Renowned financial planner William Bengen has redefined the retirement withdrawal game with an updated rate of 4.7%, surpassing his original 4% rule that has been a staple for retirees since 1994.
In his groundbreaking work published in the Journal of Financial Planning, Bengen introduced the 4% rule, offering retirees a simple strategy to make their savings last for at least 30 years. By starting with a 4% withdrawal rate and adjusting for inflation annually, retirees could confidently manage their spending without depleting their funds. This approach gained widespread popularity for its reliability and ease of use, becoming the go-to guideline for many retirees seeking financial security.
Now, in his latest book, A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More, Bengen reveals that the safe withdrawal rate is actually closer to 4.7%. This means that a retiree with a $1 million portfolio could comfortably withdraw $47,000 annually, up from the previous $40,000, while adjusting for inflation to maintain purchasing power. The revised figure is the result of an updated analysis encompassing the investment returns of numerous retirees dating back to 1926.
Bengen explained to Yahoo Finance that his latest research is more advanced, incorporating a wider range of assets and a diversified portfolio that includes international stocks, small, and mid-size company stocks in addition to U.S. bonds and large stocks. Each asset class contributes to portfolio diversification and increases the withdrawal rate, making the 4.7% guideline more robust and adaptable to varying market conditions.
Despite the enhanced analysis, Bengen emphasizes that no single withdrawal rate is universally effective, and external factors like market volatility, inflation, and healthcare costs must be considered. He particularly highlights inflation as a major threat to retirees, recalling the detrimental impact of high inflation rates in the past that eroded retirement portfolios.
Reflecting on historical data, Bengen views the 4.7% rule as a conservative starting point rather than an absolute rule, suggesting that current retirees could potentially withdraw at rates between 5.25% to 5.5% depending on economic conditions. He attributes the worst-case scenario of 4.7% to a particularly challenging period in U.S. stock market history characterized by successive bear markets and high inflation, cautioning that individual circumstances should guide withdrawal decisions.
While Bengen’s updated rate offers retirees a slightly higher starting point, some experts argue that the 4% rule is outdated, lacking flexibility to accommodate changing financial circumstances and alternative income sources like Social Security. The debate over withdrawal rates continues, with Morningstar advocating for a more cautious 3.7% rate based on future market projections.
Despite varying perspectives, Bengen’s research remains a valuable benchmark for retirees, emphasizing the importance of personalized financial planning tailored to individual needs and circumstances.
As Bengen aptly advises, “Personalize it for your situation.””
