Introduction — Why the 4 % Rule Still Commands Attention
When it comes to planning for retirement withdrawals, one rule of thumb has become especially famous: the 4 % rule, originally developed by Bill Bengen in the 1990s. It proposes a simple guideline: withdraw 4 % of your starting portfolio value in your first retirement year, then adjust subsequent withdrawals for inflation. This idea has become a cornerstone in many retirement-planning discussions.
Yet, the reality is more nuanced. Over the decades, academics, financial advisors, and retirees have debated whether 4 % is too conservative, too risky, or just right given different circumstances. Moreover, Bill Bengen himself has revisited and refined his own thinking as markets evolve.
In this article, we’ll dive deep into the origins, logic, limitations, and modern adaptations of the 4 % rule. By the end, you’ll have not just an understanding of what the 4 % rule is, but when, how, and for whom it may or may not apply.
1. Origins: Bill Bengen, “SAFEMAX,” and the Birth of the 4 % Rule
1.1 Who Is Bill Bengen?
William P. (“Bill”) Bengen is a retired financial planner best known for pioneering empirical research into safe withdrawal rates. His 1994 paper, “Determining Withdrawal Rates Using Historical Data”, introduced what would become widely known as the 4 % rule.
Bengen began his career in aerospace engineering, later shifting into financial planning after selling his family’s business. He ran a fee-only planning practice in Southern California and, through his own practice, applied many of the very ideas he published.
Because Bengen’s rule was grounded in real historical markets (not theoretical models), it resonated widely. Over time, practitioners and academics often referred to the rate he identified as the SAFEMAX rate—the maximum “safe” withdrawal rate historically tested.
1.2 The Research Setup — How Bengen Arrived at ~4 %
Bengen’s methodology was empirical and retrospective:
- He used historical U.S. stock and bond return data, dating back into the 20th century (including data from Ibbotson Associates), covering cycles of booms and busts.
- He considered hypothetical retirees with a 30-year horizon (e.g. retiring at age 65, planning through age 95) so that withdrawals had to last at least 30 years.
- He assumed a portfolio composed of a mix of equities (U.S. large-cap stocks) and intermediate-term U.S. government bonds, rebalanced annually.
- For each possible retirement start year, he backtested various withdrawal rates, adjusting for inflation, to see which rates would exhaust the portfolio in the worst historical scenarios versus which would survive all periods.
His key finding: in the worst-case historical scenario, a withdrawal rate of about 4.15 % (rounded to 4 %) in the first year, with inflation adjustments, would allow survival for 30 years under many different market periods. That became the practical 4 % rule.
Bengen himself did not call it “the 4 % rule”—he called it “SAFEMAX,” or the maximum historically safe withdrawal rate.
2. How the 4 % Rule Works (Step by Step)
Let’s walk through how to apply the 4 % rule in practice, under its original assumptions.
2.1 Step 1: Determine Starting Portfolio Value
At retirement, decide the total value of your investable assets (for instance, $1,000,000).
2.2 Step 2: Withdraw 4 % in Year One
Multiply your portfolio by 4 %. In our example:
$1,000,000 × 0.04 = $40,000 withdrawal in Year 1.
This becomes your baseline retirement income (from portfolio withdrawals) for the early years.
2.3 Step 3: Adjust for Inflation Each Year
For subsequent years, you adjust the previous year’s withdrawal upward by inflation. If inflation in Year 2 is 3 %, then:
$40,000 × 1.03 = $41,200
That becomes your Year 2 withdrawal, even if the portfolio’s value fluctuated.
This inflation-adjusted withdrawal continues each year—so you aim to maintain your purchasing power over time.
2.4 Step 4: Maintain Asset Mix & Rebalance
To approximate the original assumptions, you maintain a portfolio mix (e.g., 50/50 stocks and bonds) and rebalance annually. This keeps exposure in line with historical assumptions.
2.5 Step 5: Monitor & Adjust If Needed
Even though the 4 % rule is often framed as “rigid,” prudent retirees and advisors may adjust withdrawals (or the mix) if markets diverge dramatically from expectations. The original derivation is a worst-case boundary, not a guarantee.
3. Why 4 %? The Underlying Logic and Risks
3.1 The Problem With Naive Averages
Before Bengen’s work, many individuals and advisors looked at “average returns” and reasoned simplistically: if stocks deliver, say, a 7 % average annual real return (after inflation), one should be able to withdraw 7 % and never run out of money. Bengen identified that this ignores sequence-of-returns risk—i.e., volatile returns, especially early in retirement, can drastically reduce the sustainability of withdrawals.
Consider this: if your portfolio loses 20 % in early years, you’d be selling into a downturn while reducing your principal. Even if later years see strong returns, the damage may already be done.
Bengen’s use of historical simulations accounts for the worst-case sequences, not just average outcomes.
3.2 The Role of Inflation
Because retirees must maintain purchasing power, withdrawals are adjusted annually for inflation. That means your withdrawals may increase even in years when portfolio returns are negative—putting additional pressure on capital.
If inflation is high, that adjustment can erode the sustainability of the withdrawal strategy.
3.3 Portfolio Volatility, Rebalancing, and Asset Mix
The assumed mix of stocks and bonds matters. A more equity-heavy allocation typically allows a higher sustainable withdrawal rate (because equities historically deliver higher returns), albeit with more risk. But excessive volatility early on can be dangerous.
Annual rebalancing helps keep your allocation within tolerable bounds and can improve long-term outcomes.
3.4 Worst-Case Periods Define the Boundary
The 4 % figure is essentially a worst-case boundary from historical data. In many historical periods, higher rates would have worked; but the rule ensures the withdrawal rate would survive even during particularly challenging stretches. In Bengen’s original tests, the worst single 30-year scenario had a safe withdrawal rate around 4.15 %.
Thus, 4 % is conservative — meant to protect against extreme downside.
4. Strengths of the 4 % Rule
4.1 Simplicity and Intuitiveness
Perhaps the biggest appeal is its relative simplicity. Many retirees and advisors like a straightforward benchmark: withdraw 4 %, adjust for inflation. It turns a complex problem into a rule-of-thumb that’s easy to compute.
4.2 Historically Backed by Data
Because Bengen’s rule is grounded in backtesting across multiple decades (including devastating market downturns), it’s more defensible than ad hoc guesses. It explicitly acknowledges historical volatility.
4.3 Buffer Against Unexpected Storms
Because it is conservative by design, the 4 % rule builds in a margin of safety — a buffer for unexpected poor market returns, inflation surprises, or longevity risk.
4.4 Useful as a Planning Starting Point & Communication Tool
Even if your real withdrawal strategy becomes more flexible or complex, the 4 % rule often serves as an anchor or conversation starter. Many financial plans use it as a baseline scenario.
5. Criticisms, Caveats & Limitations
The 4 % rule is popular, but it is far from perfect. Here are some of its major criticisms and things to watch out for.
5.1 The Assumption of a 30-Year Horizon
If you retire very early (say, at age 50) and expect a longer than 30-year horizon, 4 % may be overly aggressive. Conversely, if you retire late and expect a shorter timeframe, you might afford more.
Moreover, the historic trials only covered 30-year periods; they do not guarantee safety over 40 or 50 years.
5.2 Market Conditions Evolve — History May Not Repeat
The 4 % rule is backward-looking. Future market returns, interest rate environments, inflation regimes, and correlations across assets may differ significantly from the past. Low expected bond yields, high equity valuations, or rising inflation regimes could stress the rule’s applicability today.
In fact, some researchers re-evaluations show that combining different bond indexes yields modestly adjusted safe rates.
5.3 Ignoring Taxes, Fees, and Other Real-World Friction
The original formulation typically assumes a tax-advantaged portfolio and ignores fees, fund expenses, account taxes, and transaction costs. In reality, those drag your returns and reduce sustainability unless accounted for.
5.4 Fixed Withdrawal vs. Variable Spending Needs
Life is rarely smooth. You may have years of higher spending (e.g. healthcare, travel) or reduced spending in others. A rigid inflation-adjusted increase may not reflect real-life behavior. Some years, reducing your withdrawal could be wise, but the 4 % rule doesn’t inherently allow that flexibility.
5.5 Sequence of Returns & Timing Risks
If your early retirement years coincide with deep market downturns, you may suffer more than the historical worst-case built into 4 %. In practice, real markets could mix worse elements (e.g., inflation + poor equity/bond returns) not seen historically.
5.6 Legacy / Heirs / Bequest Desire
If you want to preserve or leave a legacy for heirs, gently drawing principal down may not align with that objective. The 4 % rule is optimized for zero terminal value in many cases—not for leaving significant capital.
5.7 Longevity and Uncertainty Risk
Medical advances, lifestyle changes, or simply good luck may extend your lifespan beyond 30 years. If you live 40 or 50 years post-retirement, a 4 % rule may underperform.
5.8 Exploring Extensions & Alternatives
Because of these limitations, many researchers have proposed modifications or dynamic withdrawal strategies:
- Guardrails / Banding: Reducing or skipping inflation increases if portfolio drops below thresholds.
- Guyton-Klinger rules: Rules to reduce withdrawals in years with bad returns or high valuation.
- Dynamic spending strategies that adjust based on current portfolio performance, valuations, or longevity risk.
- Floor-and-ceiling spending: putting caps on increases or drops.
- Bucket strategies: using separate “safe” reserves for early years, and growth assets for later years.
These strategies aim for more resilience than a rigid 4 % slot.
6. What Bill Bengen Thinks Now — Has He Abandoned 4 %?
Over time, Bill Bengen has revisited and refined his view. He has published new thinking and even a book that contemplates adjustments to the original 4 % rule.
6.1 From 4 % to 4.7 % (and Beyond)
In newer work, Bengen has proposed that a safer “universal” withdrawal rate—accounting for broader asset classes, modern portfolio diversifications, and updated data—might be 4.7 %. He calls this a new “universal SAFEMAX” or baseline worst-case in modern conditions.
Under certain conditions, he suggests that retirees starting now might even safely begin at 5.25 % or more—though with caveats about valuations, inflation, and economic environments.
6.2 Expanded Asset Classes & Diversification
One reason Bengen feels comfortable raising the benchmark is because people today can build more diversified portfolios than just U.S. large-cap stocks and U.S. Treasuries. He includes mid-cap, small-cap, international stocks, and possibly other fixed-income or risk-mitigating assets. This broader diversification can improve the risk/return trade-off relative to his original portfolio.
6.3 Emphasis on Flexibility & Market Conditions
He emphasizes that the “4.7 %” or “5.25 %” is not a rigid rule—but one benchmark under certain conditions. If market valuations are high or inflation is elevated, one should be more conservative. Conversely, under favorable environments, modest upward adjustments may be justifiable.
6.4 What He Personally Did (and Does)
Interestingly, Bengen himself did not always rigidly apply 4 % for clients. In practice, he used 4.5 % as a base in many cases and made adjustments based on client circumstances.
For his own retirement, he remained somewhat conservative. Today’s environments, he says, suggest more room to maneuver—but with caution.
7. When and How to Adapt the 4 % Rule to Your Situation
Because every retiree’s circumstances differ, here’s a framework for adapting or stress-testing the 4 % rule.
7.1 Adjust for Retirement Timing & Horizon
- Early or very long retirements (40+ years)
Use a more conservative starting rate—perhaps 3–3.5 %. - Shorter retirements or late retirements
You may afford a slightly higher initial rate, depending on your health and goals.
7.2 Adjust for Asset Allocation, Fees & Taxes
- If your portfolio has higher expected return (e.g., more equities), you may push a bit higher—but be mindful of volatility.
- Always account for fees, fund expenses, and taxes. If effective costs are 1 %, that can erode your sustainable withdrawal rate.
7.3 Work With Valuations & Market Conditions
- In periods when stocks are expensive (high valuations), start more conservatively.
- In cheap markets or low-interest-rate regimes, there may be more breathing room.
- Be prepared to cut withdrawals temporarily if markets hit bad streaks.
7.4 Build Flexibility Into Spending
- Don’t rigidly increase by inflation every year if portfolio performance is poor; skipping or reducing the increase can improve longevity.
- Use “guardrails” or “floors/ceilings” to control extremes.
- Consider a dynamic model: spend more when safe, cut when under stress.
7.5 Incorporate Other Income Streams & Liabilities
- Social Security, pensions, annuities, or rental income can reduce reliance on portfolio withdrawals.
- Residual liabilities (healthcare, long-term care) must be factored in.
- If you intend to leave a legacy, reduce your withdrawal rate accordingly.
7.6 Periodic Reassessment
At regular intervals (say, every 5 years), re-evaluate your withdrawal strategy in light of actual returns, inflation, life expectancy, and goals. Be ready to dial back or adapt.
8. Example Scenarios & Simulations
Let’s explore two hypothetical retiree examples to see how the 4 % rule behaves.
8.1 Example A: Conservative Retiree — $1,000,000 Portfolio
- Portfolio: 60 % stocks / 40 % bonds
- Withdraw 4 % in Year 1: $40,000
- Year 2 inflation: 2 %, withdraw $40,800
- Over time, in years of market downturn, the portfolio may dip, but the withdrawal is maintained; in up years, portfolio recovers and rebalancing helps restore mix.
Under many historical periods, that portfolio would last 30 years or more. In benign markets, it could last much longer.
However, if the retiree’s early years correspond to a major market crash + high inflation (e.g. retiring at a market peak before a deep downturn), the sustainability becomes more tenuous.
8.2 Example B: Aggressive Retiree — $2,000,000, early retirement
- Portfolio: 80 % stocks / 20 % bonds
- First-year withdrawal: $80,000
- But the retiree plans for 40 years of retirement.
Because volatility is higher and timeframe longer, this retiree should consider starting lower—say 3.5 %—or use dynamic adjustments.
You can run Monte Carlo simulations or backtest across historical periods to see the outcomes (probability distributions of portfolio survival). Many financial planning tools now incorporate this.
8.3 Stress Test Comparison
One helpful stress test: simulate a withdrawal schedule through some of the worst historical periods (e.g. retiring in 1968, early 2000s, Great Depression, high inflation periods). That helps answer: in which periods does 4 % fail? In Bengen’s original research, even in worst-case times the 4 % threshold survived 30 years.
But future sequences may differ, so stress testing is not foolproof.
9. What Has Research After Bengen Said?
9.1 The Trinity Study & Subsequent Research
In 1998, the Trinity Study (Cooley, Hubbard & Walz) expanded and popularized the concept of safe withdrawal rates. They tested various asset mixes and rates, again assuming 30-year horizons, and concluded that 4 % was broadly safe for many mixes.
However, critiques emerged: some argue that the fixed-withdrawal rule is inefficient economically, or that dynamic strategies outperform static ones.
9.2 More Recent Reassessments
- Some more recent studies suggest that under modern bond index returns, a slightly higher withdrawal rate (e.g. 4.3 %-4.5 %) might be feasible.
- Others caution that ultra-low bond yields and high equity valuations make future returns more constrained, encouraging more conservative rules (e.g., 3.5–4 %).
- Some academic modeling (e.g. discrete-time stochastic return models) show that by adjusting for return variance, consumption growth, and longevity risk, rates close to 4 % are still defensible under cautious assumptions.
9.3 Real-World Withdrawals Often Deviate
In practice, many retirees do not adhere strictly to 4 %. Some reduce withdrawals after bad years; others maintain fixed dollars; some use flex strategies based on market performance.
10. Recommendations for Retirees & Planners
If you're considering using the 4 % rule (or a variant), here are actionable recommendations.
10.1 Use It as a Benchmark, Not a Mandate
Treat 4 % as a starting guideline. It can inform your budget, but don’t feel forced to adhere rigidly.
10.2 Start Conservatively if Uncertain
If markets are expensive or your personal circumstances are uncertain, consider starting withdrawals at 3.5 %–4 % and reassess upward only if things go well.
10.3 Build Flexibility Into Spending
Allow for occasional years of reduced withdrawals or skipped inflation adjustments in bad years. Use guardrails or “banded” approaches to modulate spending.
10.4 Diversify Asset Classes & Use Modern Portfolio Tools
Include global equity exposure, small/mid caps, and diversified bond types. Rebalance regularly and avoid concentration risk. Bengen’s later thinking emphasizes this evolution.
10.5 Account for Costs, Taxes & Life Changes
Model net-of-fees returns and tax effects. Plan for medical inflation, long-term care, emergencies, and unexpected spending.
10.6 Periodic Reassessment & Scenario Planning
Every few years—or after major market moves—revisit your withdrawal plan. Consider stress-test scenarios. Use Monte Carlo analysis when feasible.
10.7 Hybrid Strategies
Combine the 4 % rule framework with dynamic strategies (e.g. reduce withdrawals following poor returns). You can also use buckets for short-term safety reserves + long-term growth.
11. Conclusion
Bill Bengen’s 4 % rule has earned its place in the pantheon of retirement-planning heuristics precisely because it bridges academic rigor and practical simplicity. It gives retirees a defensible starting point—withdraw 4 % in year one, adjust for inflation, maintain a balanced portfolio, and hope your nest egg survives for 30 years.
But no rule is perfect. The 4 % rule is anchored in historical data and must be adapted carefully to the modern context of low yields, high valuations, fees, taxes, and individual life variables. Bengen himself has expanded his thinking, proposing upward adjustments (e.g., 4.7 %) when justified by broader diversification and favorable conditions.
Ultimately, the 4 % rule is not a rigid prescription—it’s a tool. Use it as a baseline, stress-test your assumptions, build in flexibility, and remain ready to respond to changing markets and personal needs. A truly robust retirement withdrawal strategy is not static; it evolves with you and the world.