The 4% Rule: Clearing Up Misconceptions With Its Creator Bill Bengen

Nov 15, 2024

In this discussion with Bill Bengen, the creator of the 4% Rule for retirement planning, we uncover surprising insights into retirement strategies. Bill clarifies that the 4% Rule is more of a flexible guideline than a strict rule, allowing for personalized withdrawal rates. Contrary to popular belief, he reveals that many retirees have successfully withdrawn an average of 7% without depleting their portfolios. The conversation also touches on the emotional aspects of investing and the importance of finding purpose in retirement beyond just financial success.

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INSIGHT

Origin of the 4% Rule

Bill Bengen, creator of the 4% rule, got started when his clients began asking about retirement planning.
Existing financial planning resources lacked guidance on withdrawal rates, prompting him to research it himself.

ANECDOTE

Bengen's Background

Bill Bengen's background is in aeronautics, having studied at MIT.
He initially aimed for a career in space exploration but transitioned to financial planning.

INSIGHT

4% Rule: A Guideline

The 4% Rule is more of a guideline than a rigid rule, emphasizing flexibility.
It's based on a worst-case scenario, with most retirees able to withdraw more.

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I had the pleasure of speaking with Bill Bengen, creator of the "4% Rule" for retirement planning. Bill has been a reader of Financial Samurai for many years and has always been courteous in the comments section when I write about safe withdrawal rates. So, I figured it was time we had a chat to clear up some misconceptions.

For those unfamiliar, the 4% Rule, developed by Bill in the 1990s, suggests that traditional retirees (around age 65) can safely withdraw 4% of their retirement portfolio in the first year—adjusted for inflation in subsequent years—without running out of money over a 30-year period.

Misconceptions About The 4% Rule Cleared Up By Bill Bengen

Here’s what I learned from Bill that helped clarify the 4% Rule:

Not a Hard “Rule”: Bill considers the 4% Rule more of a guideline than a strict rule. He encourages flexibility with withdrawal rates, though it’s often treated as a rigid rule in the public eye.
4% Isn’t Actually Aggressive: Contrary to popular belief, Bill’s data shows that 4% is actually conservative. In his study of 400 retirees since 1926, only one retiree (who retired in 1968) had to stick to a 4% rate to avoid running out of money. The rest withdrew an average of 7% without depleting their portfolios.
Adjusting for Inflation: The 4% Rule isn’t static; it adjusts with inflation. For instance, if you start with a $1 million portfolio and withdraw $40,000 one year, you would adjust that amount by inflation the next year to $44,000. This means your withdrawals fluctuate with your financial needs and economic conditions.

You can e-mail bill at Bill@begenfs.com if you have any questions.

Posts mentioned:

Misconceptions About The 4% Rule With Bill Bengen

The Proper Safe Withdrawal Rate

Finishing Rich In A Low Return Stock Market Environment

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