The 4% Rule: Clearing Up Misconceptions With Bill Bengen

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 and has always been courteous in the comments section when I write about safe withdrawal rates. So, I figured it was time we had a chat to clear up some misconceptions.

For those unfamiliar, the 4% Rule, developed by Bill in the 1990s, suggests that traditional retirees (around age 65) can safely withdraw 4% of their retirement portfolio in the first year—adjusted for inflation in subsequent years—without running out of money over a 30-year period.

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Challenging the 4% Rule

I’ve critiqued the 4% Rule, arguing it’s outdated because of how much times have changed since the 1990s when Bill first popularized the concept. Back then, the 10-year bond yield was over 5%, so it made sense that withdrawing at a 4% rate wouldn’t exhaust your savings with a 5% risk-free return available.

Today, with financial giants like J.P. Morgan, Vanguard, and Goldman Sachs lowering their stock and bond return forecasts, maintaining a 4% withdrawal rate—let alone considering a 5% rate—feels unrealistic.

I don’t mean to sound dismissive, but it’s in my nature to question established assumptions in a world that’s always evolving. As I mentioned in my WSJ bestseller, Buy This Not That, we must think in probabilities, not absolutes, since even an 80% certainty means we’ll still be wrong sometimes. The key is learning from our mistakes and adapting.

I’ve Been Too Cautious To Follow The 4% Rule

Since semi-retiring in 2012, I haven’t followed a 4% withdrawal rate—mostly out of caution about outliving my savings. With two young children and a spouse without a traditional job, most of the financial responsibility rests on me. We’d like to have maximum flexibility while our children are still adolescents.

Additionally, I find it hard to let go financially, having spent most of my post-college years in fast-paced cities like New York and San Francisco, surrounded by ambitious individuals.

I’m impressed with husbands who claim they’re financially independent while encouraging their wives to keep working. But to me, retirement feels most fulfilling when both partners are free from work pressures. Besides, my wife would slap me silly if I made her work while I played pickleball all day!

Given these factors, I’ve withdrawn anywhere from +2% to -10% on average since 2012.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 grown since our retirements in 2012 and 2015. At this pace, we’ll likely end up with more than we need, which would be suboptimal.

Misconceptions About The 4% Rule Cleared Up By Bill Bengen

Here’s what I learned from Bill that helped clarify the 4% Rule:

1. Not a Hard “Rule”: Bill considers the 4% Rule more of a guideline than a strict rule in America. He encourages flexibility with withdrawal rates, though it’s often treated as a rigid rule in the public eye. This is new to me as I’ve been pushing for a dynamic safe withdrawal rate for years.
2. 4% Isn’t Actually Aggressive: Contrary to popular belief, Bill’s data shows that 4% is actually conservative. In his study of 400 retirees since 1926, only one retiree (who retired in 1968) had to stick to a 4% rate to avoid running out of money. The rest withdrew an average of 7% without depleting their portfolios.
3. Adjusting for Inflation: The 4% Rule isn’t static; it adjusts with inflation. For instance, if you start with a $1 million portfolio and withdraw $40,000 one year, you would adjust that amount by inflation the next year to $44,000 if inflation was 10%. This means your withdrawals fluctuate with your financial needs and economic conditions.
4. The Safe Withdrawal Rate it is computed on a “total return” basis: It makes no distinction between principal, capital appreciation, dividends, interest, and other forms of income. For example, if you have a $1 million portfolio that generates $20,000 a year in income, a 5% withdrawal rate would mean withdrawing $50,000, not $50,000 + $20,000.

Key Takeaway: The 4% Rule May Be Too Conservative

After our conversation, my biggest takeaway was that the 4% Rule may actually be overly cautious. Bill argued that a 5% safe withdrawal rate could work well for a 30-year retirement horizon. For workers who want to retire early, his research even suggests a 4.3% rate is adequate for those with a 50+ year horizon.

Since introducing the 4% Rule in 1993, Bill has adjusted his recommendation to 4.5% in 2006 and 4.7% in 2021. He now believes a 5% withdrawal rate is feasible.

Lowering the Traditional Retirement Age from 65 to 52

Increasing the withdrawal rate from 4% to 5% means retirees need only 20 times their annual expenses, reducing the savings requirement by 20% (from 25X to 20X). If Bill considers age 65 the traditional retirement age, this suggests we could retire 20% earlier, around age 52.

This is a general estimation, and actual retirement age would still depend on factors like investment returns and retirement income sources. The main risk would lie in covering expenses between 52 and 59.5, when traditional retirement accounts incur penalties for early withdrawal.

Further, ages 52 until 65 tend to be more powerful earning years for greater net worth compounding. Hence, you may still want to generate supplemental retirement income as a hedge. Keeping active in your 50s with meaningful work is generally a good idea.

So perhaps lowering the traditional retirement age by 13 years from 65 to 52 is too aggressive. Instead, 55 – 59.5 may be more appropriate. That’s still an extra 5-10 years off of needing to work.

Reassessing Retirement Goals: Accumulate 20X Expenses, Then Relax?

While I still believe that accumulating a net worth equal to 25 times annual expenses might not be sufficient for retirement, hearing Bill’s argument for a 5% withdrawal rate has me reconsidering. If Bill’s latest research holds, those of us with diligent savings habits might not need to work as long as we previously thought.

For those of you under 50, now’s the time to plan what you’d like to focus on in early retirement. You’ll likely still have good health in your mid-50s, so consider activities that keep you physically engaged!

Of course, achieving financial freedom and actually retiring from the “money chase” are two separate challenges. The desire for more is hard to break. But for the disciplined savers and investors, take comfort: Bill’s research suggests we may not have to grind as hard or as long as we once thought.

Here’s to more Americans retiring in their early 50s!

Readers, what do you think of my reasoning in lowering the traditional retirement age from 65 to 52 if the safe withdrawal rate has indeed shifted to 5%? Do you believe people will actually be able to step away from “the money” in their early 50s? Or will fear of running out and the pull of financial security keep most people working longer?

My Conversation With 4% Rule Creator Bill Bengen

Feel free to leave a comment if you have any questions for Bill and I’ll make sure he sees them. Thanks for your reviews and shares of my podcast. Every episode takes hours to record, edit, and produce. Each review means a lot. You can subscribe to the Financial Samurai podcast on Apple or Spotify.

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