How a Simple Formula Was Born
In the early 1990s, financial planner William Bengen developed what is now known as the 4% withdrawal rule. He published his research in 1994, offering a simple guideline: retirees could withdraw 4% of their portfolio in the first year of retirement, then adjust that amount each year based on inflation. This rule was designed to help retirees avoid running out of money over a 30-year period.
Adapting the Rule to Modern Times
Bengen now argues that retirees should take a more nuanced view. In his new book, A Richer Retirement, he introduces the concept of the “Universal Safemax,” estimating a modern safe withdrawal rate of 4.7%. Under ideal market conditions, this rate could rise to 7.1%, though it comes with risks. These figures are historical estimates, not guarantees, and should be used cautiously.
Accounting for Inflation and Market Risk
Inflation remains the biggest threat to retirees. Even large Social Security cost-of-living adjustments (COLAs), like the 8.7% increase in 2023, may be offset by price increases. Bengen urges retirees to be prepared to reduce spending if inflation spikes. He also notes that market downturns early in retirement can shorten portfolio longevity, especially if withdrawal rates remain too high.
Personalizing the Retirement Strategy
The 4% rule was never intended as a one-size-fits-all approach. Bengen emphasizes that retirees should consider their entire financial picture. Key factors include tax status of assets, desired legacy for heirs, investment allocation, time horizon, and withdrawal timing. Some may prefer withdrawing fixed amounts or more aggressively early on, then adjusting later.
Ultimately, the 4% rule is a starting point—not a fixed law. Retirees should model different scenarios and remain flexible as markets and personal needs evolve.
