The 4% Rule - Bill Bengen's Retirement Withdrawal Secrets Revealed

Bill, I'm ever so grateful that you've joined me for this chat. It was lovely to speak with you last time, and I thought it'd be great to record some questions to help people along their journey. Now, Bill, can you take me back to 1994, when you first came up with this research around the 4%? What was it that you were trying to do back then? Do you remember?

Well, it was the early '90s, and I had just become a financial advisor. I'd started my third career - not a young advisor, but a new one anyway. I had clients who were about my age, baby boomers, and they were just starting to think about retirement, which was maybe 20, 25, or 30 years off at the time. They were looking for guidance. They wanted to know: how do I save enough money? How should I allocate my portfolio across various investments? And how much can I safely withdraw from my portfolio to support my lifestyle? Back then, I looked at all kinds of resources to answer that question. I went to my CFP textbooks. I looked at magazines and newspapers. I called upon other advisors, and the answers were all over the map - none of them based on any scientific study. So at that point I said, I think I need to do the work for my clients, because that's primarily who I'd set out to help. So I got my computer, I got Lotus 1-2-3 working, and a book of returns going back to 1926, and I started doing the work.

Everyone coming up to retirement is always wondering and worrying about whether they'll have enough money going forward, right? It's that thing where you spend your whole life working and accumulating, accumulating, accumulating, and then you start decumulating - and you have no idea how long it will last. So since then, everyone's been calling it the 4% rule. Now, you actually mentioned to me last time that it was never meant to be a rule, right? But it was meant to be a guideline? Was it just a rule of thumb? How would you describe it?

In that original paper I wrote, I was looking for the worst-case scenario historically. What was the worst set of circumstances you could retire into, the ones that gave you the lowest withdrawal rate? That turned out to be the late '60s, which were followed by multiple very severe bear markets and high inflation, which forced the withdrawals up every year and locked them in.

Because it's almost that, right? Inflation affects it worse than the bear markets, because you're taking out more over time than you'd planned to. Is that fair?

You're absolutely correct. Quite frankly, I knew from the beginning that inflation and stock market valuation were important, but I couldn't figure out a way to capture inflation in some kind of mathematical expression. Only about four or five years ago did I realize that inflation is so important you have to put it before bear markets. Once you do that, everything falls into place.

Okay. And your new book talks about around 4.7%. I've seen you mention 5.5% - you commented on one of my LinkedIn posts. Those numbers have changed and gone up over time, if that makes sense.

Over the years, my research became more sophisticated. In my first paper I used two investments: U.S. Treasury bonds and large-cap U.S. stocks. Over time I've added small-cap stocks, mid-cap stocks, international stocks, cash, and so forth, and each of those asset classes added some value. So steadily and slowly the withdrawal rate has risen - although I suspect we're getting pretty close to some maximum, because you can see in the numbers that we're experiencing diminishing returns. I keep adding assets, but I don't necessarily see any gains. What do you think is one of the most common ways people misuse it? Well, I think there are two main ones. One is that some folks have the opinion that the 4% rule means you take out 4% of your portfolio every year. That's not how it's designed; it's designed to give you a steady income that increases with inflation over time. The other is that too many people use it as a first resort - they start with it and end with it. People should look way beyond it, because there are much higher rates available, even in today's difficult times.

Well, we're at a funny time at the moment, with the markets doing extremely well. On average they've done maybe 10% or 12% a year. And we had the whole Trump tariffs liberation day just over a year ago, which obviously had an impact on the markets, so we've only had maybe 15% from just before then. Given that, do you think that if the markets are doing well you can take out higher? Or do you think you have to start lower?

I think what matters is not necessarily how the market is doing, but how it's valued. My research indicates a pretty strong correlation between the valuation of the stock market and your withdrawal rate. If you have a very richly valued market, as you do today, you tend to have lower withdrawal rates, because going forward the returns are lower - you're going to get less out of the stock market for a number of years. Conversely, if stocks are cheap, as they were in April of 2009 at the bottom of that terrible financial crisis, you can take 8%. That's the number that's worked out for folks who retired at that time. So you have to be aware of those circumstances.

Okay, that's really interesting. So let's take that hypothetical crash that's always coming. If the markets were to crash, you might actually be able to take out a higher rate than 4% to start with, right? Because, like you say, they're then expected to go back up again. So you can gauge it based on the current situation at any given point.

Right now my investment stance is quite conservative. I use a third-party service to help me decide what percentage of stocks to hold, depending on the perceived risk in the market. But I expect that when the market declines, as it inevitably will, value will appear and withdrawal rates will blossom.

And of course you have different levels of involvement for each individual, right? There's the general population, who aren't going to try anything clever with their portfolio - they just have something static and very passive that does its thing, and they withdraw when they need to - rather than people who are optimizing, or even micro-optimizing, who might be able to get a bit more juice out of it. You mentioned your portfolio, and last time we chatted you said you're currently holding minimal bonds. Is that just because of your own situation, or is it because of the markets as they are? What are your thoughts on that?

Well, when inflation rates rise, bonds lose money, and that was happening for the last six months or so. But now I'm looking at the charts, and it looks like that may have been a false breakout. It may be that interest rates topped out recently and are going to start coming down again, and come down considerably. If that's the case, I'll probably add a significant portion of bonds to my portfolio, because as interest rates decline, bonds go up.

How actively are you managing your portfolio at the moment?

I probably make changes once every couple of weeks. I look at investments I think are interesting and undervalued, and I like to put money into undervalued investments.

Do you see it more as a pastime than a requirement for you?

Probably. I could be doing less and still be doing fine, but I do enjoy it. I manage it not only for myself but for my family - I have a responsibility. I almost feel like I'm back being a financial advisor again.

And we have a term in the UK called a busman's holiday - I don't know if it's made it to that side of the pond. It's when a bus driver goes on holiday by coach: you've retired into the job you were doing before, just doing it for your family. You could call me retired - technically I'm not actually advising anymore - but I'll spend a lot of time on this research, as my wife can attest. What I found interesting while doing my research is that the markets are so different to how they were 20 years ago, just from a retail-access perspective. You couldn't access them in the same way you can now, which obviously means all of the data is different.

It's definitely different today than it was 20 or 30 years ago. I remember Warren Buffett saying some years ago that he felt sorry for investors, because they didn't enjoy the circumstances he had when he began his hedge fund in the '50s, with a lot of cheap stocks around that he was able to buy and make huge amounts of money from. Today there's so much research being produced, in various firms and online - everybody is aware of which stocks are cheap and which are not, and that reduces the value. Some of that research has been done well.

It also means we're seeing dips getting bought straight up, right? Because there are so many people either trying to play the system or doing the right thing - just constantly buying - and there's more money going into the markets, because retail investors can do it themselves.

Well, buying the dip is good until it isn't. Buying the dip is a good habit to get into if you believe the stocks are reasonably valued and you want to put your money into something. But buying the dip on stocks as expensive as they are today doesn't really appeal to me. I'm looking for pockets of value rather than putting money into an index fund and investing in the broader market.

I'm a big believer that time in the market beats timing the market - but at times, timing the market is more fun than time in the market, I feel. So, you mentioned to me the other day that you feel some retirees should be spending more money than they currently are. Is that because they've built up such a war chest while times have been good, and they've been well disciplined? They have no idea how many years they have left, but at the same time they eke it out and spend as little as possible, when they should be spending more and enjoying life.

I think it's really important that people spend significant amounts on themselves during retirement, because, as you mentioned earlier, there have been so many years of saving and accumulating these funds, and then not to use them seems tragic. In some ways I regret ever having come up with a rule, because people are using it as a guideline and aren't getting the retirement they thought they could have. They should be withdrawing quite a bit more than they are.

Well, like you said earlier, it was meant to be a worst case, and I'm definitely aware of plenty of people who aren't treating it as a worst case - they're almost treating it as a baseline. They think, well, we want to make sure we're safe, so we'll stick to 3.5%. In my eyes that just means you're working extra years you don't necessarily need to. Don't get me wrong - lots of people like their job and their work - but if they could stop a couple of years earlier and then enjoy their retirement more, and, like you say, spend more in retirement and enjoy themselves, then encouraging people to get out there and enjoy it, but safely, is really the issue, isn't it? Lots of people have come up with different numbers, so where do you think people get it wrong? Morningstar has something like 3.7%, Suze Orman reckons 3%. Why do you think yours are higher than theirs?

I'm not sure exactly. I know we use different methodologies. I use historical data strictly, so I know my data reflects what's happened in the past. The key question is whether it will also be true for the future, and no one can guarantee what will happen in the future.

No one can guarantee it at all, right? And that's the whole thing with Monte Carlo. I have a background in that - I've done Monte Carlo simulations for decades now - and whenever you run the numbers for a financial case, you get that percentage chance. But because of the volatility, it's never going to be the worst year ever for 30 years in a row; that's just about impossible. I'm not saying it's impossible, because I guess I could be proven wrong, but the likelihood of it being the worst year, every year, for years on end, is extremely unlikely. So that whole idea that you need it to be 100% safe - well, depending on your approach and outlook, I guess - you don't actually need it to be 100%. But going back to that...

You don't need it to be 100%. I understand why people have been worried about the stock market when they see it's so expensive and they know it can drop 50% or more, which is really scary when it happens. But you don't necessarily have to use the withdrawal scheme with the cost-of-living adjustment that I mentioned. If you're really worried about the stock market, there are other ways to withdraw money. For example, my friends Arthur McGuinn and Bill Klinger, a computer expert, issued a paper three years ago in which they used the COLA scheme but applied decision rules: sometimes they would freeze the withdrawal at a certain level, sometimes they would raise it, and sometimes they would lower it, depending on the performance of the portfolio. I haven't finished my analysis of it, but it appears to result in higher withdrawal rates and a greater degree of safety. Also, recently Warren Buffett, for whom I have nothing but admiration, recorded a video on YouTube in which he suggested another strategy: hold three years of expenses in cash. That way, if the stock market goes down for two or three years, you don't take money out of stocks - you don't sell them; whatever you do, you do not sell stocks, you take the money out of your money market fund instead. Then, when the market starts to recover, it's better to go back to taking money out of stocks. I haven't tested that yet, but it seems very sensible to me. It's similar to the CAPE...

...withdrawal - I don't know if you've come across the CAPE withdrawal. You have your two to three years of cash and cash-like assets, and depending on how the markets are doing, you take it either from your cash or from the markets. So you have this buffer: if it does go down within the next year, you've got that buffer there. But then I guess that's almost what bonds are there for as well, right? In the whole game, they dampen the ups and downs a little bit.

Bonds are probably at the point now where they have an interest rate high enough that they do offer some protection - a buffer against a stock market decline. So I would think that in the next big step down...

...bonds would do very well. Interesting. If you were starting your research today, with everything you now know, would you still do the same things to come up with the 4% approach?

No. About five years ago I made a breakthrough that let me work inflation and market valuation into my calculations and replicate the withdrawal rates that occurred in the past. We've had some pretty high withdrawal rates in the past - a high of 16%, probably, during the Great Depression at the end of the great bear market - but there have been many years where we've had nine, ten, eight. The long-term average over the last hundred years is 7%. So we're living in a period now where withdrawal rates are much lower than they've been in the past, certainly below average, primarily because of how expensive stocks are. When that adjusts, we should start getting back closer to the average of 7%.

That's really interesting. So an average of seven - stocks are expensive right now, so it's quite low, and the four is across everything. Is there anywhere we can go to look up what the withdrawal rates would have been in each year?

Yes. On my website, bengenfs.com, I've published a number of retirement scenarios that assume a certain allocation to stocks, a certain time horizon, and a type of account - whether you're leaving a legacy or not. If you look at the tables there, which are organized by inflation regime, you'll see that for each Shiller CAPE level there's a different withdrawal rate. There are also charts that show you how those withdrawal rates have changed over time historically. It's pretty fascinating.

Wow, that's really good - thank you ever so much. And then, for people who want to go deeper, you've got a book that's been out for a little while now: once they've read that book, where are you hoping they get to?

Well, hopefully they'll get a good start. But there are a lot of other fine researchers out there, like Wade Pfau and Jonathan Guyton, whose papers are well worth going back to read, because they offer a lot of valuable advice.