The 4% Rule Isn't Actually a Rule, Says Its Creator
Key Points
Bill Bengen, the creator of the 4% rule, has updated his original calculations several times.
If you want your portfolio to last for at least 30 years, the 4% rule says you can safely withdraw 4% of your portfolio the first year of retirement, and adjust it annually for inflation.
Some investors may be able to safely withdraw more.
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As the man best known for developing the 4% rule for retirement withdrawals, financial planner and author Bill Bengen has spent decades explaining and updating his work. Bengen probably never imagined how strongly his research would affect everyday Americans or how tightly some people would hold to the rule.
Today, based on more recent research, Bengen has updated the original 4% rule to better reflect the realities retirees face. He also says it's not actually a "rule," but more of a "guideline." Here, we look at what he means.
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The old-school 4% rule
In 1994, Bengen developed the 4% rule based on historical market data. To learn whether there's a way to guarantee that a retirement stash would last 30 years, he ran hundreds of scenarios in which retirees held a balanced portfolio of 60% stocks and 40% bonds.
Bengen analyzed rolling 30-year market periods to determine the maximum sustainable withdrawal rate that would last a retiree at least 30 years. He then looked for the worst-case scenario -- the one that stood out from the others.
Among more than 400 scenarios, Bengen identified a hypothetical account for someone who retired in 1968 during a period of high inflation. For that individual, the safe withdrawal rate was only 4.2%, and the 4% rule was born.
Updates to the 4% rule
Since that time, plenty has changed, and Bengen's guidelines have evolved. Here's his latest advice:
- An updated rate: Based on market performance research, Bengen says that the 4% rule is now the 4.7% rule, and even 4.7% may be overly conservative for some retirees.
- For those who plan to retire early: Early retirees planning for 50 or 60 more years of life should stick to the safe rate of 4.2%
- The bite of inflation: Bengen says that inflation is retirees' "greatest enemy," and that they must consistently adjust their withdrawals to account for the higher cost of living.
- Flexibility: He encourages all retirees to adjust spending based on market conditions rather than stick religiously to the 4.7% guideline. While some may be able to safely increase their withdrawals during times of high inflation, others may need to cut back to stay on track.
Perhaps it's better to consider the 4% rule a starting point. Despite its imperfections, it's a reasonable way to build guardrails that protect your portfolio and offer you peace of mind.
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