By Nicholas Hamner
Investment Advisor Representative, Director of Marketing & Operations
[email protected]
Our life is framed by rules. No matter what you want to do—get dressed in the morning, drive to work, run with scissors, etc.—there are rules governing how much of anything you can do. Some written (speed limits, criminal codes, etc.) and some unwritten (never bunt to break up a no hitter bid). Some rules—laws mostly—originate from serious civic debate and a demonstrated evidence of need. Others just kind of appear and seem to have always been there, like whether you should or should not wear white after Labor Day (no) or mess around with Jim (also no).
In the retirement planning world, we have a ton of rules. Lots of laws and regulations, lots of governance, but we are also impacted by rules that some people just create out of thin air. One such thin-air rule is the 4% rule. The idea that retirees can safely withdraw 4% of their savings each year without running out of money. You’ve heard it forever, and you probably thought that it has been around forever but, nope, this rule first appeared in 1994. A financial planner named Bill Bengen put it together using a spreadsheet and a lot of data. And folks have repeated it ever since.
But that was 30 years ago. A lot has changed since then, and Mr. Bengen has now clarified his rule and tweaked it. That he has a new book hitting shelves this month is completely unrelated to his reanalysis…
When Mr. Bengen created his 4% rule, he created a controlled environment in which the rule would work: money would be invested in a tax-advantaged account (like a traditional IRA), the money had to last 30 years and end in zero, the money was invested in a fixed investment allocation of 60% stocks and 40% bonds, and the investments would be rebalanced annually to reset the portfolio back to its targeted weighting. Under those conditions, he estimated the average retiree following those rules could pull out an absolute maximum of 4.15% each year and continue on for the remainder of the 30 years.
However, after 30 years of economic changes… and the realization that people don’t operate in a controlled environment… Mr. Bengen’s rule has come under fire from a number of directions. In the 11 years I’ve been at FRS, I’ve seen questions ranging from “Is 4% truly enough to live on?” as well as “Is 4% going to wipe out your accounts too soon? Should it really be 3%?” In response to those questions, and having had 30 years to think on it, Mr. Bengen has decided to revisit his 4% rule.
Firstly, he insists that we read his rule wrong way back in 1994. He says 4% was only the amount for the first year, with every subsequent year modified by the Social Security Administration’s Cost of Living Adjustment (COLA). How would that work? If you were withdrawing 4% in 1994, you would modify that amount the next year by the COLA. For 1995, that was 2.6%. Taking 4% and adding 2.6% more to it gets us to 4.104% in 1995. In 1996, you’d adjust 1995’s amount by the 2.9% COLA, and so on, and so on. Following that math, you’d be withdrawing 8.4% in year 29.
Secondly, since his COLA clarification still doesn’t fully address the questions that have been raised about his theory, Mr. Bengen also says that the COLA strategy is just one way to get to 4% and that others exist. He says retirees could stick to the fixed percentage or the COLA method, but that they could also frontload their withdrawals and pull out more in the early go-go years and less in the no-go years, so long as they average 4% a year. His key quote? “There’s so many ways you can do it.”
Mr. Bengen’s adjusted-for-2025 “universal safemax” amount is now 4.7% a year—a fairly significant increase in available withdrawals that he determined from 30 years of past performance. Although he cautions that that amount could differ for future generations based on inflation and market performance. Echoing the statements of another noted financial advisor and author known for quips like “The markets will do what the markets will do” and “My crystal ball is cloudy”. Past that, Mr. Bengen also says that any retiree wishing to leave money to heirs should spend less, and that inflation can be scary for those on a fixed income and the best way to deal with inflation is to spend less. With insight like that, let’s be thankful he didn’t spend any ink expounding on the wetness of water or the intrinsic hotness of fire.
In truth, the critical takeaway from Mr. Bengen’s new rule clarifications (and book) is his embracing of the idea that retirees need to keep their financial circumstances in mind when identifying their personal strategy. Worded another way, Mr. Bengen now believes what any good financial planner believes (including everyone in this office): an individual retiree has unique needs, goals, and circumstances and their retirement plans should be uniquely tailored to their needs, goals, and circumstances. Worded an even other way, Mr. Bengen is saying that there is no one-size-fits-all perfect retirement plan that fits everyone. In contrast to his development of the 4% rule.
At Franklin Retirement, we do our best to practice in a holistic manner—holisitc in the sense that that we consider every source and every potential solution in developing a plan… we’re not invigorating a down portfolio with powdered shark fin. We know that standard solutions don’t work for everyone just like an off-the-rack suit doesn’t work for anyone. Our solutions are designed for you, tailored to you, and exist solely for you. It’s why we make such a considerable effort to get to know you, and why our information gathering can feel like an interrogation at times. We’re not creating a hard-and-fast rule that we expect to work for everyone we meet.
If you’re reading this and wondering about your own plan or just wondering if you can spend a little more cash, let’s take a look together. Grab a time on our calendar and let’s talk! Just no Mondays. We don’t meet on Mondays as a… well… rule.