The 4% rule is a reasonable way to start thinking about retirement, and a poor way to finish. It comes from a pair of American studies written for a different retirement system, and in Australia it ignores the three things that do the most work in a real plan: the Age Pension, the tax treatment of super, and the portfolios Australians actually hold. Follow it literally and you risk underspending for decades, or getting caught early by the one risk it handles worst.
This one came up because of a comment on our YouTube channel. The gist: financial planners make retirement sound too complex, when you could just rely on the 4% rule and be done. Phil and Dan took that on in a recent episode of the Wealthlab Podcast, walked through what the rule actually says, and then did something more useful: they opened up two real client plans (details changed, as always) to show what the rule can’t see. This post covers both.
What the 4% rule actually says
The rule comes from a 1994 paper by a US financial planner, backed up by a follow-up study in 1998. The question it answered: what is the highest “safe” percentage you can draw from retirement savings each year and still have a reasonable chance of the money lasting at least 30 years, even through bad market stretches? Using historical US market data and a classic American 60/40 shares-and-bonds portfolio, the answer came out at 4% of your starting balance, increased each year with inflation.
Its cousin is the rule of 25: whatever annual income you want, multiply it by 25 and that’s the starting balance the 4% rule says you need.
Phil’s worked example from the episode: $500,000 in super means $20,000 in year one. If inflation runs at 3%, year two is about $20,600, year three around $21,200, and so on for 30 years. Simple, mechanical, done.
And that’s the appeal. It turns the hardest question in retirement into one line of arithmetic. The problem is what the arithmetic leaves out.
Please note: All figures, projections and scenarios in this article are approximate and for illustrative purposes only. The client scenarios described are real cases shared on the podcast with names and details changed. Individual outcomes will vary based on personal circumstances, investment returns, fees and current government policy. This is general information, not personal advice.
Who is living on $20,000 a year?
Phil’s first objection on the episode was blunt: who the hell is living off 20 grand a year? And $500,000 is not an unusual retirement balance.
Here’s the thing the rule cannot know: $20,000 a year is not just low by Australian standards, it is less than the Age Pension pays on its own. The full single Age Pension is about $32,180 a year and the couple rate about $48,516 (from 20 September 2026, source: Services Australia; rates are updated each March and September). ASFA’s modest retirement standard sits at $36,548 a year for a single (ASFA, June quarter 2026).
A US rule has no reason to know Australia runs a means-tested pension underneath every retirement. But that pension changes the whole shape of the maths: an Australian retiree with $500,000 who draws it down is moving toward pension support, not toward a cliff. Following 4% to protect against a 30-year horizon the pension already partially insures is how people end up dying with their biggest-ever bank balance after decades of skipped holidays.
Four more reasons the rule travels badly
Australian super isn’t a 60/40 portfolio. The rule was tested on 60% shares and 40% bonds. As Phil pointed out, if you’re in a typical Australian default fund, you’re nowhere near that: most so-called balanced options hold closer to 80% in shares and property. Different portfolio, different risk, different safe drawdown. (Phil has ranted about the “balanced” label before, in Episode 22.)
Pension-phase earnings are tax-free here. Once super is in an account-based pension, earnings inside it are untaxed, which the US modelling never contemplated. The net return assumptions underneath the rule simply don’t match the Australian wrapper.
Australia already sets drawdown floors. An account-based pension comes with legislated minimum drawdown rates that start at 4% before 65 and climb with age: 5% from 65, 6% from 75, 7% from 80, up to 14% from 95 (source: ATO, current as at November 2026). A flat 4% forever isn’t just unwise in the Australian system; past your mid-70s it isn’t even allowed.
Sequencing risk breaks it. The rule offers a “reasonable chance,” not a promise, and the failure mode is a run of bad returns early. We’ve covered this before: Scott and Phil showed in Episode 1 how two retirements with the same average return can end 15 years apart purely because of when the bad years land. A fixed drawdown formula doesn’t adjust when that happens. A real plan does.
What a real plan looks like: Jack and Jill
The first case Dan walked through on the episode shows what no formula can touch. Jack and Jill (not their real names) are 55 and 57 with $440,000 in combined super and three properties: the home they live in and two investments. They want to retire early next year, years before they can touch super. Their plan isn’t a drawdown percentage; it’s a sequencing puzzle. Which property do they live in? Which ones get sold, and in which financial years? How do they fund life until super opens at 60?
The team modelled four options. Staying put and selling the two investment properties in stages funded them past 95. Moving into one investment property with different sale timing ran to 91. Selling everything and buying a new home came last, running out at 81, because stamp duty and buying costs took a permanent bite on day one. As Phil put it, “I love a good donation to the state government.”
Two nuances from the episode are worth repeating, because they’re exactly what a formula hides. First, the best-looking option partly wins because it holds less wealth in property, so more money is liquid and invested; the “when does the money run out” number is really a liquidity number. Second, every one of these projections depends on properties actually selling, and right now the team is seeing plans revisited because properties sit on the market or sell below expectations. As Dan said on the episode, “it becomes extremely emotional when you have 30 grand left in your bank account and 500, 600 grand of equity tied up in a property.”
Try running the 4% rule on that.
What a real plan looks like: Mark and Sue
The second case is closer to a typical household: own home, decent super, planning to downsize at some point. Mark holds most of the super and is five years older; Sue has almost none. Their instinct was to keep everything in Mark’s name, since that’s where the balance lived.
The modelling showed why the opposite can be worth real money. Because a younger spouse’s super in accumulation phase isn’t counted in the older partner’s Age Pension means test, directing money into Sue’s account, through a transition strategy in Mark’s final working year and then the downsizer contributions when they sell, changed Mark’s pension entitlement in the window between his 67th birthday and hers. The modelled difference: around $46,000 of additional Age Pension across that period, without changing how much they own or taking on any new investment, just changing whose name the money sits in and which phase it sits in.
And as Phil noted, the $46,000 understates it, because every pension dollar received is a dollar not drawn from super, left compounding for the next 20 or 30 years. The same restructure also rebuilt part of Mark’s taxable super as a tax-free component in Sue’s name, which matters for what adult children may eventually pay on inherited super. That trap gets its own treatment in our post on who gets your super when you die.
Whether a strategy like this suits any particular couple depends entirely on their circumstances, ages, balances and plans; it is the kind of thing to model properly with a licensed adviser, not to copy from a blog post. The point here is simpler: none of it exists inside the 4% rule.
Today’s dollars, future dollars, and the $30 loaf of bread
One more thing from the episode worth keeping: when you look at any long-range projection, check which dollars it’s in. Projections in today’s dollars hold your spending flat (say, $77,000 a year, the income Jack and Jill’s plan targets) and quietly discount the balances so everything is in today’s purchasing power. Flip the same model to future dollars and that $77,000 becomes $150,000 to $200,000 a year by their 80s, because inflation never retires. Phil’s version: before financial planning he ran a coffee shop and sold coffees for two dollars. Think about what you paid this morning.
The future-dollars view also deflates false comfort. A projection showing $240,000 still in super at 95 looks reassuring, until you notice that by then it’s one year of living expenses.
So is the 4% rule useless?
No, and the episode was fair about this. If your situation is genuinely simple, your super is your only asset, you’re comfortable with your fund’s defaults, and you just want a sanity-check number, the rule is a reasonable starting point and better than no plan at all.
But in sixteen-plus years of advice, Phil’s experience is that very few lives are actually that simple. People arrive with a property to sell, an age gap, a redundancy, a question about helping the kids, a market fall two years in. What they’re really asking, as Dan put it, is rarely a percentage: “It’s not even just a financial decision that we’re helping them with. It’s a lifestyle, it’s mental clarity, it’s everything.” And the standard Phil holds the whole exercise to is worth quoting in full: “Good financial planning is an art form. It’s the art of matching a spreadsheet answer that says this is your financially optimal course of action, and marrying that with: hey, I’m a real person, I’ve got a real life, and it may not align with what the spreadsheet tells me to do.”
The full episode, including both case walkthroughs on screen, is here:
Frequently asked questions
Does the 4% rule work in Australia? As a rough starting point, yes; as a plan, no. It was built on US market data and a US 60/40 portfolio, with no Age Pension, no tax-free pension phase and no legislated minimum drawdowns. Australian retirees who follow it literally often underspend, because the means-tested pension provides a floor the rule doesn’t know exists.
What is the 4% rule? Draw 4% of your starting retirement balance in the first year, then increase the dollar amount with inflation each year. Based on 1990s US research, that gave a reasonable (not guaranteed) chance of savings lasting 30 years. The related rule of 25 multiplies your desired annual income by 25 to estimate the balance needed.
What withdrawal rate do Australian retirees actually use? Account-based pensions have legislated minimums that rise with age: 4% before 65, 5% from 65, 6% from 75, 7% from 80 and up to 14% from 95 (current as at November 2026). Many retirees draw more than the minimum in the active early years and let the Age Pension carry a growing share later. The sustainable rate for any individual depends on their balance, pension eligibility, portfolio and spending shape.
Is the rule of 25 realistic for Australia? It overstates what most Australians need, because it assumes savings fund everything forever. In practice the Age Pension supplements most retirements: ASFA’s benchmarks have a single funding a comfortable lifestyle of about $56,166 a year from a $630,000 balance plus a part pension, which is nowhere near 25 times the income.
What does a financial planner actually model instead? The episode shows two examples: a property-sequencing plan comparing four sale-and-residence scenarios (with outcomes ranging from money lasting past 95 to running out at 81), and a spouse-balance restructure that added around $46,000 of Age Pension in a modelled window. Real modelling covers asset sale timing, means-test positioning, tax components, liquidity and the ability to re-run the numbers when life changes.
When is the 4% rule good enough? When your situation is simple and you want a ballpark: one super balance, no major assets to restructure, default investments you’re happy with, and spending near what 4% produces. Even then, it’s worth checking the result against the Age Pension and ASFA benchmarks rather than trusting the formula alone.
Your next step
The 4% rule answers one question with one number. A retirement plan answers the questions that actually keep people up at night: can I retire, when, what happens if I sell the house, what if markets fall in year two, what does it mean for the kids. If any of this has raised those questions about your own situation, book a free chat with the Wealthlab team. No pressure, no jargon. Or take the free Wealthlab retirement quiz for a general snapshot, and the super calculator for a quick look at your own drawdown numbers.
