We’ve all heard of the 4% rule, but did you know that the creator’s recommendation for it has changed over the years?

I recently discovered an article from ThinkAdvisor.com that included an interview with the father of the 4% rule, Bill Bengen. In the retirement headlines segment, we’ll take a close look at the article and learn directly from Mr. Bengen’s perspective and then I’ll offer my own. Don’t miss out on this glimpse into the mind of the creator of the 4% rule.

Don’t miss out on this glimpse into the mind of the creator of the 4% rule. Share on X

Outline of This Episode

  • [2:12] Manage the risk portion of your retirement nest egg actively
  • [7:00] Adjust your withdrawal rates along with inflation
  • [7:47] My thoughts on using the 4% rule
  • [15:03] Is there a way to improve Jim’s retirement plan?

When should you use the 4% rule?

Bill Bengen came up with the 4% withdrawal rate back in 1994 to use on a tax-deferred portfolio based on a 30-year retirement. This rule doesn’t work for planning a 20 or 40-year retirement.

Even though we call it the 4% rule, many people don’t realize that a few years ago Mr. Bengen increased the suggested withdrawal rate to 4.7% based on new research. Now, because of high inflation rates, he has recently recommended that the rate drop a bit below 4.7%.

Mr. Bengen recommends extreme caution in this new economic environment. Share on X

We are in new economic territory

In the past 20 years or so the market has been able to bounce back quickly whenever issues arose since the Fed was able to use monetary policy to lower interest rates. Before that period the Fed didn’t intervene and markets took a long time to bounce back.

We are currently in a period of high risk for retirement investors due to the high inflation, rising interest rates, and falling stock prices. Mr. Bengen recommends extreme caution in this new economic environment. Since inflation forces retirees to increase their withdrawals they get stuck with a higher withdrawal rate for the rest of their retirement.

One never knows what the future will bring

The 4% rule was based on 90 years of historical data. In those 90 years, we have encountered a broad spectrum of financial events like market crashes, wars, depressions, and more. Although 90 years is a lengthy timeline, there is little chance that the next 30 years will look like some version of the past. This is why every financial product has the disclaimer: “past performance is no guarantee of future returns.”

In the end, there are an infinite number of possible market scenarios and uncertainties that council happen over the course of a 30 or 40-year retirement. This is why I think it is unreasonable to set your withdrawal rate to 4% and never look at it again.

A dynamic withdrawal rate allows you to adjust for the best-case and worst-case scenarios. Share on X

My thoughts on the 4% rule

Using the 4% rule means never reducing your income no matter what the market does. Whereas, a dynamic withdrawal rate allows you to adjust for the best-case and worst-case scenarios. (If you would like to understand why this is so important, listen in to hear the extraordinary upside of possible sequence of return risk in retirement or check out this article.) I prefer to watch my clients start their spending higher early on in retirement and enjoy the market highs then reduce their spending a bit when the market misbehaves.

I like using the 4% rule for napkin math. It is a great rule of thumb to use to do some quick calculations. However, it is much too rigid to base a retirement plan on and it is rather conservative for most people.

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