skip to Main Content

Does the 4% Rule still work today?

Now, more than ever people are investing their money into retirement. People have stopped putting their retirement funds under their mattress and instead into 401ks and IRAs. Everyone typically has a goal of how much they would like to save before they retire. This number is usually constructed off of basic math. For example, if someone expects to need $40,000 a year in retirement and plans on retiring at age 65 and expects to live until 95, they could have $1.2 million set as their retirement goal. However, this number could be misleading because it does not take into consideration factors such as taxes, investment growth/decline, inflation, and fees. In 1994 a financial advisor by the name of William Bengen published a paper titled Determining Withdrawal Rates Using Historical Data” and based off his research, he determined the most efficient way to retire comfortably and maintain longevity in your retirement account would be to withdraw 4% per year. This has since become the staple for most retirees and advisors

To explain how Bengen got to 4% we will first need to understand how he tested this data. As expected, Bengen had to run many different tests over many different time frames to come to this number. Bengen used an allocation model of 50% Stocks (S&P500) and 50% Bonds (Intermediate Term Treasuries) to test his theory. He would run a 50-year test of this portfolio for every retirement year ranging from the year 1926 to 1976. He would use the actual returns of these securities until he reached the year 1993, the year he wrote the paper. Post 1993, he would use a 10.3% return on stocks and a 5.2% return on bonds for his testing. This is a great first step but now we need to find how much we can withdraw. Bengen tested a withdrawal rate of 3%, 4%, 5%, and 6%. However, $100 today will not buy you as much in 20 years because of inflation. Bengen had to account for this, so every year his tested withdrawal rate would be adjusted for inflation. For example, if you had $1 million and withdrew 4% you would withdraw $40,000. If inflation goes up the next year by 2% then you would have to take $40,800 ($40,000 x 1.02). Then if inflation went up another 2% in year 3 you would take out $41,616 ($40,800 x 1.02). Bengen then tested this theory with each withdrawal rate. At a 3% withdrawal rate, each portfolio lasted 50 years but 3% is a low amount of money to live on for some retirees. At a 5% withdrawal rate over half of the tested portfolios did not last 50 years and a few did not last more than 20 years. This could be a bigger risk than a retiree would like to take. At a 4% withdrawal rate, 80% of the portfolios lasted 50 years and all of the portfolios lasted 35 years₁. This seemed to be the rate that gave the best risk vs reward for retirees.

It has been 29 years since Bengen published his renowned article. Since then, there have been major market impacts including the Dot-com bubble burst in 2000, 2007-2008 Financial Crisis, and the 2020 Coronavirus Pandemic. These events resulted in retirees losing significant value in their retirement portfolios but was it enough to stray away from the 4% withdrawal rate? The answer is “it depends”. Just like the stock market and inflation, how much money you will need each year of retirement changes. Bengen has spoken and written other papers regarding this specific topic and has modified his stance on withdrawal rate. Right before the pandemic he wrote an article stating that he believes 4.7% would be a good withdrawal rate for most retirees, mainly because the market had been doing well for over a decade and there were no signs of slowing down. Since then, a pandemic happened and everyone’s finances have been impacted. Inflation has been highest it has been in many decades and because of this and uncertainty in the market Bengen has changed his tone again. In an interview with Jane Wollan Rusoff, he stated that he would lower the withdrawal rate to 4.5% due to high inflation₂. 

Although it can be hard to stomach for retirees, studies have shown that a 60/40 portfolio could be a better allocation compared to a 50/50 allocation for retirees depending on their the risk level that they are a confident in0. A 50/50 portfolio would have less risk but even with the major stock market events in the last 3 decades a 60/40 portfolio has returned a 8.04% compounded annual return₃  compared to a 50/50 portfolio which returned 6.81% compounded annual return₄. Below you can see a chart published by Charles Schwab.  Charles Schwab tested 4 of their models to test the upper limit return and lower limit return from each model over a 30 year period. You might notice that each portfolio does not has the same withdrawal rate. Schwab determined these withdrawal rates by choosing the highest withdrawal rate that they had a 75% confidence level would last for 30 years. What Schwab is showing here is that at the same confidence level you could withdrawal more money and not run out of money from the Moderate and Moderately Aggressive portfolios to the Conservative portfolio. Although being more aggressive results in more risk, based off their research Schwab shows that in the long run of 30 years the slightly higher risk could result in much more portfolio value. 

For some retirees a 75% confidence level is not enough and they want to be as sure as possible. On the second chart Schwab shows their testing at a 90% confidence level and for a less risk adverse retiree this where they could feel more comfortable. At any risk level, Schwab recommends you review your withdrawal rate annually.

At the end of the day planning for retirement is not an exact science. There are many variable factors that go into planning for retirement like life span, market movement, unexpected costs, inflation, etc. Even though you can’t plan with 100% accuracy, you can still plan smartly.  Anywhere from 4% to 4.5% seems to work for most retirees and can be a great starting point but it will depend on each individual situation.  Some advisors also recommend reducing your withdrawals during bear markets and resuming back during bull markets.  First State Trust Company recommends sitting down with a Financial Professional to discuss your needs and wants for retirement and come up with a plan to reach these goals. You work too hard to not retire comfortably.,with%20a%209.48%25%20standard%20deviation.

Kevin Beal
Investment Analyst
First State Trust Company
Phone: 302-573-5963 /  / Website:

The posts expressed are views of FSTC and are not intended as advice or recommendations. FSTC does not offer tax or legal advice, professional counsel should be sought for tax or legal advice. For informational purposes only.

Kevin Beal
Back To Top