In the early 1990s, financial planner William Bengen developed an idea that took hold in retirement planning. His approach, which became known as the 4% rule, evolved into a strategy for withdrawing income from a retirement portfolio without running out of money.
More than 30 years later, Bengen revisits this strategy in an upcoming book, “A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More.” The new book builds on his original research, incorporating decades of market data, evolving asset classes and lessons from real-world applications, according to Bengen.
The so-called rule, which Bengen noted was always intended as a guideline, suggested withdrawing 4% of your portfolio in year one, adjusted for inflation.
“The 4% rule isn’t really a rule; it’s a process,” Bengen said. “My new research looks at 10 variables that affect retirement income, and eight of them you have control over. This book builds on everything I’ve learned over the past 30 years and shows how retirees can safely increase their withdrawal rate without taking on more risk.”
Bengen now considers 4.7% a new starting point for sustainable annual withdrawals.
Although late economist Harry Markowitz called diversification the only free lunch in investing, Bengen said the biggest surprise in his research was finding four “free lunches” that retirees can use to safely boost withdrawal rates.
In addition to diversification, the other three advantages include rebalancing, asset class tilts and a rising equity glide path.
Diversification
Diversification is a familiar concept to many retirement savers and one that Bengen endorses. Asset classes perform differently at different times, and research has shown that it’s impossible to predict which will outperform at any given time.
Investing in a broad portfolio of equity and fixed-income asset classes can not only smooth an investor’s return but also improve the outcome over time.
[Read: If You Want to Retire in 2026, Here’s What You Need to Prep Now]
Asset Class Tilting
Bengen now advises retirement investors to consider tilting their portfolios slightly to two of the highest-returning asset classes, small caps and microcaps.
“Not drastically, but the extra return generally will help your portfolio,” he said.
Equity Glide Path
Historically, retirement investors have been told to steadily decrease their equity holdings as they age.
However, Bengen recommends a different approach, the rising glide path, developed by retirement researchers Wade Pfau and Michael Kitces.
Using the glide path, an investor’s equity allocation gradually increases during retirement. Bengen’s recent research suggests this can improve retirement outcomes compared to traditional fixed or declining equity allocations.
“It’s really a strange concept when you hear it for the first time,” he said. The small percentage increase each year should be in the range of about 1% to 2%, he added.
[Read: How to Build a Balanced Retirement Portfolio]
Rebalancing Your Portfolio
In simple terms, this is the process of selling assets that have outperformed and using the proceeds to purchase some that have lagged. This returns a portfolio to its predetermined allocation as set by your financial plan.
Bengen recommends doing this every six to 12 months.
Extend Your Time Horizon
One of the variables that Bengen analyzed was retirement portfolio longevity versus the retiree’s longevity.
“Never plan based upon what you think your life expectancy is going to be,” he said. “Plan for 10 to 15 years beyond that. So if you think you’ll live until 95, plan to about 110.”
That margin of error is important, he says, although it usually leads to a lower withdrawal rate.
“But you don’t want to start messing with going back to work in your mid-90s,” he quipped.
[Should Retirees Still Plan for 95?]
How Your Financial Advisor Views the 4% Rule
Aaron Brask, principal at Aaron Brask Capital in Lake Worth, Florida, said in an email that he prefers a dynamic approach to estimating sustainable withdrawal rates.
Instead of relying on a fixed percentage, this approach adjusts withdrawal rates based on current economic conditions, life expectancy data and potential income from the portfolio.
“Rather than using a static figure such as 4% or 4.7%, I like to calibrate withdrawal rates to current market rates, actuarial tables and the clients’ ages,” Brask said.
This estimate is not perfect, he added, as factors such as dividend sustainability can change. “However, it is a quick and easy estimate that might be more precise.”
Anthony Saccaro, president at Providence Financial & Insurance Services in Woodland Hills, California, noted that Bengen’s 4% rule offered a logical retirement withdrawal strategy when it was introduced in the 1990s, thanks to strong equity markets and higher interest rates.
“If someone had retired in 1994 with a $1 million portfolio allocated 75% to stocks and 25% to bonds, they would have still ended the year 2000 with well over $2 million, even after taking annual withdrawals,” Saccaro said in an email.
Lower Market Returns After 2000
From 2000 to 2013, it was a different story, Saccaro said.
“The market experienced two major crashes — the dot-com bust and the Great Recession — and even though there were recoveries in between, equity returns over that entire 13-year period were essentially flat,” Saccaro said.
Using a 4% withdrawal rate, a retiree who started with $1 million in 2000 would have had just over $700,000 left by 2013.
“That kind of drawdown creates real concern for longevity risk,” he said, noting that he prefers to focus on income-generating investments that pay interest and dividends.
That way, retirees “can live off the income without having to sell assets, regardless of market conditions,” Saccaro said.
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The 4% Rule No Longer Works for Retirees, Says the Man Who Invented It originally appeared on usnews.com
