Is Bengen’s Four Percent Rule Still Relevant?

How much should retirees safely withdraw each year?

By Guy Baker

Key Takeaways:

  • The calculus of retirement planning has changed as people live longer in an era of extended low interest yields, inadequate nest egg accumulation, market volatility and high medical costs.
  • SAFEMAX refers to the highest sustainable withdrawal rate for the worst-case retirement scenario in a retiree’s lifespan.
  • Sequence risk refers to the danger of receiving lower (or negative) returns, which substantially deplete assets, in the early stages of one’s retirement.

Many of you may remember William Bengen, the trailblazing advisor who in 1994 first proposed the concept of a levelized withdrawal (SAFEMAX) from an investment account. His research was predicated on the 1992 Ibbotson Associates’ Stocks, Bonds, Bills and Inflation Yearbook. This data was used to determine whether a portfolio invested in stocks and bonds could sustain a four percent withdrawal rate over an extended life expectancy. His conclusion was retirees could withdraw 4.2 percent with confidence that their money would last for 30 years. Is this still valid today?

Financial advisors are helping clients cope with the reality of retirement. This reality includes living longer, extended low interest yields, inadequate retirement accumulation and market volatility, not to mention the impact of inflation and high medical costs. The question of “Where should I invest my money?” is being asked more and more frequently.

So is Bengen’s recommended withdrawal rate still valid today? Since his inaugural quest, many academics have attempted to modify his four percent analysis to include Monte Carlo simulation, more sophisticated asset class allocations and strategies to protect capital from sequence risk. The conclusions are varied, with estimates the SAFEMAX rate could be as high as 5 percent or as low as 2.5 percent.

Sequence Risk

The issue for many clients and their advisors is sequence risk. Over the past 90 years, the stock market has returned, on average, 10 percent (with dividends reinvested). But again, that’s the average. It is the down years that drive the potential for retirees to run out of money. So it is important to protect against a protracted down market. The market has never been down for five consecutive years, even during the Great Depression. It would be smart to split clients’ money into two funds. One is the income fund and the other is the growth fund. Set aside five years of income in the income fund and then invest the rest in the growth fund.

By doing this, you can drain the income fund and fill it back up when the growth fund is substantial and has followed the course of the market. It prevents having to liquidate in a down market. Of course, there are no guarantees. This is why using an annuity to lock in a pension income can be a benefit. But it all depends on the amount of capital someone has. Don’t forget how powerful Social Security can be as well. If retirees can push back their normal retirement date until age 70, they will get 8 percent growth on their Social Security benefits every year until they start taking their income. Also, since Social Security has an inflation boost each year, it is a way for retirees to keep pace with purchasing power pressure.


The question remains: What is the SAFEMAX rate? Despite all of the studies that have been done, no one knows for sure. Markets are unpredictable. But one thing is for certain; the coming influx of retirees (including those who have already retired) is going to have to navigate these troubled waters. So, advisors who can help clients find a safe harbor for a reasonable time frame and then invest the rest will provide a meaningful benefit to those clients.

About the Author

Guy Baker, MBA, MSFS, CFP® is a financial advisor to business owners. He works to help owners find ways to reorganize their planning to achieve tax-efficient solutions to their succession, retirement and estate planning problems. Guy is a 34-year member of Top of the Table and recognized by Worth magazine as one of the top 250 financial advisors. For more information, you can contact him at guy@bmiconsulting.com or through www.bmiconsulting.com.