The 4% Rule Revisited: Determining a Sustainable Withdrawal Rate

For decades, the "4% rule" has served as a widely cited guideline for retirees. This concept, developed by financial planner William Bengen in the early 1990s, suggested that an investor could successfully sustain a 30-year retirement by initially withdrawing 4% of their total invested portfolio and adjusting that dollar amount for inflation each subsequent year.

Bengen’s goal was to identify the highest possible initial withdrawal rate that would have survived the worst 30-year market periods in recorded U.S. history. By conducting simulations focused on historical worst-case scenarios, including the Great Depression and the high inflation of the 1970s, he concluded that a 4% rate would have endured, positioning it as an extremely conservative and stress-tested benchmark for retirees. His research was explicitly intended as a worst-case guide for conservative retirees.

Despite its conservative origin, the 4% rule has often been treated as the default standard for Safe Withdrawal Rates (SWRs). It is important to note that average historical market returns, such as the S&P 500's average return over the last decade, have been significantly higher than the 4% withdrawal rate. This has led to speculation that a rigid adherence to the 4% rule may result in retirees needlessly limiting their spending.

When Bengen first formulated the 4% rule, his portfolio model was relatively basic, consisting of U.S. large-cap stocks and intermediate-term government bonds. Recognizing the evolution of investment options, Bengen has since updated his projections based on a more diversified portfolio (including large, mid, small, and international stocks, as well as bonds and cash). Using this broader asset allocation, his updated research suggests that a 4.7% initial withdrawal rate may also be sustainable over a 30-year retirement period, even when tested against those same historical worst-case scenarios.

It is crucial to consider an individual investor’s asset allocation, which may differ substantially from Bengen’s models. A portfolio with a heavier stock allocation may be statistically more likely to generate higher returns than 4.7%, but it also increases the risk of negative outcomes during early retirement, a concept known as Sequence Of Returns Risk (SORR). A severe market downturn early in retirement could put a portfolio in jeopardy.

However, Bengen’s updated 4.7% calculation is still based on the absolute worst-case scenarios in recorded market history, meaning the risk of SORR is already accounted for in his conservative model. It is reasonable to conclude that for retirees who do not encounter such historically devastating market conditions, a higher initial withdrawal percentage may be sustainable. In fact, Bengen has noted that "The average [successful withdrawal rate] over the last 100 years, believe it or not, is 7 percent." Furthermore, other financial commentators, such as Dave Ramsey, have suggested a significantly higher withdrawal rate, up to 8% in retirement. These higher rates carry a corresponding increase in risk and are not based on the same worst-case historical modeling.

Ultimately, no one can predict the future. Market behavior—whether we face a crash, a bear market, a bull market, or something in between—remains unknowable. We cannot know if international markets will continue to outperform the U.S. market, or if bonds will successfully outpace future inflation. However, historical data is the only tool we have to project future unknowns, and Bengen’s 4.7% rule provides a highly conservative measure against various potential market returns.

Disclosure: This material is provided for informational and educational purposes only and is not intended to provide specific investment, tax, or financial advice. Past performance is not indicative of future results. All investments involve risk, including the potential loss of principal. The withdrawal rates discussed are based on historical modeling and may not be appropriate for all investors. Actual results will vary based on individual circumstances, market conditions, and future returns. Clients should consult with a professional before implementing any withdrawal strategy.