I had the pleasure of speaking with Bill Bengen, creator of the “4% Rule” for retirement planning. Bill has been a reader of Financial samurai For many years I have always been polite in the comments section when I write about safe withdrawal rates. So, I thought it was time to have a conversation to clear up some misconceptions.
For those unfamiliar, the 4% rule, instituted by Bell in the 1990s, suggests that traditional retirees (around age 65) can safely withdraw 4% from their retirement portfolio in the first year — adjusted for inflation in subsequent years — without running out of stock. . Money over 30 years.
Challenge the 4% rule
I have criticized the 4% rule, arguing that it has become outdated because of how much time has changed since the 1990s when Bell first popularized the concept. At the time, the 10-year bond yield was more than 5%, so it made sense that withdrawing at 4% wouldn’t deplete your savings while providing a risk-free return of 5%.
Today, with financial giants like JPMorgan, Vanguard, and Goldman Sachs lowering their forecasts for stock and bond returns, maintaining a 4% withdrawal rate – let alone considering a 5% rate – seems unrealistic.
I don’t mean to sound dismissive, but it’s in my nature to question established assumptions in an ever-evolving world. As I mentioned in my Wall Street Journal bestseller, Buy this and not thatWe must think in terms of probabilities and not in absolutes, as even 80% certainty means that we will still be wrong sometimes. The key is to learn from our mistakes and adapt.
I’ve been very careful to follow the 4% rule.
Since I retired in 2012, I haven’t followed a 4% withdrawal rate — mostly out of caution about going beyond my savings. With two young children and a husband without a traditional job, most of the financial responsibility falls on me. We like to have maximum flexibility while our children are still teenagers.
Additionally, I find it difficult to part with my money, having spent most of my post-university years in fast-paced cities like New York and San Francisco, surrounded by ambitious individuals. I admire husbands who claim to be financially independent while encouraging their wives to keep working. But to me, retirement seems more fulfilling when both partners are free from the pressures of work. Plus, my wife would slap me funny if I made it work while I played pickleball all day!
Considering these factors, I have drawn from +2% to -10% on average since 2012. A -10% withdrawal essentially means increasing our net worth by 10% through active income generation. As a result, our net worth has steadily increased since our retirement in 2012 and 2015. At this pace, we will likely end up with more than we need, which will be suboptimal.
Misconceptions about the 4% rule are cleared up by Bill Bengen
Here’s what I learned from Bill that helped illustrate the 4% rule:
- Not a hard “rule”.: Bill considers the 4% rule more of a guideline than a strict rule. It encourages flexibility regarding withdrawal rates, although it is often treated as a strict rule in the eyes of the public.
- 4% are not actually aggressiveContrary to popular belief, Bell data shows that 4% is actually a conservative percentage. In his study of 400 retirees since 1926, only one retiree (who retired in 1968) had to commit to a 4% rate to avoid running out of money. The remainder withdrew an average of 7% without exhausting their investment portfolios.
- Adjusting for inflation: The 4% rule is not fixed; Adjusts for inflation. For example, if you start with a $1 million portfolio and withdraw $40,000 one year, you can adjust that amount for inflation the following year to $44,000. This means that your withdrawals fluctuate depending on your financial needs and economic circumstances.
Key takeaway: The 4% rule may be too conservative
After our conversation, my biggest takeaway was that the 4% rule may actually be too cautious. Bell argued that a safe withdrawal rate of 5% could work well for a 30-year retirement life. For workers who want to retire early, his research suggests that a rate of 4.3% is appropriate for those with a 50-plus year horizon.
Since introducing the 4% rule in 1993, Bell has revised his recommendation to 4.5% in 2006 and 4.7% in 2021. He now believes a 5% withdrawal rate is possible.
Reducing the traditional retirement age from 65 to 52 years
Increasing the withdrawal rate from 4% to 5% means retirees only need 20 times their annual expenses, reducing their savings requirement by 20% (from 25X to 20X). If Bill considers 65 the traditional retirement age, this suggests we could retire about 20% earlier Age 52.
This is it General appreciationThe actual retirement age will still depend on factors such as investment returns and sources of retirement income. The main risk is in covering expenses between 52 and 59.5, when traditional retirement accounts impose penalties for early withdrawal.
Furthermore, ages 52 to 65 tend to be the strongest earning years for increasing net worth. Therefore, you may still want to generate additional retirement income as a hedge. Staying active in your 50s through meaningful work is generally a good idea.
Reevaluate Retirement Goals: Accumulate 20X Expenses, Then Relax?
While I still believe that accumulating a net worth equivalent to 25 times annual expenses may not be enough for retirement, hearing Bill’s argument for a 5% withdrawal rate made me reconsider. If Bell’s latest research is correct, those of us with diligent savings habits may not need to work for as long as we previously thought.
For those of you under the age of 50, this is a good time to plan what you want to focus on when you retire early. You’ll likely stay healthy, so think about activities that keep you physically engaged!
Of course, achieving financial freedom and actually retiring from “chasing money” are two separate challenges. It’s hard to break the desire for more. But for disciplined savers and investors, they should be relieved: Bell’s research suggests that we may not have to act as hard or as hard as we once thought.
Here’s to more Americans retiring in their early 50s!
Readers, what do you think about my reasoning for lowering the traditional retirement age from 65 to 52 if the safe withdrawal rate has already shifted to 5%? Do you think people will actually be able to move away from “money” in their early 50s? Or will the fear of running out of finances and withdrawing financial security push most people to work longer?
My conversation with the creator of the 4% Rule, Bill Bengen
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