Well, I, too, will be making a change to my 4% Rule, but it’s not going down. It’s going up by 0.5%. That’s right, the 4% Rule has become the 4% Plus Rule!
While that half of 1% may not sound like a lot, it’s a 12.5% raise. Imagine a $1 million portfolio. Drawing down 4% would mean $40,000 per year, but that extra 0.5% would give folks an extra $5,000 annually to spend on life’s needs and wants. Of course, inflation rates would adjust the numbers a bit, but you get the point.
I’m massively interested in this topic. If you’ve listened to my “Money Matters” radio show and “Retire Sooner” podcast or read my new book “What the Happiest Retirees Know,” you’ve heard me talk about it a lot.
Why do I believe so strongly in it? Because not only was William Bengen a really smart guy, but my team re-created and re-tested the formula in 2014 and 2021.
At 4%, it turned out that 82.9% of the time your money will last 45 years. And 92.7% of the time it will last 40 years. Even at the high end of the projection, at 50 years — and most of us are not going to have a 50-year retirement — there’s a 70.7% chance your money will go the distance. Once we veer into the more realistic retirement lengths of 30 or 35 years, you’re edging closer and closer to a 100% chance of retirement savings lasting as long as you do.
When Bengen announced the new 4.5% rate in 2021, it was because he discovered that keeping 50% in bonds while redistributing stocks to a 40% large caps/10% small caps ratio made space for a small improvement. At this new rate, if you retire early at 60 and live until 90, there’s a 90.2% chance your funds will last. Incredibly, if you did manage to stick around for 50 years there’s a 53.7% chance your money would, too.
What’s the bottom line? No matter what you do, retirement planning is a living, breathing, dynamic strategy, not a tablet of stone. Bengen, Pfau and all the others want to say their piece. I’m less interested in theory and more interested in what these numbers look like in the real world.
I want to help retirees pull out the maximum amount from their savings with full confidence that they won’t outlive their money. And in the real world, somewhere in the 4%–5% range works most of the time.
Retirement planning is not a straight line. There isn’t, and never will be, an exact percentage that retirees need or want to stick to each year, come hell or high water. Remember that these “rules” are guidelines, not mandates. Flexibility is the key.
In my opinion, Bengen’s calculations are more accurate to follow than Pfau’s, largely because Pfau’s just aren’t practical. If 2.4% were the guideline, then the majority of Americans could never afford to retire. Life requires us to run on the hamster wheel from time to time, but if it never stops, what’s the point?
From what I’ve seen during my 20 years of helping people plan for retirement, using a dynamic approach to your nest egg is the key. Anywhere from 4% to 5% is sustainable so long as you are willing to make adjustments as needed. And there’s always the three-step dance between math (objective), common sense (subjective), and emotions (very subjective) like greed or fear. Stay the course but be willing to take tiny detours to avoid pitfalls.
The takeaway is that retirement withdrawals aren’t static. Sometimes you withdraw a little more, and sometimes you tighten the belt if you’ve overspent or the markets aren’t particularly generous. Dipping into your nest egg should be flexible, but it needn’t be miserly.
I am a believer in the 4% Rule, and I am excited about the new 4.5% Rule. After all, my focus is on happy retirees, and what makes a person happier in retirement than peace of mind, financial stability and a nice raise? I’d say those are key ingredients to a retirement well-spent.
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