In an interview with Robert Brokamp for The Motley Fool's "Hidden Gems Investing Podcast," William Bengen, often hailed as the "father" of the 4% rule, discusses his latest research, which indicates that most retirees can safely withdraw significantly more than the widely accepted 4% in their first year of retirement.
Bengen, originally an aeronautical engineer, transitioned into financial planning in his 40s after selling his family business. He embarked on his seminal research in the early 1990s because he found a severe lack of guidance for clients, particularly Baby Boomers, who were approaching retirement and asking how much they could safely spend. With people living longer, the need for robust withdrawal rate strategies became critical.
His initial 1994 research, using historical market data and Lotus 1-2-3 spreadsheets, identified a "safe max" withdrawal rate of 4.15%, later revised to 4.5% in 2006. While the "4% rule" gained widespread recognition, Bengen notes it's often a misrepresentation of his evolving work, failing to capture the nuance that most retirees could withdraw more.
Bengen's latest book, "A Richer Retirement, Supercharging the 4% Rule to Spend More and Enjoy More," reflects his updated safe max of 4.7%. This increase is primarily due to his research incorporating more sophisticated, diversified portfolios, expanding from two asset classes to seven. He believes even this 4.7% could be an understatement, potentially reaching 5% or higher with further diversification into alternative investments.
Crucially, Bengen emphasizes that 4.7% is a *worst-case scenario*, representing the rate that would have survived the most adverse historical conditions (since 1926). Historically, the *average* safe withdrawal rate has been over 7%, with some best-case scenarios (like retiring in July 1932 when markets were extremely cheap) allowing for withdrawal rates as high as 15-16%. He points out that withdrawing 5.5% has been historically successful 90% of the time, and 6% has worked 75% of the time.
Two key factors significantly influence the safe withdrawal rate:
1. **Market Valuation (CAPE Ratio):** Building on research by Michael Kitsis, Bengen found a strong correlation between stock market valuations (using the Shiller CAPE ratio) and safe withdrawal rates. Cheap markets allow higher withdrawal rates (e.g., 8% for a 2009 retiree), while expensive markets necessitate more conservative approaches. Currently, with a high CAPE ratio, rates would lean lower.
2. **Inflation:** High inflation dramatically reduces safe withdrawal rates. The worst historical case (4.7%) occurred for a 1968 retiree who faced consecutive bear markets followed by over a decade of high inflation. In contrast, the much deeper stock market crash of 1929-1932 was less detrimental to withdrawal rates because it was a deflationary period, allowing retirees to reduce their withdrawals. Bengen suggests that in today's medium-inflation environment, coupled with high CAPE, a withdrawal rate around 5.5% might be appropriate.
The interview also highlights the critical "sequence of returns risk," emphasizing that the first 10-12 years of retirement are paramount. An early bear market can significantly derail a retirement plan, whereas market downturns later in retirement tend to have less severe impacts.
Bengen discusses several elements for personalized withdrawal planning:
* **Flexible Withdrawal Scheme:** Adjusting withdrawals (reducing spending in tough times, increasing in good) is a natural and beneficial strategy.
* **Time Frame:** The withdrawal rate is highly sensitive to the planning horizon. While a 30-year retirement (65-95) often aligns with the 4.7% rule, a 10-year horizon could support an 8% rate. For very long retirements (e.g., 60 years), the rate doesn't drop much below 4.1%.
* **Asset Allocation:** A diversified portfolio (Bengen's base case uses 55% stocks across five categories, 40% intermediate bonds, 5% T-bills) is crucial. While a minimum stock allocation is needed for higher rates, too high an allocation (especially undiversified) can be counterproductive during deep bear markets. Current research suggests a 65% stock allocation might be even more beneficial. Holding excessive cash, which offers lower returns, reduces the safe withdrawal rate.
* **Rebalancing:** Rebalancing portfolios annually appears to be optimal across various market conditions.
* **Glide Path:** Bengen also discusses research suggesting that *increasing* stock allocation by 1-2% annually through retirement (starting lower) can be advantageous, as it reduces early bear market exposure and allows for aggressive buying into rising markets later.
Finally, drawing from his own decade-plus in retirement, Bengen advises cultivating four crucial aspects throughout life: family, friends, health, and passions. Neglecting any of these can diminish life quality. His generosity with research and thoughtful responses have made him a respected figure in retirement planning.