The 4% Rule Isn’t Broken — It Was Never Really a Rule

How Federal Employees Should Think About the 4% Rule When creating a TSP withdrawal strategy

Some people swear by it.

Others say it’s outdated, flawed, or dangerously simplistic.

And still others argue retirees should withdraw far more than 4%.

So which is it?

Like most things in retirement planning, the honest answer is:

It depends.

But contrary to what you might hear in the financial media, there’s actually nothing  wrong with the 4% rule — as long as we stop treating it like a rigid rule and start using it for what it really is:

A starting point for estimating retirement income from your TSP.

Because when federal employees think about retirement, they are almost always wrestling with two competing fears.

Fear #1: Running out of money.

After decades of saving in the Thrift Savings Plan, the idea of depleting that nest egg is unsettling. No one wants to be forced to cut their lifestyle dramatically late in retirement.

But there’s another fear that often receives less attention.

Fear #2: Not enjoying the money you worked so hard to save.

Many federal employees spend 20–30 years building their retirement savings in the TSP. The goal is to eventually enjoy the fruits of that discipline. Yet if retirees become too cautious with withdrawals, they may underspend their savings and miss experiences that truly matter.

In other words, retirement income planning is really about threading the needle between two risks:

• Spending too much and running out of money
• Spending too little and living with regret

The entire debate surrounding the 4% rule for retirement withdrawals, and really any TSP withdrawal strategy, attempts to balance those two fears.

How Much Income Will $1,000,000 in the TSP Generate?

This is one of the most common questions federal employees ask as retirement approaches.

After years of saving in the Thrift Savings Plan, many people reach retirement with balances approaching — or even exceeding — $1,000,000.

But a large account balance doesn’t answer the question that actually matters:

How much income will that money produce?

Is a million dollars in the TSP worth:

• $70,000 per year?
• $50,000 per year?
• $40,000 per year?
• Something else entirely?

The answer depends on how you convert your TSP balance into retirement income — and that’s where the discussion around the 4% rule begins.

The Real Question Federal Employees Need to Answer

For federal employees approaching retirement, the real challenge isn’t simply how much money is in the TSP.

It’s understanding how that savings fits into the broader federal retirement system.

Federal retirement is often described as a three-legged stool:

• FERS pension
• Social Security
• Thrift Savings Plan (TSP)

Two of these legs are relatively easy to estimate.

Your FERS pension follows a formula.

Your Social Security benefit follows a formula.

Once you know your inputs, you can estimate those retirement paychecks with a high degree of confidence.

But the TSP is different.

It’s not a paycheck.

It’s a pool of investments that must be converted into retirement income.

And that’s where things get complicated.

Or more accurately… complex

Why Estimating TSP Retirement Income Is a Complex Problem

When it comes to determining how much income your TSP can safely generate, several key variables are unknowable:

• How long you will live
• Future inflation
• How you spend your money
• Market returns
• The order in which those returns occur
• Taxes

Because these factors interact in unpredictable ways, there is no simple formula that can perfectly determine how much you can withdraw from your TSP each year.

This is why retirees — and financial planners — have long searched for rules of thumb to guide retirement withdrawals.

And that’s where the 4% rule comes from.

The Strategy That Came Before the 4% Rule

Before the 4% rule existed, many people relied on what we might call the average return approach.

The logic seemed simple. It goes something like this…

Historically, the stock market had produced average returns of roughly 10% per year.

After adjusting for inflation, that equated to roughly 7% real returns.

So if your retirement portfolio could earn about 7% after inflation, the thinking went, retirees should be able to withdraw 7% annually and live off the returns without touching their principal.

Under that logic, a retiree with $1,000,000 in the TSP could potentially generate:

$70,000 per year of retirement income.

On paper, the math looked perfectly reasonable.

But this strategy ignores a critical risk.

The Risk That Changed Retirement Planning

Markets don’t deliver their long-term average returns smoothly.

Instead, returns arrive in unpredictable sequences of good years and bad years.

And once retirees begin withdrawing from their portfolios, the order of those returns becomes extremely important.

This is known as sequence of returns risk.

For example, two retirees could start with identical TSP balances and earn identical average returns over 20 years.

But if one experiences market losses early in retirement while the other experiences them later, the outcomes can be dramatically different.

The retiree who experiences losses early in retirement must sell more shares when prices are low, making it harder for their portfolio to recover.

In extreme cases, this can cause a portfolio to run out of money years earlier than expected.

This insight changed the way retirement researchers thought about withdrawal strategies.

Before you go further…

If you’re a federal employee approaching retirement and you’re wondering how much income your TSP might realistically generate, we’re hosting a short educational webinar that walks through exactly that question.

It’s called:

“The $1,000,000 Question: How Much Income Will Your TSP Generate?”

In about 60 minutes we’ll show you how federal retirees think about turning their TSP into retirement income.

👉 Reserve your seat here

The Birth of the 4% Rule

In 1994, financial planner William Bengen set out to answer a deceptively simple question:

What withdrawal rate would have allowed retirees to safely withdraw income from their portfolios without running out of money?

Bengen approached the problem with an unusually analytical mindset. Before becoming a financial planner, he had actually trained as a rocket scientist, graduating from MIT with a degree in Aeronautics and Astronautics. Earlier in his career he even co-authored the book Topics in Advanced Model Rocketry.

That engineering background shaped how he approached retirement income.

Rather than relying on simple averages, Bengen intuitively understood that the order of market returns matters when retirees are withdrawing money from their portfolios. A bad sequence of returns early in retirement can cause far more damage than poor returns later on.

So instead of assuming smooth average returns, he tested withdrawal rates against actual historical market sequences.

Using rolling 30-year periods of market data — including difficult environments such as the Great Depression and the inflationary 1970s — he looked for starting initial withdrawal rate that would have survived even the worst historical outcomes.

His conclusion:

A retiree withdrawing about 4% of their portfolio in the first year of retirement, and increasing that amount annually for inflation, would have survived even the worst historical market environments.

But notice something important.

Bengen himself never called this the “4% rule.”

He simply identified a historically sustainable withdrawal rate based on the data he analyzed. The term “4% rule” came later, as the idea spread through the financial planning community and the media.

And that subtle shift in language may be where much of today’s confusion begins.

Because the moment we start calling something a rule, we imply certainty in a situation that will always involve uncertainty.

Why the 4% Rule Is Constantly Debated

Because the 4% rule was built around worst-case historical scenarios, it often leads to an interesting outcome.

Many retirees who follow it end up dying with significant wealth remaining.

In other words, they likely could have spent more.

This has led some critics to argue that the rule is too conservative, potentially causing retirees to underspend their savings.

Other researchers argue the opposite — that lower bond yields, longer retirements, and changing market conditions may require withdrawal rates closer to 3–3.5%.

And, of course, some voices in the financial media suggest retirees should withdraw far more.

Even Bill Bengen himself later revisited his original research, suggesting that under certain portfolio assumptions a withdrawal rate closer to 4.5% might have survived historical market environments.

Taken together, it’s easy to see why the entire topic can feel confusing.

But much of this disagreement stems from a simple misunderstanding.

People often treat the 4% rule as a precise answer, when it was really intended to be a starting point for thinking about retirement income.

The Real Problem: Calling It a “Rule”

The biggest issue with the 4% rule isn’t the math behind it.

It’s the word rule.

Calling it a rule suggests certainty in a situation that will always involve uncertainty.

Retirement income planning is not a formula problem.

It’s a complex process that evolves over time.

Markets change.

Spending changes.

Taxes change.

Life expectancy changes.

No single withdrawal percentage can work perfectly for every retiree.

The 4% rule was never meant to be a universal law.

It was meant to be a historically informed guideline.

How Federal Employees Can Use the 4% Rule in TSP Withdrawal Strategy

For federal employees approaching retirement, the 4% rule can still be extremely useful.

Not as a rigid withdrawal strategy — but as a planning benchmark.

For example, a federal employee with $1,000,000 in the TSP might estimate roughly $40,000 per year of starting retirement income, with that amount adjusted upward for inflation over time.

That estimate can then be combined with the other two legs of federal retirement:

• FERS pension
• Social Security (or the Special Retirement Supplement)

Together, these income sources help answer the most important planning question:

Does my total retirement income support the lifestyle I want?

In other words, the 4% rule can serve as a practical way to estimate how much income your TSP might realistically contribute to retirement.

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The Real Solution

The real challenge of retirement income planning isn’t finding a perfect withdrawal percentage.

It’s developing a disciplined TSP withdrawal strategy for turning your TSP into reliable income.

Some retirees prefer relatively stable withdrawals, similar to the traditional 4% approach.

Others prefer dynamic spending strategies, adjusting withdrawals based on portfolio performance.

Still others prioritize guaranteed income approaches, converting part of their savings into lifetime income.

Each approach involves trade-offs between:

• flexibility
• predictability
• risk
• and spending potential

The key is developing a strategy that aligns with your goals, personality, and retirement plan.

The Bottom Line

The 4% rule has survived decades of debate not because it is perfect, but because it solved an important problem.

Before Bill Bengen’s research, many retirement projections, and TSP withdrawal strategies relied heavily on average market returns to estimate sustainable withdrawals. That thinking often led retirees to overestimate how much income their portfolios could safely generate, and in turn, their overall retirement readiness.

Bengen’s work changed that conversation.

By highlighting the dangers of sequence of returns risk, his research forced planners and retirees to confront a difficult reality: retirement income planning cannot rely on simple averages.

In many ways, the 4% rule became the foundation for nearly every withdrawal strategy that followed.

Whether someone uses guardrails, dynamic withdrawals, safety-first approaches, or even higher withdrawal targets, most modern retirement strategies are really attempts to manage the same risks Bengen identified more than thirty years ago.

For that contribution alone, the retirement planning world owes him a great deal of credit.

The 4% rule simply acknowledges a fundamental truth:

Turning a portfolio like the Thrift Savings Plan into retirement income will always involve uncertainty.

It attempts to balance the two fears every retiree faces:

• Running out of money
• Not enjoying the money they worked so hard to save

So no, the 4% rule isn’t perfect.

But it’s also not broken.

In fact, there’s nothing wrong with the 4% rule.

The real mistake isn’t using it.

The real mistake is believing it’s a rule at all.