I had the pleasure of speaking with Bill Bengen, creator of the “4% rule” of retirement planning. Bill was a student of A financial samurai for years and has been polite in the comments section when I write about safe withdrawal rates. So, I thought it was high time we had a discussion to correct the misconceptions.
For those unfamiliar, the 4% Rule, established by Bill in the 1990s, suggests that traditional retirees (around age 65) can safely withdraw 4% of their retirement portfolio in the first year—adjusted for inflation in subsequent years—without expiring. it’s time. money over a period of 30 years.
Challenging the 4% Rule.
I have criticized the 4% Act, saying it is out of date because of how much times have changed since the 1990s when the Bill first became popular as a concept. Back then, the 10-year bond yield was over 5%, so it made sense that withdrawing at a 4% rate wouldn’t wipe out your savings with a 5% risk-free return.
Today, as financial giants like JP Morgan, Vanguard, and Goldman Sachs lower their stock and bond forecasts, maintaining a 4% withdrawal rate—let alone considering a 5% rate—sounds absurd.
I don’t mean to sound rude, but it’s in my nature to question established ideas in an ever-evolving world. As I said in my WSJ columnist, Buy This Not Thatwe have to think about probability, not absolutes, since even 80% certainty means we will still be wrong sometimes. The important thing is to learn from our mistakes and adapt.
I am Very Careful to Follow the 4% Rule.
Since I retired in 2012, I haven’t followed a 4% withdrawal rate—mostly out of caution about outliving my savings. With two young children and a spouse who does not have a traditional job, most of the financial burden is on me. We would like to have more flexibility when our children are young.
Additionally, I find it difficult to quit financially, as I spent most of my post-college years in fast-paced cities like New York and San Francisco, surrounded by ambitious people. I love husbands who claim to be financially independent while encouraging their wives to continue working. But for me, retirement is more enjoyable when both partners are free from work pressures. Besides, my wife would slap me if I made her work while I played pickleball all day!
Given these factors, I have withdrawn anywhere from +2% to 10% on average since 2012. A 10% withdrawal means increasing our net worth by 10% by generating revenue. As a result, our total number has steadily increased since our retirements in 2012 and 2015. At this rate, we’ll probably end up with more than we need, which would be great.
Misconceptions About The 4% Rule Debunked By Bill Bengen
Here’s what I learned from Bill that helped explain the 4% Rule:
- It is not a Hard “Rule”.: The bill considers the 4% Rule as a guideline rather than a hard law. He advocates flexibility in withdrawal rates, although it is generally considered a rigid rule in the eyes of the public.
- 4% Are Not Really Aggressive: Contrary to popular belief, Bill’s data shows that 4% save. In his study of 400 retirees since 1926, only one retiree (who retired in 1968) had to stick to the 4% rate to avoid bankruptcy. Others withdrew an average of 7% without liquidating their portfolio.
- Adjusting for Inflation: The 4% rule does not hold; is in line with inflation. For example, if you start with a $1 million portfolio and withdraw $40,000 in one year, you can adjust that amount for inflation the following year to $44,000. This means that your withdrawal is flexible according to your financial needs and economic conditions.
Key Takeaway: The 4% Rule Can Be Too Cautious
After our discussion, my takeaway is that the 4% rule may be overly cautious. Bill argued that a safe withdrawal rate of 5% would work well for 30 years of retirement. For workers who want to retire early, his research even shows that a 4.3% rate is sufficient for those aged 50+.
Since introducing the 4% Act in 1993, the Bill has adjusted its recommendation to 4.5% in 2006 and 4.7% in 2021. Now you believe a 5% withdrawal rate is possible.
Lowering the Traditional Retirement Age from 65 to 52
Increasing the withdrawal rate from 4% to 5% means that retirees need only 20 times their annual expenses, reducing the savings requirement by 20% (from 25X to 20X). If Bill considers age 65 as the traditional retirement age, this suggests we could retire 20% earlier, about 52 years.
This is a general estimate, and the actual retirement age will still depend on factors such as investment gains and retirement income sources. The biggest risk would be in paying costs between 52 and 59.5, when traditional retirement accounts incur early withdrawal penalties.
Reassessing Retirement Goals: Collect 20X Expenses, Then Get Comfortable
While I still believe that accumulating a total amount equal to 25 times expenses may not be enough for retirement, hearing Bill’s argument about the 5% withdrawal rate made me reconsider. If Bill’s latest research is anything to go by, those of us with active savings habits may not need to work as long as we previously thought.
For those under 50, now is the time to plan what you would like to focus on in early retirement. You’ll probably still be in good health, so think about activities that keep you busy!
Of course, achieving financial freedom and giving up “chasing money” are two separate challenges. The desire for more is hard to curb. But for professional rescuers and investors, take heart: Bill’s research suggests we may not have to grind as hard or as long as we once thought.
Here’s to more Americans retiring in their early 50s!
Readers, what do you think of my idea of lowering the standard retirement age from 65 to 52 once the safe withdrawal rate has changed to 5%? Do you believe that people will really be able to get away from “money” in their early 50’s? Or is it fear of the end and the drawdown of financial security that keeps most people working longer?
My Interview With 4% Rule Creator Bill Bengen
Feel free to leave a comment if you have any questions for Bill and I’ll make sure he gets them. Thank you for your reviews and sharing of my podcast. Every episode takes hours to record, edit, and produce. Every review means a lot. You can subscribe to the Financial Samurai podcast on Apple or Spotify.
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