Tag: 4% rule

Today’s episode is sheer retirement nerd bliss.

We talk to the creator of the 4 percent retirement safe withdrawal rule, Bill Bengen.

If you’re new to retirement planning, you might not yet grasp the gravity of this. Let’s cut to the chase: the 4 percent rule is one of the most revolutionary, groundbreaking insights in the field of retirement research in the past 30 years.

To understand why, let’s climb in our time machines and return to 1994.

Back then, many financial advisors were telling their clients that they could safely withdraw 7 percent of their retirement portfolio each year.

After all, the simplistic logic went, the stock market has historically yielded between 7 to 9 percent returns, so that type of withdrawal rate shouldn’t dwindle the principle … right? ⠀
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Bill Bengen, an MIT graduate and former rocket scientist, decided to build a better model. He looked at the performance of investment portfolios across 30-year time horizons, beginning in 1926.

Under the assumption that the portfolio is invested 50 percent in an S&P 500 Index and 50 percent in intermediate-term bonds, in a tax deferred account, he found that retirees could only withdraw 4.2 percent of their portfolio in the first year of retirement, and that amount adjusted for inflation each subsequent year.

He called this the “safe withdrawal rate” that gave people a reasonable chance of not outliving their money, based on historic performance.

He published the results in the Journal of Financial Planning and caused a stir. This was revolutionary. It upended the assumptions that dominated the field at the time.

And it remains a cornerstone of retirement planning to this day.

We talk to Bill Bengen about his discovery – and his latest research – in today’s episode.

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