Why This Retirement Guru Thinks You Can Spend a Little More
William P. Bengen's invention of the "4% rule" in the early 1990s made him an Oracle of Retirement Finance.
The rule was his attempt to help retirees avoid crimping their lifestyle only to die with too much money in the bank. Nor did he want them exhausting their savings only to live on in poverty. Bengen has now updated his rule to 4.7%, which we will get to in a moment.
My very first research result, obtained in 1993, determined a maximum "safe" withdrawal rate of 4.15% for all the retirees I had under study at that time. This result was predicated on a withdrawal of 4.15% of the starting portfolio value in the first year. In subsequent years, the withdrawal amount increased with inflation.
— Bill Bengen
By "safe," Bengen meant a withdrawal rate that would prolong your retirement savings at least 30 years, even if you had the bad luck of suffering market conditions as unfriendly as any since 1926.
Bengen found that both inflation and investment returns have a gigantic impact on how long your retirement savings last. A bear market early in your retirement is especially harmful. In his new study, Bengen found that the new universal safe maximum withdrawal rate is now 4.7%. To arrive at that figure, he looked at decades of historic market conditions, going back past the Great Depression.
Remember that the universal safe maximum means that the 4.7% withdrawal rate was successful for all past retirees. It is not a guarantee of "safety" for future retirees. Could the "4.7% rule" fail someday? Certainly!
— Bill Bengen
If we suffer from a horrible market over the next two decades, withdrawing 4.7% of your savings each year could leave you short of cash in your final years.
On the other hand, in less hostile market conditions, withdrawing just 4.7% could mean foregoing too many comforts, only to end up with too much money in the bank at the end.
Bengen highlighted some retirees in his study who had accumulated $1M of savings after 30 years of withdrawals, even though their goal had been to arrive at a $0 balance. A problem more of us would love to have, I'm sure.
For more on Bill Bengen's fascinating new analysis of how to save best for retirement, check out his new book, A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More.
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