What Experts get wrong about the 4% Rule

Pexels Photo by Miguel Á. Padriñán

By Michael J. Wiener

Special to Financial Independence Hub


The origin of the so-called 4% rule is WIlliam Bengen’s 1994 journal paper Determining Withdrawal Rates Using Historical Data.  Experts often criticize this paper saying it doesn’t make sense to keep your retirement withdrawals the same in the face of a portfolio that is either running out of money or is growing wildly.  However, Bengen never said that retirees shouldn’t adjust their withdrawals.  In fact, Bengen discussed the conditions under which it made sense to increase or decrease withdrawals.

Bengen imagined a retiree who withdrew some percentage of their portfolio in the first year of retirement, and adjusted this dollar amount by inflation for withdrawals in future years (ignoring the growth or decline of the portfolio).  He used this approach to find a safe starting percentage for the first year’s withdrawal, but he made it clear that real retirees should adjust their withdrawal amounts in some circumstances.

In his thought experiment, Bengen had 51 retirees, one retiring each year from 1926 to 1976.  He chose a percentage withdrawal for the first year, and calculated how long each retiree’s money lasted based on some fixed asset allocation in U.S. stocks and bonds.  If none of the 51 retirees ran out of money for the desired length of retirement, he called the starting withdrawal percentage safe.

For the specific case of 30-year retirements and stock allocations between 50% and 75%, he found that a starting withdrawal rate of 4% was safe.  This is where we got the “4% rule.”  It’s true that this rule came from a scenario where retirees make no spending adjustments in the face of depleted portfolios or wildly-growing portfolios.  So, he advocated choosing a starting withdrawal percentage where the retiree is unlikely to have to cut withdrawals, but he was clear that retirees should reduce withdrawals in the face of poor investment outcomes.

We can see Benegen’s thinking in two quotes from his paper.  When a portfolio is depleting too fast, a retiree has the “option to improve the situation for the long term, and that is to reduce—even if temporarily—his level of withdrawals.”  When a portfolio’s growth exceeds expectations, “Some increase in withdrawals are probably inevitable.”

So, when experts think they are criticizing Bengen when they say the 4% rule is too inflexible, they are mischaracterizing his paper.  I’m not aware of any serious advocate for blindly following a fixed spending plan in retirement that ignores portfolio growth or decline.

Bengen’s paper has its faults, though.  Here are several articles I’ve written about the 4% rule:

Adjusting the 4% Rule for Portfolio Fees

Revisiting the 4% Rule

A Quiz on the 4% Rule

4% Rule Based on Longevity Statistics

Michael J. Wiener runs the web site Michael James on Moneywhere he looks for the right answers to personal finance and investing questions. He’s retired from work as a “math guy in high tech” and has been running his website since 2007.  He’s a former mutual fund investor, former stock picker, now index investor. This blog originally appeared on his site on Oct. 23, 2023 and is republished on the Hub with his permission. 

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