Have you been wondering if the 4% rule still applies with a bear market and high inflation? Many financial pundits may have you questioning the validity of this so-called retirement rule of thumb.

In the retirement headlines segment, I share a recent article from Financial Advisor Magazine that highlights quotes from the creator of the 4% rule, William P. Bengen. After sharing the retirement headline, I’ll chime in with my own thoughts on the validity of the rule.

Stick around until the end of the episode to hear whether Social Security benefits increase each month that you delay filing until age 70 or each year.

Outline of This Episode

  • [1:52] William Bengen doesn’t believe that it is necessary to adjust spending to 3%
  • [5:24] Where the 4% rule is helpful
  • [9:20] Do Social Security benefits increase each month you delay filing until age 70, or each year?

Do high inflation and a bear market give retirees a reason to cut consumption?

Many advisors may recommend that their clients cut back consumption to 3% for a while, but William Bengen, the father of the 4% rule, disagrees. Even though we are experiencing a bear market and inflation, he doesn’t believe that those issues should cause an adjustment in withdrawal rates.

He instead prefers to cut portfolio risk rather than adjust lifestyle, it’s his opinion “that (retirees’) money should serve them and not the other way around.”

Inflation may be the bigger issue

Mr. Bengen feels that the bear market is the lesser issue for retirees and that the bigger worry is inflation. According to Bengen, a 20% decline in the market after the performance of the past 10 years doesn’t call for a reduction in withdrawal rates. To drop down to a 3% withdrawal rate would require a “catastrophic set of circumstances.”

The 4% rule is great for napkin math

The 4% rule is quite helpful for making simple retirement income calculations. A 4% withdrawal rate on a $1 million portfolio is simply $40,000, from there one can adjust up or down quite easily.

Since the 4% rule was proven effective in all 30-year periods tested, it helps us understand what a potential “worst-case scenario” might look like in retirement. It gives retirees context and a possible income floor. Working with a bit of optimism, we can see how a slightly higher withdrawal rate with plans to reduce over time if needed.

Don’t allow pessimism to influence your retirement

I share this article with you so that you understand why you can ignore all of the inflammatory headlines that you’ll see in the coming months. I don’t want the media’s pessimism to influence you into not pursuing your retirement goals. Even though the market isn’t great right now, a good retirement plan and a diversified portfolio can help you weather this storm.

Resources & People Mentioned

Connect with Benjamin Brandt