What the Founder of the “4% Rule” Wants You to Know Now

7 minute read time.

If the name William “Bill” Bengen doesn’t ring a bell, his “4% rule” might. Developed in the 90s, the rule suggests that traditional retirees (around age 65) can safely withdraw 4% of their retirement nest egg in their first year of retirement, then adjust for inflation each year after, without running out of money over 30 years.

Decades after coming up with this rule of thumb that financial professionals have used with their clients for decades, Bengen is back with a new book, “A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More.” He recently joined host Jean Chatzky and Alliance for Lifetime Income research fellow Michael Finke on “Your Money Map” to share how his thinking has evolved – and why he now believes the 4% number may be too conservative.

THE RETIREMENT SPENDING DILEMMA 

Alliance for Lifetime Income research shows that one of biggest fears of retirees is running out of money. Bengen has seen the same throughout his career. “It’s a natural response to a transition to a new phase in life,” he shares. “Before, if they started to run short of cash, they could go out and get a part-time job or seek to get a raise. But during retirement, there’s no one to go to for that…and it can be a little off-putting.”

Strategies, like the “4% rule” are designed to make that challenge more manageable. “With Bill’s philosophy, you can actually feel comfortable spending down the money,” shares Finke. “And even if there’s a year where the market goes down, you can continue to spend that money. The balance of your portfolio is going to go down, but the likelihood is that it’s eventually going to recover over time, as it has historically.”

REVISITING THE 4% RULE

Bengen’s career path has been anything but typical – he’s worked as an aerospace engineer, CEO of his family’s soft drink bottling business, a fee-only financial planner and today, a financial researcher and aspiring novelist.

Every four or five years, he launches a new research cycle. “There’s always something new and I wanted to explore the field fully,” he explains. “I felt that I was able to advise people how to really maximize what they take out of their retirement accounts without taking undue risk.”

That research has led him to revise the 4% figure upward to 4.7% Even so, according to Bengen’s studies throughout his career, the average safe withdrawal rate over the past 100 years has been around 7%. “It’s designed as a rule for the person who doesn’t want to be worried about anything that may occur,” says Bengen. “And the problem, of course, is that if you follow it, and markets [as they have over the past few decades] to do better than you expect, you’re going to end up with a lot of money at the end of retirement, and perhaps harbor regrets you didn’t spend as much earlier on.”

The 4.7% is what Bengen calls the “universal SAFEMAX,” or the lowest percentage a person can safely withdraw in retirement, based on all the investors he’s tracked. “Each individual has their own individual SAFEMAX, which depends upon the circumstances when they retire, stock market valuation and inflation,” he says.

BEYOND THE 4% RULE: VARIABLES THAT SHAPE YOUR WITHDRAWAL RATE

In his book, Bengen outlines 10 variables that determine a safe withdrawal plan. Eight are within your control, such as your withdrawal scheme (or the rules by which you plan to withdraw), asset allocation, retirement time horizon and legacy goals.

There are others – for example, stock market valuation and inflation – that are not. “The higher the stock market valuation is, the lower the withdrawal rate,” says Bengen. “I consider inflation the greatest threat to all retirees. The higher the inflation rate, the lower the withdrawal rate.”

There’s also the longevity factor, Finke points out. “Nobody knows how long they’re going to live, so we have to have some sort of strategy for dealing with that uncertainty,” he stresses.

Your strategy for doing just that is determining your withdrawal scheme, or the rules for how much you’ll take out each year. One approach Bengen favors is a riff on the original 4% rule: you start with your set percentage, then give yourself a cost-of-living adjustment annually. (Social Security, an annuity with a built-in COLA, works pretty much like this.)

But, there’s no one-size-fits-all. Some people may want to cover fixed monthly costs, like a mortgage, while others may choose to “front row” expenses – spending more early in retirement, on travel, for example, then cutting back later. “A lot of retirees don’t spend as much when they’re in their late 70s and early 80s as they did when they were in their late 60s and early 70s,” says Finke. “I want to make sure when people put together a plan, they enjoy the life that they can lead in their late 60s and early 70s, when they are really able to enjoy the money the most, before they begin to slow down a little bit, say, in their late 80s and 90s.”

One way to be sure that you can do that is by covering those fixed expenses and stabilizing withdrawals with guaranteed income in the form of an annuity. Recent research from the Alliance’s Retirement Income Institute shows that retirees with assets that annuitize income spend twice as much as retirees with an equal amount of non-annuitized savings. In other words, protected income can “allow retirees to spend their savings without the discomfort generated by seeing one’s nest egg gradually get smaller,” their research noted. “You can take the part of your investment portfolio that you would have invested in less risky types of things, like bonds, and instead use it to fund an income on top of Social Security that will cover all of those basic expenses,” explains Finke.

SIMPLIFYING A COMPLEX PROBLEM

All in all, though, it’s not an easy problem to solve. Decumulating assets is complicated, especially with market downturns in the mix. Bengen says many people will benefit from professional help. “Finance is a complex area,” he notes. “No one needs to be embarrassed because they don’t understand it, because it’s difficult even for the professionals. So I think getting a helpful professional is a good idea in many cases.”

As is following some general rules of thumb. Bengen and Finke offer these top tips to people seeking a “richer” retirement:

• Have a solid withdrawal plan. “Have a developed plan, be ready to stick with it, and not be thrown off by temporary events. Because it’s more likely to hurt you than help you by doing so.”
• Wait to claim Social Security. “It’s probably a good idea to delay claiming Social Security to build up a bigger base of income,” says Finke. “That really is the bedrock of that retirement income plan.”
• As you develop your plan to spend down your retirement nest egg, focus on three important things – family, friends and passions, says Bengen. “If you cultivate those three elements, whether it’s retirement or pre-retirement, I think you’re going to have an enjoyable life, because they are, my opinion, what constitute the most important things in life.”

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