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Aug 11, 2021

4% Rule on Retirement Withdrawals Evolves

Kevin BrosiousBy Kevin P. Brosious, CPA, PFS, CFP


Many financial professionals plan a client’s retirement cash flow by using the 4% rule. The 4% guideline basically states that one can confidently withdraw 4% from retirement accounts (adjusted for inflation) every year in a 30-year retirement and not run out of money. So, if a client has $500,000 saved when they retire, the first-year withdrawal would be $20,000. If inflation were 3% for the subsequent two years of retirement, the second-year withdrawal would be $20,600, third year would be $21,218, and so on.

The 4% rule was introduced by William Bengen in a 1994 article in the Journal of Financial Planning. He further explained his research in the 2006 book, Conserving Client Portfolios During Retirement (a must-read for any financial planner or money manager). Bengen’s background belies his work as the creator of one of the most noted guidelines in financial planning. He received a bachelor’s degree from MIT in aeronautics and astronautics, and initially worked in his family’s soda bottling company for 17 years until it was sold. He moved to California and changed his career to financial planning.

Retired couple worried over their financesBengen sought a rule of thumb to answer his clients’ most common question: “How much can I spend from my investments during retirement without running out of money.” He wanted to be able to give clients what he called a “SAFEMAX” annual spending number that would apply to their projected retirement years. Prior to the 4% rule, there was no standard and no studies to validate estimates.

Bengen looked back over 75 years of U.S. large company stock returns, Treasury notes, and inflation. He then used various withdrawal rates over this period and zeroed in on the maximum portfolio withdrawal level that held up over a 30-year period.1 Although not perfect because it was based on a two-asset-class portfolio, Bengen at least had a rule of thumb that could be used as a starting point with clients. His initial guideline shocked some in the investment community; prior to his work, some advisers were recommending 6% or higher annual drawdowns.

Before to the release of his book in 2006, Bengen added U.S. small cap stocks to his analysis. He found that the addition of this group of stocks to the portfolio added more return and did not always move in the same direction as U.S. large cap stocks. Consequently, the SAFEMAX withdrawal rate shifted from 4% to 4.5%.

Bengen has been working on adding additional asset classes to his test portfolio – international stocks, mid-cap stocks, micro-cap stocks, and total market funds. His preliminary findings are that the SAFEMAX can be pushed to a 5% annual portfolio withdrawal. So, again using a $500,000 portfolio, a first-year withdrawal would be $25,000 instead of $20,000, a whopping 25% improvement from the initial portfolio consisting of only U.S. large cap stocks and Treasury notes.

Recently, Bengen was interviewed about current market conditions and asked if the 4.5% rule was still pertinent or if financial planners should lower the SAFEMAX? But instead of recommending a lower SAFEMAX, Bengen thought that if the low-inflation environment continued, it would lend itself to an even higher SAFEMAX annual withdrawal, to perhaps 5.3%. But he did have a warning for planners: “If inflation hits levels experienced in the early 1980s, this could have a significant negative impact on safe withdrawal rates. So, be sure to keep an eye (maybe two) on the government’s Consumer Price Index.”

1 Actually, the 4% rule is really 4.2%. The press found it easier to call it the 4% rule.


Kevin P. Brosious, CPA, PFS, CFP, is president of Wealth Management Inc., located in Allentown and Plymouth Meeting. He can be reached at kevin@wealthmanagement1.com.


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  • Rosemary Lamaestra | Aug 12, 2021
    Very enlightening - great article Kevin.

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    Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.