Bill Bengen Discusses His Retirement Withdrawal Strategy

William “Bill” Bengen, whose 1994 study introduced the concept of the 4% withdrawal rate for retirees, recently participated in a question and answer session on social media website Reddit. The conversation focused on retirement withdrawal strategies and portfolio allocation. I’ll provide some highlights here. The full exchange is interesting, though you will want to set aside some free time as it encompasses nearly 450 questions and comments in total. Keep your eyes open for an interview with Bengen to appear in the AAII Journal early next year.

Not surprisingly, there were several questions about Bengen’s withdrawal strategy. The 4.5% rule is a guideline for how much can be safely withdrawn each year without causing the retiree to run out of money over a period of 30 years. As such, it is referred to as a safe withdrawal rate (SWR). The strategy starts by withdrawing 4.5% of portfolio assets (Bengen has increased the percentage since his original research was published). The dollar amount is then increased by inflation each year thereafter. [Bengen uses the consumer price index (CPI) for determining by how much the withdrawals should be increased.]

There were several questions about whether or not the 4.5% rule is still applicable in the current environment. Bengen believes the state of the economy has had “little bearing on safe withdrawal rates.” Rather, he thinks the big dangers are encountering a “major bear market early in retirement” and/or experiencing high inflation during retirement. (Bengen called inflation “the retiree’s worst enemy.”) Though the average safe withdrawal rate has historically been 7%, a bear market similar to what occurred in 1937 or 2000 drops the SWR to 5.25%. Adding in the heavy inflation of the 1970s lowers the SWR to 4.5%. Bengen then added, “So far, I have not seen any indication that the 4.5% rule will be violated.”

Longevity also plays a role. A 35-year retirement would require a safe withdrawal rate of 4.3%. For 40 years, the SWD is 4.2%. It’s 4.1% for someone expecting to spend 45 years in retirement.

He thinks it’s too early to tell how a prolonged period of low interest rates will affect the 4.5% rule. It may be another 10 years before an assessment can be made. If, on the other hand, inflation rises significantly, it would be a problem. As far as prevailing valuations, Bengen—citing research from financial adviser Michael Kitces—said “it is best to stick with the appropriate safe withdrawal rate, and not try for something higher.”

Bengen’s original research used a 50% stock/50% bond allocation. He continues to believe in this mix. Bengen found that safe withdrawal rates peaked at 4.5% at equity allocations of 45% to 55%. He described an allocation mix of 50% to 55% in stocks, 35% to 40% in bonds and 10% in cash as appearing to be “optimum.” When asked about his own allocation, Bengen simply responded, “I have a lot of cash!”

Bengen says he advised his clients to always have a significant amount of cash on hand. This cash allocation reduced the bond allocation “dollar-for-dollar.” The 10% allocation was intended to be the equivalent of two years of withdrawals. Bengen believed this gave his clients comfort in knowing that they would not have to touch their investments during periods of down markets.