It's time to reevaluate that 4% withdrawal rule. Better to base on market conditions, inflation, and personal longevity needs!
The 4% withdrawal rule, introduced by financial advisor Bill Bengen in 1994, has long been a cornerstone of retirement planning. It suggests that retirees can safely withdraw 4% of their portfolio in the first year of retirement and adjust for inflation annually, ensuring their savings last for at least 30 years. This principle has been widely adopted, especially within the Financial Independence, Retire Early (FIRE) movement. However, 25 years after his initial publication, Bengen himself has reassessed the rule’s relevance in today’s financial landscape, and maybe you should too…
The Origins of the 4% Rule
Bengen formulated the 4% rule after analyzing major market downturns since 1926, including the Great Depression (1929–1931), the late 1930s recession (1937–1941), and the 1973–1974 oil crisis. His analysis tested various withdrawal rates on a 60% stock / 40% bond portfolio.
His findings concluded:
- A 3% withdrawal rate ensured a 50-year portfolio lifespan.
- A 4% withdrawal rate was safe for at least 30 years.
- Historically, no retiree had exhausted their portfolio within 30 years when following the 4% rule.
Why Bengen No Longer Stands by 4% Rule
Bengen’s recent research suggests the 4% rule was designed for a worst-case scenario. The original model assumed a retiree who retired at the worst possible time – October 1968, right before a prolonged bear market and high inflation.
Key Updates from Bengen’s New Findings:
- Under average market conditions, a safe withdrawal rate has historically been closer to 7%, with some periods peaking at 13%.
- Given today’s high stock valuations and economic uncertainty, Bengen believes retirees should limit withdrawals to no more than 5%.
Misconceptions About the 4% Rule Cleared Up by Bill Bengen
A 2024 interview with Bill Bengen clarified several common misunderstandings about the 4% rule:
- Not a Hard “Rule”: Bengen views the 4% rule as a guideline rather than a rigid rule. He encourages retirees to remain flexible with their withdrawal rates.
- 4% isn’t Aggressive: Contrary to public perception, Bengen’s data suggests 4% is actually conservative. Among 400 retirees studied since 1926, only one (who retired in 1968) needed to strictly adhere to 4% to avoid running out of money. The others withdrew an average of 7% without depleting their portfolios.
- Adjusting for Inflation: The 4% rule is not static; it adjusts annually based on inflation. For example, if a retiree withdraws $40,000 from a $1 million portfolio in year one, they would adjust for inflation the following year (e.g., $44,000 if inflation is 10%).
- Total Return Basis: The safe withdrawal rate is computed based on total return, meaning it does not differentiate between principal, capital appreciation, dividends, or interest. For instance, with a $1 million portfolio generating $20,000 in income, a 5% withdrawal rate means withdrawing $50,000 – not $50,000 plus $20,000.
Today’s Market Conditions and Withdrawal Rates
Sustainability of withdrawal rates depends on market valuations and inflation expectations. Generally:
- When the stock market is undervalued, future returns tend to be higher, supporting a higher withdrawal rate.
- When stocks and bonds are expensive, future returns tend to be lower, requiring a more conservative approach.
Currently, with high stock valuations and economic uncertainty, Bengen warns against exceeding a 5% withdrawal rate. While this is an improvement over 4%, it underscores the importance of flexibility in retirement planning.
Longevity Risk and the FIRE Community
A significant misconception about the 4% rule, especially within the FIRE movement, is the assumption that 30 years is a sufficient time horizon. For early retirees in their 30s or 40s, portfolio longevity may need to extend 50–60 years.
Key Findings on Portfolio Longevity:
- A 75% stock / 25% bond portfolio has a 15% chance of depletion over 50–60 years with a 4% withdrawal rate.
- A 50/50 stock-bond portfolio increases depletion risk to 30–35%.
- A 5% withdrawal rate raises depletion risk to 60–65%.
Adjusting for a Sustainable Retirement
For those planning extended retirements or wishing to preserve wealth for heirs, a more conservative approach is advisable.
Advisor Recommendations:
- Target a 3.0–3.25% withdrawal rate for portfolios expected to last beyond 30 years.
- This may require a larger initial nest egg or additional income streams, but it significantly reduces the risk of depleting savings.
The 4% rule has been a trusted benchmark, but evolving market conditions and longer lifespans call for a reevaluation. Bill Bengen’s updated research suggests retirees should adjust withdrawal rates based on market conditions, inflation, and personal longevity needs.
Investors should work closely with a financial advisor to develop a flexible withdrawal strategy that balances long-term security with financial independence.
"It's Time to Reevaluate that 4% Withdrawal Rule." FMeX. 2025.
