What Is The 4% Retirement Rule? A Brief History

O riginally published in 1994, the 4% retirement rule is one of Bill Bengen’s most honored researched findings. He published his strategic research in the Journal of Financial Planning 28 years ago but people are still talking about the retirement rule. 

Comfortable retirement life is every working individual’s ultimate dream. Some work their way up the ladder harder than others in the hope of early retirement while others play it safe and retire later rather than sooner. 

At the end of each individual’s story, retirement is the end game that we all think about, and plan for. 

So, what is the 4% retirement rule? Let’s address past facts with the present realities on the subject. 

What is the 4% Retirement Rule?

In his research, Bergen concluded that for an individual to live a comfortable life in their retirement, they can spend up to 4% of their retirement value in the first year (adjusted with annual inflation), if they have invested in bonds and large capital U.S stocks. 

As per the inflation rate of the time, the return from the investments would keep the individual comfortable for 30 more years to come. 

According to his research, the individual would not run out of their retirement fund for up to 30 years.

How Does the 4% Retirement Rule Work?

The rule is simple and easy to follow. 

The research claimed that retired individuals can safely spend up to 4% of their savings in the first year of retirement. 

They can adjust the annual provident for their financial liberty for the years to come. 

For example, if person 'A' has half a million saved in their retirement funds, they can spend $20,000 in the first year and still have sufficient returns coming in to sustain a healthy and comfortable life for 30 years. 

Moving forward from the first year, the inflation rate will dictate how much the retiree can take out from their retirement fund. 

What are the Important Assumptions of the 4% Retirement Rule?

Benge’s original research assumes:

• A portfolio of individuals who have invested 50% in bonds and 50% in U.S stocks. 
• That the historical market rate will apply in the future too, or that the market will grow at the same rate as it has been in the past. 
• That the individual will be alive and living for up to 30 years. This does not follow the average life expectancy rate calculated by the Social Security Administration (SSA). 
• It does not account for taxes, and other fees attached to investments and withdrawals on those investments. 
• That the individual must withdraw an adjusted amount each year, as per that year’s inflation rate. 

A common misconception about the 4% retirement rule is that the retiree can withdraw 4% every year for the next 30 years. This is far from the published findings. 

At that rate, the retiree will probably burn through their retirement savings within the first 10 years. 

So, the current rate of inflation will dictate how much can be withdrawn in the subsequent years. 

What Happened at the Time?

Analytical research is done using data, and having placed assumptions in place. This study was no different. 

If you study the 4% retirement rule closely, it was not present as an actual rule. It was a strategic finding, done from screening trends of the previous year. 

Even in 1994, the data that was used to deduce the conclusion was old data, hence not a representation of the future. 

Hence, it was not a rule, but a finding of the then present, taking into account what has worked in the past. 

It was not a fact for the world, nor was it published as a rule of thumb. Even though Benge presented this as research, it was changed into the shape of a “rule”. 

The “rule” was also then applied for other financial research, but that was not Bengen’s will or intention. 

Over time, the 4% retirement “rule” was also misused, and used as a benchmark strategy that will work with all portfolios, and for the future. 

Jamie Hopkins - Director of Retirement Research and Managing Director of Carson Coaching- whilst talking about the 4% rule, has also specified the many reasons why the rule is misunderstood. Hence, not a “rule”. 

What Does Bengen Say About the Rule in 2022?

If you ask Bengen today what is the 4% retirement rule? His expert opinion is that it does not as rigidly apply anymore 

In a recent podcast appearance with Morning Star, Bengen revisited the 4% retirement rule, and the same was shared in his phone call interview with Barron’s.

Following his recent findings, Bengen agreed that the 4% retirement rule does not apply anymore as the assumptions can pause a limitation in the current economy for an average American citizen. 

His latest findings suggest that a retiree can now withdraw 4.5% from their retirement savings if the retiree is to invest in more than two assets.