A 4% retirement asset withdrawal rate remains the standard for financial planning, but it doesn’t hold up against every scenario.

In fact, according to a new white paper, longevity, volatility and inflation are putting pressure on the usefulness of the 4% rule for retirement distributions.

The paper, which was released by the Alliance for Lifetime Income, an insurance and industry trade group, is called “Planning for Retirement Income Within an Increasingly Volatile and Uncertain World,” and it revisits common retirement planning income assumptions. The paper was written by Colin Devine, an education fellow for the alliance and a principal at Devine & Associates, and Ken Mungan, the chairman of alliance member Milliman, an independent provider of actuarial and risk management services.

“The results provided by our research and models present substantial cause for concern, particularly within a world where increasing volatility has arguably become the norm,” Devine and Mungan write.

In conducting their own research on a safe retirement withdrawal rate, the authors found that the 4% rate, under normal conditions, still holds strong, and it poses only a small 16% risk that retirees will run out of assets within the first 20 years of retirement.

The 16% failure rate was an average of three different portfolio assumptions: equity-to-bond allocation mixes of 60% to 40%, of 70% to 30%, or 80% to 20%. The authors assumed the inflation rate was 2%.

The authors also studied a 5% withdrawal rate and found that a retiree using this rule of thumb faced twice the risk of exhausting assets than they would have using the 4% rule.

The paper then looked to a 6% rate, approximating the payout factor of a single-premium immediate annuity. Retirees using 6% portfolio withdrawals ran a 60% chance of running out of income within the first 20 years in a 60%-40% portfolio.

Devine and Munger extended the 4% findings beyond the 20-year point in retirement and found some fragility in the rule. In each portfolio allocation assumption, the failure rate of the 4% rule crossed the 50% threshold somewhere between a person’s 30^th and 40^th year of retirement.

It’s not enough for advisors to look at a person’s average life expectancy, say the authors, since “half of the population could be expected to exceed it, particularly as the standard deviation for longevity is about 10 years. Extending the time horizon out to 25, 30, 35 or even 40 years suggests that for each of these time periods there is simply much too high a risk of outliving income.”

The study also examined the resilience of the 4% and 5% withdrawal rates across different portfolio assumptions, taking into account a 20% drop in equity values during the first 10 years of a client’s retirement. Again, the 4% rule held up well: In the 22^nd year of retirement, there was a 20% failure rate in the portfolio of 60% stocks and 40% bonds. There was a 22.3% failure rate in the 70% to 30% portfolio, and there was a 21.9% failure rate in an 80% to 20% portfolio. By year 30, the 60% to 40% portfolio failure rate had increased to 43%. The 70%-30% stock-to-bond allocation failed 40.1% of the time by year 30, and the 80% to 20% allocation failed 37.3% of the time.

When clients used a 5% rule of thumb for withdrawals and there was a market decline in their early years of retirement, their failure rates in year 22 increased to 44.8% for a 60% to 40% stock/bond portfolio. A 70% to 30% portfolio in the same situation failed 41.8% of the time, while an 80% to 20% portfolio failed 38.4% of the time.

By year 30, those failure rates had increased dramatically: A 5% withdrawal rate with an early market decline failed 70.7% of the time if the stock/bond allocation was 60% to 40%. The portfolio failed 63.3% of the time when stocks to bonds were at 70% to 30%, and failed 59% of the time if stocks to bonds were at 80% to 20%.

The earliest year of failure in the 4% withdrawal rate scenarios was 10 years into retirement, and it was at nine years for the 5% withdrawal rate scenarios.

“The analysis also showed the implicit trade-off between selecting a higher equity [to] fixed-income investment mix and the risk of running out of income sooner,” the authors wrote. “While an 80-20 strategy produced a lower overall risk of running out of income over an individual’s lifetime, it also increased the risk [the client would run] out of income sooner because of the higher exposure to equity market declines. For example, when using a 4% withdrawal rate and an 80-20 equity/fixed income mix, our analysis revealed that the earliest [the] savings were exhausted was in year 10, which compared to year 13 for the more conservative 60-40 mix.”

The researchers noted that four key factors affect the effectiveness of the 4% withdrawal rule and other static withdrawal rates: retirees’ longevity, their health, market volatility and inflation. Advisors are now using retirement planning assumptions that place retirees around 100 years old.

As clients live longer, it’s more likely advisors will encounter those with some level of physical or cognitive impairment that affects them for the rest of their life.

Market declines during the global financial crisis, in December 2018 and at the outset of the Covid-19 pandemic serve as reminders that financial markets remain volatile.

And even though a 2% inflation rate may seem benign, it requires doubling people’s retirement income over 35 years if they want to maintain purchasing power. If inflation approaches 3%, this doubling would need to happen even sooner, in 23.5 years. Three percent inflation would require income to nearly triple during a 35-year retirement, the researchers noted.

The authors recommended a variety of planning approaches to solve these problems: Retirees can adopt a more conservative withdrawal rate, work longer, save more and use income annuities.