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Rethinking The 4 % Rule
Is Bill Bengen ’ s famous rule for safe withdrawal rates still relevant ? People disagree .
By Ben Mattlin
NEARly 30 yEARs AGO , FINANCIAl advisor William Bengen conceived the so-called 4 % rule as a guardrail for retirement budgeting . In essence , it holds that people can fund their retirement adequately by withdrawing or consuming 4 % of their financial assets annually , increasing it periodically for inflation .
Over the years , Bengen himself tweaked his own guidance . In worst case scenarios , retirees can actually withdraw 4.7 %, the now retired Bengen says . Adding smallcap stocks to a portfolio of intermediate-term Treasurys and large-cap stocks can help enhance returns .
Not all advisors agree . As the price of stocks and bonds climbed over the last decade , the income that these financial assets produced declined on a per dollar basis . some advisors and academics saw this altered economic environment as a valid reason to advise retirees to slash their asset consumption rate to 3 %, in case returns regressed to the historic mean . Few of them were even thinking about a resurgence in inflation .
Mixed Reviews
Few advisors , Bengen included , believe the rule should be set in stone . “ While the 4 % rule doesn ’ t really need revising , I ’ ve been saying since 2004 that a flexible withdrawal approach is best and most realistic ,” says Jonathan Guyton , a financial planner and principal at Cornerstone Wealth Advisors in Edina , Minn ., who has extensively studied the issue .
Retirees with a solid , evidence-based plan and an advisor to keep them on track , Guyton adds , can manage to live within the 4 % spending limit . Retirees “ are doing just fine these days even as markets fluctuate ,” he argues .
But Bob Kalman , founder and senior portfolio manager at Miramar Capital in Northbrook , Ill ., disagrees . “ The 4 % rule does need modification for several reasons ,” he says , citing rising interest rates and stock market returns that were unusually high until 2022 . The rule , he says , “ presupposes factors that aren ’ t applicable in today ’ s environment .”
The Case Against The 4 % Rule For some , the 4 % rule is intrinsically flawed . “ The whole thesis for a ‘ safe ’ 4 % income rule is based on backward-looking data ,” says Philip Chao , founder and CIO of Experiential Wealth in Cabin John , Md . “ Assumptions that worked for the past may and often do not work exactly going forward .”
Marissa Beyer of Fidato Wealth in Middleburg Heights , Ohio , puts it another way . “ What happens if the stock market has a great one-to-two-year period and the account balance goes up — does the distribution amount get recalculated ?” she asks . “ What if the opposite happens , and the account value goes down ?”
64 | financial advisor magazine | july / august 2022 www . fa-mag . com