Retirement Savings: How Long Will My Money Last?

A Fresh Look at the 4% Rule on Retirement Spending

Emotions run high during Financial Market sell-offs. Investment portfolios are down across the board while the grocery bill, price at the gas pump, and the cost for seemingly everything explodes higher. There seems to be an inordinate amount of media noise today, making it difficult to focus on what you can control in these times of Market turmoil. Rules of thumb can simplify things, boil it down. The research done by William Bengen on the 4% rule of retirement spending demonstrated you could make your retirement portfolio last at least 30 years. Simple, straightforward, and easily understandable. The rule states that at a 4% portfolio withdrawal rate, retirement savings will last at least 30 years no matter when you choose to start retirement, supported by almost 100 years of Market return data. That sounds reassuring in times like this, except William Bengen just said it might not work in today’s environment.

History of the 4% Rule

Published in the Journal of Financial Planning in 1994, William Bengen’s paper titled “Determining Withdrawal Rates Using Historical Data” demonstrated that by using a simple formula, retirement portfolios would last for at least 30 years. The simple equation is: withdraw 4% from your retirement savings accounts during the first year of retirement, and each year after that, you adjust the rate of withdrawals by the rate of inflation.

Quick Example. If you have a $2,000,000 portfolio when you retire, that first year of retirement, you can withdraw 4% of that or $80,000. This amount doesn’t include social security or other retirement income. This is a mathematical exercise focusing on the portfolio of retirement savings and how much we can pull from that each year without depleting it completely. Year 2 of retirement with 3% inflation rate you can withdraw $82,400 ($80,000 x 1.03). Year 3 of retirement, with inflation running a little higher at 4%, would be a withdrawal of $85,696 ($82,400 x 1.04). If we are in a deflationary environment, the amount dips down.

Many people make a mistake when considering the 4% rule by thinking that you take 4% of your portfolio ending balance every year. You only make that calculation in year one of retirement; after that, the yearly change in the inflation/deflation rate determines the amount that you can safely withdraw.

Bengen’s original research looked at retirements that started over a 50-year period from 1926 to 1976 with a portfolio invested 55% S&P 500 index and 45% invested in intermediate-term US Treasury bonds. The portfolio is rebalanced annually. Using historical Market data, he tested various withdrawal rates noting how quickly portfolios failed as the percentage withdrawn ticked up higher. Example: Someone who retired in 1943 would use yearly Market returns for that 50-year retirement period, 1943 to 1993, to examine how long the portfolio could be drawn upon and stay intact.

At a 3% withdrawal rate, all the portfolios survived without failing for at least 50 years. At 4% withdrawal rate, 80% of the portfolios lasted 50 years, while those that fell short of that mark lasted at least 30 years. That was the key takeaway: the worst performing portfolio safely lasted at least 30 years of retirement withdrawals; hence the term 4% Rule was coined.

With a 5% or higher first-year withdrawal rate, the risk becomes greater that the portfolio doesn’t even last 20 years. It then becomes somewhat a “roll of the dice” to select a good period to start drawing on your retirement portfolio. Unfortunately, this is very difficult to do without a crystal ball.

Given his background, it was surprising that during an interview with the Wall Street Journal last quarter, Mr. Bengen said that given the unpredictable nature of Market conditions today, he has moved from his normal portfolio mix of 55% in stocks and 45% in fixed income to hold an oversized cash position. This strategy shift by Bengen may sound familiar as our investment strategy at Bedell Frazier has involved a substantial cash position in 2022, given the recent Market conditions.

Worst Day to Retire?

When looking at all the 30-year periods starting in 1926 that Bengen analyzed for retirees spending their nest egg, can you guess which was the worst starting date to retire?

  • 1929 Stock Market collapse and the Great Depression
  • Nazi Germany’s invasion of Poland in 1939
  • Pearl Harbor and the US being drawn into World War II in 1941
  • 1953 during a recession caused by tightening monetary policy following the Korean War

Nope, none of those major history markers were the worst time to begin 30 years of retirement withdraw spending. Just to drive home the point of how inflation can wreak havoc on retirement planning, it was October of 1968. We were just about to enter the 1970s when inflation was running rampant for most of the decade, with prices spiking an eye-popping 22.1% from 1973 to 1974. This period of high inflation and low growth facilitated the back-to-back equity Bear Markets of 1969 and 1973. Those back-to-back Bears were in the middle of a brutal stretch for equity returns from 1965 to 1981, when the return on the S&P 500 was virtually flat, excluding dividends.

Sequence of Returns

Bad Market returns are inevitable over a long retirement period, but what can really impact how long a portfolio remains intact is when those poor Market returns occur. We find this is something in the back of clients’ minds when trying to decide on a retirement date. You can be understandably nervous about entering this new phase of life. You work and save your entire career to enjoy life after work, only to encounter bad Market returns right as you begin to pull from your retirement accounts. In retirement planning, this dilemma is known as sequence of returns; when the Market sells-off right as people begin to rely on the cash flows pulled from those accounts. Significant Market losses in the early years of retirement can shorten the longevity of a portfolio even if, in later years, the Market returns are better than average.

One of the advantages of going through the financial planning process with Bedell Frazier is we stress test our retirement financial plans to account for sequence of returns risk or bad timing in the first two years of retirement. Our dynamic software program can mimic the devastating returns of other Bear Markets as retirement starts up, accounting for the portfolio mix, to measure the long-term effects of a client’s ability to reach their spending goals. If we find a weakness in a financial plan, we can make an adjustment to overcome this shortfall. We can also take the other side to walk through a client’s spending goals to see if a more conservative portfolio will allow them to meet all of their goals without taking on additional risk. If a client desires to retire early, we can lay out a road map to draw from their taxable accounts or other assets, before social security payments begin, to alleviate some pressure from withdrawing from retirement accounts.

The comforting benefit of using the 4% rule as a guidepost is knowing it has worked for almost 100 years with periods that included The Great Depression, World War II, the Vietnam War, the high inflation periods in the 1970s, the Market crash of 1987 and the Great Recession. No matter which year people started drawing from their retirement accounts, the portfolio remained intact for at least 30 years.

Actually More than 4% Rule

Mr. Bengen has continued to update his model since 2006. As he extended his research, he added different asset classes to the portfolios beyond the original portfolio allocation of large-cap stocks and Treasury Bonds. The new portfolio includes United States mid-cap, small-cap, and micro-cap equities along with international stocks and Treasury bills. When he back-tested the new diversified portfolio, it supported a higher safe withdraw rate of 4.7% from the original 4%.

So why is William Bengen, founder of the 4% Rule who has a Bachelor of Science from MIT in aeronautics and astronautics along with a master’s degree in financial planning, moving away from his own research?

1970s Market Conditions

It is unknown if the current inflationary price surge is going to be a short-term phenomenon or a return to a decade like the 1970s with an extended period of high inflation. When using a withdraw system like the 4% Rule, the withdraws based on inflation rate can quickly increase, putting pressure on the portfolio returns to keep up with the withdraws. In a period of high inflation, with returns that don’t keep pace, it can quickly deplete retirement savings. Mr. Bengen is very uncomfortable holding his current elevated cash position and is not a Market timer. He explains his large cash position currently is just a pause to get more visibility on the current inflation landscape.

In a recent interview Bengen had with ThinkAdvisor, a timely question was asked, “Is there anything that alarms you about the way retirement planning is done today?” Bengen responded, “My biggest concern are buy-and-hold advisors who don’t modify their allocation in response to market risk.” He followed up by saying. “That’s why I say protect your retirement nest egg because if it gets damaged, there may not be a quick cure. Manage the risk portion actively. Retirees should be exceptionally careful in this environment.”


The 4% Rule is a great place to begin a retirement planning conversation, but it is not the full solution. Obviously, such a simple formula has its limitations. This is why at Bedell Frazier, we use sophisticated planning software to model various roads to retirement for clients. Retirements tend to unfold in unique ways with years of higher spending early in retirement for travel and at the end of life for extra care expenses. The 4% Rule doesn’t allow for flexibility in its portfolio construction. Perhaps most importantly, it does not account for taxes which can vary depending on state of residence, along with retirement income streams such as pensions or rental income.

Bedell Frazier accounts for many variables when planning for retirement to give peace of mind during these volatile Market conditions. We can also examine different inflation rates to see the impact on your ability to fund retirement goals if that is something that is keeping you up at night. Planning and investment management are linked at Bedell Frazier. Our investment strategy team is dynamic and active. We shift asset classes based on Market conditions. We are not the “buy-and-hold” advisors that Bengen warned of. We are the exact opposite, and we pride ourselves on that. We view this research update from Bengen as further validation of our active management of investments as well as our active revisiting of retirement plans. We live in a world that evolves quickly, and our team is working dynamically and diligently every day on your behalf.

Now is a great time to revisit your retirement plan. Contact the Bedell Frazier Financial Planning department to assist you with refreshing or designing your detailed financial retirement plan.

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