Not a Law of Nature – 4% “rule”

Adam M. Grossman 

The 4% RULE IS ONE of the best-known ideas in personal finance. But is it really a rule? And does it apply to you?

Let’s start at the beginning. The father of the 4% rule is a financial planner named William Bengen. Back in the early 1990s, he became frustrated with the prevailing rules of thumb for retirement planning. He found them too informal and set out to develop a more rigorous approach. The question he sought to answer: What percentage of a portfolio could a retiree safely withdraw each year?

In Bengen’s definition, “safely” meant that a retiree would not outlive his or her funds over the course of a 30-year retirement. The answer Bengen reached: 4%. Specifically, a retiree could build a reliable plan around a portfolio withdrawal of 4% in the first year of retirement and subsequent annual increases in line with inflation. He arrived at this conclusion after testing hundreds of hypothetical historical portfolios—evaluating different starting points and different withdrawal rates.

Since Bengen’s research first appeared in 1994, it has gained in popularity, but it’s also spurred a lot of debate. So how should you think about it?

The first thing to understand about the 4% rule is that Bengen never intended it to be a rule per se. In his paper, he’s clear that 4% is just a recommendation—and only under certain circumstances. In fact, in a recent interview, Bengen—who’s now retired—noted that the figure he used with his own clients was generally 4.5%. Today, with inflation so low, he believes that 5% makes more sense.

Meanwhile, some take the opposite view. Because of today’s very low interest rates, there’s a camp that believes 4% is far too generous and that 3% or 3.5% is a better number.

Bengen’s 4% figure has taken on a life of its own, and he recognizes the irony in that. His intention was to develop a more rigorous approach that improved upon the old rules of thumb. And yet, over time, his work—which also included an entire book on the topic—has itself been oversimplified and reduced to a rule of thumb.

That’s why I think it’s worth taking a closer look at the research. As you think about your own retirement plan, and whether 4% would make sense for you, below are six factors to consider:

READ ON at the link below.

Source: Not a Law of Nature – HumbleDollar


  1. I think the “4% rule” is a very useful PLANNING TOOL. Preretirement, it gave me a very good idea how much money I could safely withdraw and not run out of money as long as my ROR was at least 4.0%. Using that figure, I knew that I could retire and maintain my lifestyle with all my sources of income.

    With the current market highs and the Dow closing yesterday at 14.3% for the year, this keeps me from being greedy. My current mix is returning 9.3% and I am very happy with that since bonds are doing so poorly. I guess I could take out 9% next year but I want to save up for those years that the market loses money, and it will. Keeping my withdraw at 4% will help protect me for those down years.

    I could take out a fix amount or big chunk of cash too to buy a boat, but that is not in my plan. But I could. The 4% rule makes me think about it a little more to make sure that is the right thing to do. I was going to buy a car with cash last December. Instead they offered 0% financing for 6 years. Now I withdraw enough to cover my loan payment every six months and let the balance of the car loan grow with the market. I should make several thousand dollars.

    Now some people might want to spend down their nest egg and I might too as I get older but at age 59, I need to see how my health is going to be in 20 years. I think that the 4% rule is a good rule. It’s adjustable and it is much better at estimating how much you can withdraw.

    Now if we could only get a good rule of thumb for medical cost in retirement. That is the wildcard. It is different for each person and their health can go downhill overnight. Also the medical costs inflation rate does not follow any other market indicator.


    1. Dwayne, I was offered zero percent financing on a 2020 Ford Edge in April 2020. But, I did not go for it, because it had no discount off MSRP. They had a 36 month lease offer with $4,500 off of MSRP and with $4,000 down my payments are $351 per month. At the end of the lease I can purchase the Edge for $19,880 and will be getting the car for the exact purchase price of $36,516. So, no interest charges for the 36 months of the lease. I will have the money to pay cash at lease end.

      As for the 4% rule, I do not have any retirement investments at this time. My retirement income is from a USAF pension and SS. I am able to save $800 per month from my income and may invest some money in dividend paying stocks soon. I may never have to worry about taking money out of my investments because of income cash flow. In two years once the Edge is paid for, I will be able to save $1,151 per month.


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