4% Rule on Retirement Withdrawals?

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In 1993, Bill Bengen of Bengen Financial, in San Diego, challenged the widespread 4% withdrawal rule for money management in retirement by testing every 30-year retirement period since 1926, reconstructing market conditions and inflation. He identified 1969 as the worst year for retirees because a combination of low returns and high inflation had eroded the value of savings.

Michael Finke, a professor in the department of personal financial planning at Texas Tech University, in Lubbock, is a co-author of a paper that’s perhaps more critical of the 4% rule—which hasn’t worked of late, a time of prolonged low returns.

“There haven’t been any historical periods that look like today,” Professor Finke said. “We’ve never had an extended period where rates of returns on bonds have been so low and valuation on stocks so high.”

What’s more, the classic 4% rule fails to consider above-average spending in the early years of retirement, Finke says, draining too much of the capital needed to support the last 25 retirement years. So:

A standing 3% withdrawal rate in the early retirement years (and beyond) is closer to sustainability, he concludes.

Never forget: All investments and savings are gambles on the unknown future and thus subject to loss. Even educated guesses about the future are guesses.