# Bill Bengen, Creator of the 4% Rule, Suggests That Higher Withdrawal Rates Could Be Viable
In the realm of retirement planning, the “4% rule” is one of the most commonly cited and contested concepts, introduced by financial planner Bill Bengen in 1994. This straightforward yet effective model offers guidance on how retirees can withdraw money from their retirement savings safely, minimizing the risk of exhausting their funds over a 30-year period. However, as economic situations change, so too does the retirement planning strategy. Currently, Bengen is reexamining his well-known rule, proposing that higher withdrawal rates might be feasible for many retirees in specific situations.
## The Birth of the 4% Rule
The 4% rule was established as a guideline for retirees to assess how much they could withdraw from their retirement savings each year while ensuring sustainability over several decades. Bengen’s analysis was grounded in historical market performance, particularly evaluating a theoretical portfolio consisting of 50% stocks and 50% bonds. He determined that retirees could take out 4% of their original portfolio in the first year of retirement, adjusting for inflation each subsequent year, without depleting their savings within a 30-year retirement span.
Bengen termed this withdrawal figure the “SAFEMAX,” indicating the maximum amount retirees could withdraw without jeopardizing their financial security. His conclusions laid the foundation for financial retirement strategies and provided nervous retirees with a vital sense of stability during unpredictable times.
## Reevaluating the 4% Rule in Today’s Economic Context
Fast forward almost thirty years, and the economic landscape and investment conditions are markedly different from when Bengen began his research. In recent years, Bengen has undertaken further studies and implied that, under certain conditions, retirees might be able to take out a withdrawal rate exceeding 4% safely.
So, what has evolved?
### 1. **Market Trends and Valuations**
The original premise of the 4% rule was based on historical worst-case scenarios, including the Great Depression and the stagflation of the 1970s. During these turbulent times, retirees who retired in those periods often encountered tough circumstances in the early years of retirement — a phenomenon known as “sequence of returns risk.” By anchoring the rule on these severe historical contexts, Bengen crafted a conservative withdrawal rate.
However, with the robust market gains seen over the past few decades — most notably the bull market from the early 2010s through 2020 — Bengen feels it may be appropriate to factor in higher returns into the withdrawal rate calculations. For instance, retirees who started during periods of lower market valuations have historically experienced higher sustainable withdrawal rates compared to those who retired when valuations were high.
### 2. **Embracing Varied Asset Classes**
When Bengen initially formulated the 4% rule, he used a basic blend of stocks (S&P 500 index) and bonds (intermediate-term government bonds). Over time, he has broadened his model to take into account a more diverse range of asset classes, such as small-cap stocks and international equities. By diversifying the portfolio beyond just two major asset types, retirees could potentially secure higher returns, facilitating increased withdrawal rates.
Bengen has indicated that withdrawal rates reaching as high as 5% could be attainable under certain circumstances, especially for portfolios that are well-diversified and when conditions are favorable for retirees at the commencement of retirement.
### 3. **Reduced Inflation in Recent Times**
Inflation is a significant factor influencing how much retirees can withdraw without jeopardizing their purchasing power over time. While the 4% rule includes annual adjustments for inflation, periods of lower inflation lessen the necessity for significant adjustments and might permit a higher starting withdrawal rate.
Even though inflation has resurged as a concern in 2022 and subsequent years, especially in the wake of the COVID-19 pandemic and global supply chain challenges, inflation rates over recent decades have been relatively mild compared to historic instances like the 1970s. More stable inflation conditions could render higher withdrawal rates more achievable.
### 4. **Tailored Financial Planning**
A critique levied against the original 4% rule is its failure to consider personal factors. Elements such as fluctuating expenses, healthcare costs, the existence of pensions or Social Security, and inheritance goals impact withdrawal strategies for retirement. For retirees who maintain flexibility in their spending or possess additional income sources, a higher withdrawal rate may better suit their lifestyle.
Bengen recognizes that his model should serve as a guideline rather than a universal solution. “Each retiree is different,” he recently remarked in an interview, highlighting the necessity of modifying financial strategies according to individual circumstances and shifts in market dynamics.
## The Ongoing Discussion Around Sustainable Retirement Withdrawals
Not all financial experts agree with the perspective of increasing withdrawal rates. Detractors warn that recent stock market surges may lead to overly optimistic expectations regarding future returns. The market’s performance throughout the 2010s, which was driven by historically low interest rates and quantitative easing.