The Origins of the 4% Rule
In 1994, financial planner William “Bill” Bengen introduced what became one of the most influential ideas in retirement planning: the 4% withdrawal rule. His research, published in the Journal of Financial Planning, suggested that retirees could safely withdraw 4% of their savings in the first year of retirement and adjust annually for inflation without running out of money over a 30-year horizon. The rule gave baby boomers and future retirees a framework that is still widely referenced today.
Bengen’s original model assumed a 60/40 stock-to-bond portfolio, annual rebalancing, and no desire to leave assets behind. But decades later, with higher inflation risks and evolving investment strategies, he believes retirees should revisit how they apply this guideline.
Why the Rule Is Changing
In his new book, A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More, Bengen introduces the concept of a “Universal Safemax”, which he calculates at 4.7%. This means retirees may be able to withdraw more than the original 4% benchmark without jeopardizing their savings. On average, his data suggests that the sustainable withdrawal rate could even reach 7.1% in certain historical scenarios.
However, Bengen cautions that these higher withdrawal rates are not guaranteed. Market downturns, rising inflation, or unexpected expenses could quickly erode retirement funds. He stresses that retirees need to personalize their strategy, factoring in their time horizon, asset allocation, tax situation, and whether they intend to leave an inheritance.
Inflation: The Greatest Threat
Bengen calls inflation the greatest enemy of retirees. Even small spikes early in retirement can permanently damage a portfolio’s longevity. While Social Security’s cost-of-living adjustments help, they rarely keep up with rising prices. For example, the 8.7% increase in 2023 was quickly absorbed by higher costs for everyday goods and services.
Nearly two-thirds of retirees now worry that tariff-driven inflation could erode their purchasing power faster than adjustments can compensate, according to a recent survey by the Nationwide Retirement Institute. Bengen advises retirees to prepare to cut spending quickly if inflation accelerates, describing rapid expense control as the most effective response.
Practical Guidance for Retirees
Bengen recommends that retirees estimate their personal “Safemax” by considering expected inflation and stock market valuations, such as the Shiller CAPE ratio. Those planning for higher inflation or market volatility may need to remain closer to the 4% rule, while others could safely withdraw more. Flexibility, he emphasizes, is key: some retirees may prefer larger withdrawals early in retirement while scaling back later, while others may prioritize leaving assets for heirs.
Ultimately, Bengen’s updated analysis shows that while the 4% rule remains a valuable benchmark, modern retirees must adapt it to their own circumstances, especially in an era of unpredictable markets and geopolitical risks.
