“The ‘4% rule’ is actually the ‘4.5% rule.'”–William Bengen, architect of the Safe Withdrawal Rate

Yup. The man said it himself.

If you missed the 8/22/17 Reddit “Ask Me Anything” interview with William Bengen, you really should read it. But if you just want the highlights, the following Q&As are the ones I myself found most valuable.

Bengen’s 4% rule has long been a cornerstone of the financial independence / early retirement movement. He first proposed it in 1994 in a must-read paper entitled “Determining Withdrawal Rates Using Historical Data.”

Bengen, a graduate of the Massachusetts Institute of Technology’s aeronautical engineering program, ran a family business before moving west, earning a master’s in financial planning, and starting a private practice. As he built his client base he developed two ideas: “portfolio longevity” and the “maximum safe withdrawal rate”…a term he coined, and that’s still sometimes called “The Bengen Rule.” Its validity has since been confirmed by many financial researchers, including those behind the famous Trinity Study.

For the sake of convenience I’ve attempted to group and parse these Q&As without detracting from their meaning. I may have screwed that up, of course. Call me out in the comments if you think that’s the case.

Also: since the content’s from a forum I help moderate, I’ve removed the ads on this page to minimize a potential conflict of interest. (Granted that this article’s drawing readers to my blog, but I’m not sure how to present the information to you if you’re not here, you know?)

Audience questions are bolded; Bengen’s answers are plain text.


Is the 4% rule still relevant in today’s economy? What safe withdrawal rate would you recommend for someone planning for longer than 30 years of retirement?

The “4% rule” is actually the “4.5% rule”- I modified it some years ago on the basis of new research. The 4.5% is the percentage you could “safely” withdraw from a tax-advantaged portfolio (like an IRA, Roth IRA, or 401(k)) the first year of retirement, with the expectation you would live for 30 years in retirement. After the first year, you “throw away” the 4.5% rule and just increase the dollar amount of your withdrawals each year by the prior year’s inflation rate. Example: $100,000 in an IRA at retirement. First year withdrawal $4,500. Inflation first year is 10%, so second-year withdrawal would be $4,950.

I like to remind people that the 4.5% rule is not a law of nature, like Newton’s laws of motion, which will probably never change. Markets can change, and it is possible that in the future the 4.5% rule, which has held up for 50 years, might be violated. But I haven’t seen those circumstances yet.

Both the 2000 and 2007 retirees, who experienced big bear markets early in retirement, appear to be doing OK with 4.5%. However, if we were to encounter a decade or more of high inflation, that might change things. In my opinion, inflation is the retiree’s worst enemy. As your “time horizon” increases beyond 30 years, as you might expect, the safe withdrawal rate decreases. For example for 35 years, I calculated 4.3%; for 40 years, 4.2%; and for 45 years, 4.1%. If you plan to live forever, 4% should do it.

The 4.5% rule has very limited applicability, because of all the assumptions which underlie it. It assumes, to begin with, that the retiree’s expenses and other income all with grow with the inflation rate. If either the expenses or other income grow faster or slower than inflation, than some other percentage would apply. In addition to considerations of expenses and other income, there are many other variables which could affect the SWR: portfolio asset allocation, portfolio tax rate, frequency of rebalancing, time horizon, desired minimum terminal balance, withdrawal scheme, etc. All these, if different than my original assumptions, would require an adjustment to the SWR.


How do you feel things have changed since your work in 1994?

1994 was about the last year we had “average” stock market valuations (according to the Shiller CAPE), except for a few months in the spring of 2009. Thus, for the last twenty-plus years, new retirees would have found it risky to use anything other than the SWR of 4.5%. I believe this length of time at above-average valuations is unprecedented, and raises questions about the validity of the long-term average- or will we finally see years of below-average valuations, as has occurred in the past. We will have to wait and see.


Given that we’ve been in a bull bond market for so long, and given we’re currently looking at corporate bond yields of maybe 4%, does it still make sense to have a bond component in your portfolio?

Yes, I still believe bonds should play a significant role in most retirement portfolios. During a stock bear market, interest rates often decline, which causes an increase in the price of bonds. This can offset some of the losses from the stocks. Overall, I believe a 50% equities/50% bonds mixture at the start of retirement is close to ideal.

Years ago, I talked to Harry Markowitz, the founder of Modern Portfolio Theory, about this. He used that 50/50 ratio in his personal portfolio, which speaks volumes! Some recent research advocates increasing the fraction of stocks in the portfolio as the retiree ages.


What’s your opinion of the increased interest in Index funds vs. actively managed funds when investing one’s retirement savings?

My research assumes the use of low-cost index funds, as this is the only reliable way to get exactly the return of the market you are interested in. But I think it’s a mistake to ignore actively managed funds. You may be glad you have them in a major bear market, if the managers are attuned to risk management. I use a blend of the two.


What exactly prompted you to study safe withdrawal rates and to write the paper in 1994? Was there a specific incident that motivated you?

By 1993 I had been a financial advisor for about five years. Most of my clients were of similar age- Baby Boomers. At that time they were just beginning to think seriously of retirement, and had questions: How much should I save? What kind of income can I expect from my retirement investments? How should my retirement investments be allocated?

I searched through all my resources, including my CFP textbooks, and could find no good answers anywhere. Not surprising, as my generation was the first to expect such a long life in retirement; prior to that, it was live ten years after retirement, then die. I decided to do the research myself, which launched me on a totally unexpected journey.


Did you ever foresee the development of a financial independence / early retirement movement like we have today?

I think the financial independence movement is great, in part because it means people must educate themselves more in this field so they make good decisions. I have “retired’ three times, and am now in my fourth career, as a writer/researcher. But many friends and acquaintances of my generation are still working, even into their late 70’s, so I wonder how “early retirement” is succeeding in this environment.

Like everything else, if you plan and execute early and well, you will most likely achieve what you want.


What has been the most unexpected and/or pleasing result of your 1994 paper? Either for you personally, or more generally.

There is a chart in my paper which plots safe withdrawal rates against equity allocation. It looks like a “mesa”, with a flat top at about 4.2% for a wide range of equity allocations, and then falling off steeply on both sides, at very low and very high equity allocations.

The first time I produced this chart, I almost jumped out of my chair. It was totally unexpected. I though it would be more like a pyramid, with a single safe withdrawal rate at the apex. Instead, this chart told me, that within a wide range, it didn’t matter what percentage of stocks you had, you got the same withdrawal rate. When I included more asset classes in later years, this chart became less “mesa-like”, and the “sweet spot” for equity allocation narrowed to about a 10% range.

In a personal vein, I never expected that my research would be such a big deal. I shared it with other planners because that was how we operated in the fee-only community. It’s been a wild ride.


What kind of reception did you get for your work in 1994? Do you think people are more or less receptive to your ideas now?

In 1994, although many of my fellow NAPFA members were very appreciative of my work, I did receive hate mail from others. One would expect that; my research’s conclusions departed so severely from the “conventional wisdom,” it irked some folks. Imagine you were an advisor telling clients it was OK to withdraw 7% and here is this upstart saying that’s way too much!

Today, my major conclusions have been verified by so many others, it is generally accepted in the profession. That’s why I spend a lot of time warning people of its limitations; I don’t want it to be blindly accepted and get people into trouble.


What do you think is the role in today’s marketplace for a financial planner/investment advisor [given index funds, robo-advisors, self-service trading platforms, etc.?]

There are two primary functions for a financial advisor, I believe: help the client develop a viable financial plan, and then help the client stick with the plan. I have seen many clients frightened by bear markets, begging to sell their stocks at exactly the wrong time. A financial advisor can help calm the client and help prevent what might be a fatal deviation from plan.

I loved financial advising. I got up in the morning with a smile on my face because I knew I would almost help somebody that day in a measurable way.


[What do you think about] looking at fee-only investment advising as a “side hustle” either to earn additional income on the path to ER, or for income in partial retirement?

I am not sure I am thrilled with the idea of characterizing financial advising as a “side hustle.” I treated it as a calling, a sacred responsibility, as I knew I had people’s financial futures at stake. This is a noble profession, you can do good every day for one or more clients. Spiritually, very rewarding.


As someone hoping to change careers later on in life, I’d love to hear your personal thoughts on career change and what led you to financial advising. When did you know it was time to pull the trigger and do something different, and how did you know what your “calling” was?

After 25 years, I felt it was time to move on to other things. I still loved the profession, and keep in close touch with many friend still active in it. But I wanted to fully enjoy my young grandson, who lives across the country. With the hours I kept as a FA, that was becoming difficult. I also wanted to try my hand at writing creatively, and re-working by book on the 4.5% rule. I wanted to learn another language and improve my guitar skills. I’m glad I made the move.


Between the utter lack of preparation for climate disaster in the coastal cities where most economic activity occurs, crumbling infrastructure, water shortages in farm country, automation, income inequality, and skyrocketing debt, I’m having a real hard time sticking to my plan. I just don’t see how perpetual growth can continue while the middle class disappears and the planet is turning into a wasteland.

I would ask you to examine the last ninety years of history and consider times at which the outlook was equally gloomy. The Great Depression? World War II? Korean War? Nuclear annihilation? Vietnam? Rampant inflation? Wall Street greed? The fact is, I don’t know how to factor global warming into my investment outlook. Is it possible that some new unexpected technology will come along and restore the growth outlook? Who knows?

One thing I have learned from years of investing is that it doesn’t pay to be overly pessimistic. The future is too complex to forecast accurately. I plan to stay with my approach until events clearly and unmistakably demand a change. Not sure we are there yet.


 What’s the one piece of advice you would give a young person looking to be FI in the future?

Save, because your personal resources may be the only dependable source of income in the future.


If I ever meet you, can I buy you a drink? What are you having?

Screaming Eagle Cabernet will do nicely, thanks.

Author: ER Dude

Sick of your job? After a thirteen-year career, Early Retirement Dude fled corporate America for good. You can do it too! Visit http://EarlyRetirementDude.com or email EarlyRetirementDude@gmail.com.

10 thoughts

  1. You beat me to the punch – I was going to post an article on this tomorrow! 🙂 I found that very intriguing. I doubt that’ll change much, in reality, for the folks in the personal finance blog world.

    Thanks for summarizing some of the responses! I was reading through them yesterday, but didn’t ask any questions myself. I always like those AMA’s though 🙂

  2. In case anyone else is wondering what the mesa-like 10% sweet spot was for equity allocation, he said, “Between 45% and 55% equities appears optimum, to maximize the SWR.”

  3. Thanks ER. I’ve been retired for nearly a year and my wife and I are using a 2.5% SWR. We knew we were being overly cautious. This post confirms that. I think I’m going to Australia sooner than I expected and staying longer than I expected.

    1. Sure thing, although I can’t endorse or confirm drawing the conclusion that you’re being “overly cautious” since everybody’s circumstances obviously differ and I’m not a financial advisor.

  4. It is interesting that he revised his withdrawal rate upwards to 4.5 percent, as the financial crisis has proven the detrimental effect a bad sequence of events can have on a portfolio in early years. Not to long ago Morningstar published a study that revises the safe withdraw rate downward, based on low bond yields. The study can be found athttps://corporate.morningstar.com/US/documents/targetmaturity/LowBondYieldsWithdrawalRates.pdf

    With Bond yields so relatively low and PE ratios so relatively high, it would be prudent for anyone attempting the 4% rule to consider stategies to hedge risk and to maintain a cushion to prevent liqudating assets in an inopportune time.

  5. I read Bengen’s interview and the long sequence of comments. While it is good he is still doing this sort of work, there are some technical limitations in his methodology (too long to explain in this comment).

    For a conservative outlook, I take the approach of “looking for the grizzly bear and not scanning the forest” meaning searching for that one absolutely terrible ‘failure edge’ in the past 100 years of stock market history. This concept and result is described here: http://tenfactorialrocks.com/hacking-the-retirement-calculators/
    This way, I get ‘absolutely safe’ withdrawal rate for long retirement horizons of 50 years or so as 3.27%.

    1. Keeping your own counsel seems like a smart approach. People who are new to this movement (which I know you aren’t) should always develop their own models rather than letting the 4% rule do their thinking for them. It’s a good place to start, but…

Leave a Reply

Your email address will not be published. Required fields are marked *

Rockstar Finance

Important Disclaimers