Bill Bengen, the godfather / creator of the 4% safe withdrawal rate (SWR), or rule, has just published a new book available on Amazon: A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More.
I have not read the book, however, he has done a number of interviews on YouTube. The gist is that with a more diversified portfolio, as compared to that used to generate the original 4% rule, the new SWR should be raised to at least 4.7 %.
1) the original 4% SWR was not what his original study showed – it really was determined to be 4.15%. It was rounded down to 4% for unclear reasons.
2) per Michael Kitces, using a 4% SWR, 2/3 of retirees portfolios will grow to be greater than 2.5 x what they started retirement with, by the time they pass.
3) real world data has shown that retiree spending declines by around 1% per year, meaning that spending will go down by 30% over a 3- year retirement (compunding effect disregarded)
Are we vastly underspending our financial resources? Keep in mind that an increase from 4% to 4.7 % is a very large increase in “permissible ” spending. On a $2.5 million portfolio, spending would increase from $100,000 a year to $117,500 a year, which is a highly significant bump up in annual spending.
The SWR goal is to have sufficient money each year in retirement to fund our lifestyle. The SWR makes assumptions about stock gains and interest rates. That has nothing to do with inflation, per se. Inflation decreases the value of money. It erodes purchasing power and can also reduce bond yields. Since 1982, the value of investments would have to double to keep up with inflation. If I put $100 into an investment account in 1982 I would have to remove $200 to buy the same goods and services today.
If an investment nest egg is increasing in value 2% per year, it cannot keep up with modest withdrawals if we consider the erosion in purchasing power. After all, those withdrawals are used to buy the necessities of retirement.
If average inflation is about 3.0% per year, that reduces the value (purchasing power) of a nest egg. If that nest egg appreciates each year by an amount equal to inflation, then purchasing power is maintained. This is before taking any withdrawals. Withdrawals reduce the value of the nest egg.
While the average inflation for the period 2000-2024 has been 2.53%, the actual annual inflation has been as low as 0.1% (2015) and as high as 9.1% (2022).
I’ve run the numbers with 3.0% inflation. The long-term average real return for the S&P 500 is about 7.0%. Considering inflation the real return is 4.35%. The long term real return for 10-year U.S. Treasury bonds is 0.96%. If we combine these, then the real return for a 60/40 portfolio is about 2.99%.
If I begin with a $1 million portfolio invested at 3% real returns and I withdraw at 4.7% of the balance each year, my portfolio will be depleted in about 38 years. However, inflation would erode my purchasing power and I might not be able to maintain my lifestyle at a constant withdrawal rate of $47,000 each year.
If I do the same but increase my withdrawals by 3.0% to accommodate inflation this will maintain my purchasing power ($47,000 withdrawn at the end of year one, $48,410 year two, etc.) Using this approach the portfolio will be depleted in about 30 years.
Reality doesn’t provide constant returns or constant inflation. This is why some suggest a “guardrail” approach to withdrawals. If gains are lower in any given year, then the actual withdrawal is reduced. In better years the withdrawal can be increased. Of course, if there were a “lost decade” this could pose great difficulty for a retiree. Keeping some additional cash and saving more are methods to deal with this.
RMDs dictate under IRS rules how much we must withdraw from certain retirement accounts each year. However, that money may be more, or less than our calculated SWR. As noted by others here, any excess withdrawn and unspent can be re-invested in a taxable account, or saved via bonds or a high interest savings account, etc.
With 20-year Treasuries paying 4.93%, the path to a higher SWR than 4.0% is easily obtainable.
The much bigger question is not about SWR, but rather why to continue with a robust stock allocation when retirees can safely earn 5% for the long term.
John, this is worth its own new post. I’d love to see your thoughts developed. I’d like to review and comment.
Ben – you are 45 with a potential 60-year time horizon, so you must maintain a robust stock allocation to counter the risk of high future inflation. When working, my wife and I maintained a 100% stock allocation, and we’ve advised our kids to do the same – folks having an income stream can afford the risk of a high stock allocation for the decades of working.
I am 70 with a likely 15-year time horizon, so a 5% return should cover my wife’s and my needs sufficiently – and it easily beats the 4% SWR. Having said that, our allocation is ~80% stocks which has served us well with every tick up of stock indi