Why the 4% Rule Doesn’t Work for Retiring Abroad

For decades, retirement planning in America has centered around a single sacred number: four percent.

Save diligently. Invest in U.S. index funds. Withdraw 4% of your portfolio each year in retirement. You’ll be fine.

That’s the pitch. It’s simple and reassuring. In the 1990s, it even worked. But if you’re planning to retire in Italy, or anywhere outside the U.S., this method is dangerously outdated.

And frankly, even in the U.S., it’s not looking great anymore.

The Rule That Was Built for a Different World

The 4% rule comes from a 1994 study by financial planner William Bengen. He backtested market returns from 1926 onward and concluded that if you withdrew 4% of your savings in your first year of retirement (adjusted for inflation each year after), your portfolio would likely last 30 years.

However, this was a different era:

• It assumed U.S. residency and taxes.

• It assumed consistent 7–8% market returns.

• It assumed predictable inflation.

• It assumed you’d live into your 80s, not beyond.

• It assumed the U.S. dollar would remain dominant.

  
  

If you’re retiring in Italy, spending in euros, taxed under a different system, and planning to live into your 90s, none of these assumptions hold.

Why the 4% Rule Won’t Die

So why does every major investment firm still pitch it?

Because it’s easy.

It requires no explanation.

It makes advisors look smart without requiring the real work of planning around your actual life.

Companies like Fidelity, Schwab, Vanguard, and Fisher Investments still base most retirement models on some version of the 4% rule. They build flashy Monte Carlo simulations, add volatility buffers, and consider it sufficient.

These simulations don’t ask where you’ll be living. They don't model currency fluctuations. They don’t simulate Italian tax rates. And they definitely don’t calculate what happens when the dollar weakens or your “tax-free” Roth IRA gets re-taxed abroad.

It’s a comfortable illusion. But you’re not planning a comfortable retirement. You’re planning a bold one. And that requires better math.

The Economic Forecasts Are Shifting — Fast

The U.S. economy isn’t collapsing. However, it is being deliberately destabilized. The factors in play are often erratic, reactive, and driven more by political optics than coherent policy. If you’re retiring abroad, the fallout could hit you harder than most.

As of May 2025, the Trump administration imposed tariffs of up to 145% on Chinese imports as part of its latest trade war revival. This was designed to bring manufacturing back to U.S. soil. However, it was high on rhetoric, low on strategy, and blind to real-world consequences.

After a few weeks of market backlash, he began walking the tariffs back. This pattern shows that there's no stable economic doctrine, just short-term flexing and a fundamental misunderstanding of how global trade works.

The results?

• Consumer prices are rising—especially on electronics, vehicles, and appliances.

• Manufacturers are absorbing higher input costs, cutting hiring, and freezing capital expenditures.

• Global investors are once again questioning the long-term reliability of U.S. economic leadership.

  
  

What does this mean for your retirement?

If you’re relying on traditional 60/40 portfolios packed with U.S. equities, and you’re assuming dollar-based stability for the next 30 years, your assumptions are outdated. Forecasts from Moody’s and Oxford Economics now estimate long-term portfolio returns in the 4–5% range—a stark contrast to the era when the 4% rule was established.

Then there’s the U.S. dollar. While still dominant, it’s increasingly challenged. With countries reducing dollar reserves and BRICS exploring alternative currency systems, the erosion isn’t theoretical; it’s already occurring. If the dollar weakens—or worse, loses reserve status—the purchasing power of your retirement accounts abroad takes a direct hit.

This isn’t fearmongering. It’s math. It’s volatility. And it’s the price of an economic policy built on press conferences instead of planning.

If you’re planning to live in Europe, where expenses are in euros, don’t wait until the dollar drops to diversify. Watch the exchange rate. If it’s favorable now, convert some of your long-term funds. Lock in the value. Protect your lifestyle before it becomes more expensive to sustain.

$48,000 a Year Isn’t Comfortable — It’s Constrained

Let’s consider a scenario. If you retire with $1.2 million, withdrawing at 4% gives you $48,000 per year.

Let’s be honest: $1.2 million isn’t just a stretch—it’s a fantasy for most Americans. According to the Federal Reserve’s latest Survey of Consumer Finances, the median retirement savings for Americans aged 65–74 is around $200,000. Even among higher earners, $1.2 million puts you in the top quartile.

This model—the 4% rule—is built for those who managed to save and invest successfully. If you’re planning to retire abroad, you’re probably in that upper echelon. But not always. Many people move to Italy relying solely on teachers’ pensions, police or firefighter retirement, military benefits, or Social Security.

And even that pillar is looking shakier than ever.

With Social Security trust fund shortfalls expected in the early 2030s, benefits may be reduced or restructured. A full collapse is unlikely, but delayed eligibility, lower cost-of-living increases, or benefit reductions are very much on the table. If your retirement plan hinges on every dollar arriving on time and untouched, you’re betting on political gridlock correcting itself.

That’s not fear—it’s informed planning. For those living abroad, it’s critical to understand how each income stream is taxed and translated when you’re spending in euros rather than dollars.

This isn't FUD - It's just math!

What’s Taxed—and Where

Let’s break this down clearly. Here’s how key retirement income types are taxed in both countries:

In the U.S.:

• Traditional IRA / 401(k): Taxed as ordinary income.

• Roth IRA / 401(k): Tax-free if qualified.

• Dividends / Capital Gains: Taxed based on income and holding period.

• Social Security: Taxed up to 85% based on provisional income.

  
  

In Italy:

• Traditional IRA / 401(k): Taxed as pension income at progressive rates, unless covered by the 7% flat tax regime.

• Roth IRA / 401(k): Italy doesn’t recognize Roth protections. Withdrawals are taxed as ordinary income—potentially up to 43%.

• Dividends / Capital Gains: Typically taxed at 26%, unless offset by treaty provisions or covered under the 7% regime.

• Social Security: Taxed by Italy (not the U.S.) under the bilateral tax treaty; it counts toward your Italian income unless you’re under the 7% regime.

  
  

None of this is catastrophic. But it does mean that the simplicity of “4% = freedom” falls apart the moment you cross a border.

Global Investing for a Global Retirement

You don’t need to liquidate all your U.S. equities. However, blind faith in the S&P 500 isn’t sufficient.

Retirees abroad need globally diversified portfolios that can survive in the real world—not just in U.S.-centric simulations.

Here’s what to prioritize:

• Global diversification: Investing in Europe, Asia, and emerging markets can help hedge against U.S. volatility.

• Company fundamentals: Focus on multinationals with strong balance sheets and diversified revenue streams.

• Supply chain resilience: Companies that survived 2020 disruptions are more likely to weather future challenges.

• Currency alignment: Consider euro-denominated funds, international dividend ETFs, or assets that minimize dollar-to-euro risk.

  
  

Examples of resilient traits to look for (note: not investment advice):

• Firms that generate significant revenue outside the U.S.

• Companies with regional manufacturing hubs (not reliant on single-source supply chains).

• Long-term dividend growers with global operations and proven adaptability.

  
  

If you’re retiring in Europe, your portfolio should reflect your future—not your past zip code.

Final Thought

The 4% rule worked when people retired at 65, died at 82, lived in Kansas, spent in dollars, and paid U.S. taxes.

That’s not you.

You’re retiring early (or late), living longer, moving abroad, navigating two tax systems, and spending in a different currency.

You need a smarter plan—one that flexes, adapts, and actually reflects your future. The 4% rule is dead. Your real retirement starts now.

Coming Next Week:

IRAs, Roths, and Reality: What Italy Will Actually Tax

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