Last week, I came across yet another Twitter thread from a financial advisor praising the 4% retirement rule as gospel. Despite its seemingly obvious flaws, this approach somehow remains the gold standard of retirement planning.
For those unfamiliar, the 4% rule says you can spend decades building a nest egg, then withdraw 4% of it annually in retirement and theoretically never run out of money. It's a cornerstone of traditional retirement planning.
But I'm fundamentally opposed to the 4% rule. It doesn't just miss the mark – it's completely backwards thinking.
Let me explain with an illustration…
Imagine you own a factory that produces and sells widgets. To produce those widgets, you buy lots of widget-making machines. Those machines (assets of the business) serve one purpose: to make widgets that are then sold to generate cash flow.
Makes sense, right?
You don't buy those machines hoping they'll magically increase in value so you can sell pieces of them later. A real business owner knows the value is in the consistent, predictable cash flow from selling widgets – not gambling on the machines' future worth. Your success depends on meeting stable demand for your product, not speculating that uncontrollable market forces might make your equipment more valuable.
Yet the 4% rule has convinced us to do exactly that – spend decades acquiring assets with the hope (speculation) that their value will increase just enough each year that we can sell pieces of them to fund our lifestyle.
That strikes me as absolutely crazy.
What Exactly Is This 4% Rule?
The idea goes like this: since the stock market historically grows at about 7% per year, you should be able to sell off 4% of your portfolio annually in retirement and never run out of money.
Growth at 7%, withdraw 4%, net positive 3%. Forever.
And based on complicated mathematical simulations, this approach works – in an ideal world where nothing ever goes wrong and humans don’t have emotions.
But that’s not exactly the world we live in, is it?
When Human Psychology Meets Market Reality
What happens when you're supposed to sell 4% during a year when the market is down 10%? Are you really going to liquidate assets when you're already underwater?
The math might hold up in theory, but it completely ignores human psychology.
The real-world impacts to retirees is well documented. They start making suboptimal life decisions: “Maybe we don't need to take that trip” or “Maybe we don’t need to replace our car just yet.”
The mental burden of watching your portfolio turn red while knowing you still need to sell those assets to live creates a massive fear of running out of money.
A Better Way: The Cash Flow Approach
What I discovered through Robert Kiyosaki's Rich Dad Poor Dad was this idea of buying assets that produce income – assets that put money in your pocket, today.
A successful factory owner doesn't sell off pieces of machinery to fund operations – they use those machines to produce ongoing revenue. Similarly, a smart retiree shouldn't sell portfolio pieces to live, but instead rely on the cash flow from assets they own.
Real estate is a perfect example - it's essentially the retirement equivalent of owning a widget factory. When you own income-producing properties, they keep generating rent through economic cycles.
Rents are incredibly sticky. If you look at a 50+ year chart, rents have really never gone down. Even during 2008, while housing values plummeted, rents stayed flat and then resumed climbing.
This approach shifts your focus from hoping the market cooperates with your withdrawal schedule to owning productive assets that work for you every month.
You become the landlord of your investments, not the tenant of the stock market.
The Bottom Line
Just because you can sell pieces of an asset doesn't mean it's the optimal strategy for retirement. While liquidation creates wealth in specific scenarios, basing your entire retirement on systematically selling portions of your portfolio exposes you to significant market timing and emotional risks.
The 4% rule remains fundamentally flawed because it forces retirees to sell assets (often at inopportune times) rather than positioning those assets to generate ongoing income.
For retirement sustainability, structuring your portfolio to produce reliable cash flow (whether through dividend stocks, real estate, or other income investments) provides stability that systematic liquidation strategies simply can't match.