending in retirement goes beyond withdrawal strategies

While advisors emphasize high-performing withdrawal plans, retirees are chiefly concerned with the stability and reliability of their income, often favoring guaranteed income solutions.

J.P. Morgan researchers found that retirees with a larger share of guaranteed income tend to spend more comfortably. Those with 40%-60% of their retirement wealth in guaranteed income sources spend roughly 30% more annually than retirees with 20%-40%, while those with 60%-80% spend 44% more.

Those results indicate that greater guaranteed income can reduce spending anxiety and support higher living standards for clients. But advisors themselves aren’t as enthralled with such products.

“We focus on sustainable distribution rates rather than taxable income generated by the portfolio,” said Lucas Wennersten, owner and founder of 49th Parallel Wealth Management in Scottsdale, Arizona. “Dividends and capital gains are more tax-efficient than interest and ordinary income, and there is no such thing as guaranteed income. Social Security benefits and treasuries are the closest thing to guaranteed income, but we are seeing now that those are not guaranteed either.”