Author: Ty Druse
For those interested in retirement, one of the first financial rules often discovered is the 4% rule. The seminal article, written by William Bengen in 1994, applied historical investment data to determine a “maximum safe withdrawal rate” so retirees do not exhaust their retirement funds with withdrawals. Bengen created various financial charts applying 3%, 4%, and 5% withdrawal rates to a 50% stock and 50% Treasuries (bond) portfolio to ascertain if or when hypothetical clients run out of money.
The basic principle of the 4% rule is to withdraw 4% in the first year of retirement and adjust the subsequent years based on previous year’s inflation rate. For instance, let’s assume a retiree has 1 million in assets. In year one $40,000 is withdrawn. Subsequent years will apply the previous year’s withdrawal amount, plus the inflation percentage.
Example A: If inflation was 3.5%, year two would equal $41,400. Year three = $41,400 + inflation rate
Example B: If inflation was 8%, a $43,200 withdrawal would be required in year two. Year three = $43,200 + inflation rate
By running the portfolios through historical market returns, including negative historical financial events (stock market fluctuations and inflation rates), Bengen determined several key points often overlooked.
- Steady Withdrawal: Even with several good years of market returns early in retirement, do not increase your withdrawal rate as positive return years need to balance years of negative returns.
- Beware of Inflation: Inflationary periods have the most negative consequences to retirement portfolios; even in comparison to events resulting in more negative returns but a deflationary environment.
- 30 Year Window: All of Bengen’s assumptions were based on a minimum of 30 years needed for retirement. Individuals in the FIRE movement may be surprised to see that the 4% rule was not intended for those retiring in their 30’s with 50+ years in retirement.
- Early Years: Early in retirement, individuals retiring before 60 should not exceed a 4% withdrawal.
Investors can practice applying the above principles using the [Retirement Spending Calculator] found here at seedtoinvest.com.
Bengen also compiled statistics comparing various combinations of portfolios from 0% to 100% of stock allocation, applying worst case historical scenarios to portfolio mixes. Portfolios consisting of 0 to 25% stocks, consistently underperformed other portfolios. He suggested that allocating too few resources to stocks “shortens the minimum portfolio life.” Adding that a 50% stock and 50% bond allocation was “near-optimum for generating the highest minimum portfolio longevity for any withdrawal scheme.” However, if individuals are seeking to accumulate wealth for beneficiaries, allocations should be closer to 75% stocks. Bengen encouraged portfolios to be between 50 and 75% stock with the remainder allocated to bonds, based on the individual’s comfort level. Additional key points included:
- < 50% Equities: Portfolios with less than 50% in stocks are “counterproductive.”
- > 75% Equities: Portfolios with a stock allocation more than 75% should be avoided in the initial years of retirement.
- Equity Mix: There was little difference in the longevity of a retirement portfolio when allocating 50-75% to stocks.
- Bad Times: In times of poor stock returns, do not reduce stock exposure.
Interestingly, in a 2025 book, A Richer Retirement, Bengen revised the withdrawal rate to 4.7%. However, most still refer to the 4% rule, not 4.7% rule.
References: Bengen, W. P. (1994). “Determining withdrawal rates using historical data.” Journal of Financial Planning, 7(4), 171–180.
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