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For nearly three decades, the 4% rule has been the gold standard of retirement planning. Financial advisors have built careers around it, retirees have structured their entire withdrawal strategies around it, and countless retirement calculators have been programmed with its assumptions.
But recently, the 4% rule for the retired seems to be transitioning to retirement itself. This is even more apparent by even the person who coined the 4% rule – who now says it’s outdated!
Bill Bengen, the financial advisor who developed the famous rule in the 1990s, has spent the last 30 years refining his research. His conclusion might surprise you: “The 4% rule is the 5% rule today.” This isn’t just academic number-crunching—this change could mean the difference between needing $1.25 million versus $1 million to support a $50,000 annual retirement lifestyle from your portfolio.
Much of this information has been taken from a couple recent interviews by financial influencers with Bill Bengen, and you can check them out here and here.
The Birth of a Rule That Changed Retirement Planning
In the early 1990s, Bill Bengen faced a problem that seems almost quaint by today’s standards: he couldn’t find any solid research on how much his clients could safely withdraw from their retirement portfolios. Financial advisors were using rules of thumb that ranged wildly from 2% to 9%, with little scientific backing.
Bengen decided to solve this problem himself. He conducted a historical analysis going back to 1926, searching for the lowest withdrawal rate that would have sustained a portfolio for 30 years under any historical scenario. His goal was to identify the absolute worst-case scenario a retiree might face.
He found it: a person who retired in October 1968, just before back-to-back bear markets combined with devastating double-digit inflation of the 1970s. Even this unlucky retiree could have safely withdrawn 4.15% of their portfolio in the first year, then adjusted that dollar amount annually for inflation.
The methodology was straightforward: withdraw 4% of your portfolio in year one, then ignore percentages forever. Take that initial dollar amount and give yourself a cost-of-living adjustment each year, similar to Social Security. A retiree with $1 million would withdraw $40,000 in year one, then $41,200 in year two if inflation was 3%.
The media dubbed it “the 4% rule,” and Bengen was astonished by how widely it was adopted. But he never intended it as a universal law—it was based on the single worst-case scenario in modern financial history.
Three Decades of Evolution
Bengen didn’t stop researching after his initial study gained fame. Over the past 30 years, he’s continuously refined his analysis, incorporating more historical data and expanding beyond the simple two-asset portfolio he originally studied.
His original research used just U.S. large-company stocks and U.S. 5-year bonds in a 50/50 allocation. But real portfolios are more sophisticated than that. Bengen began adding asset classes: U.S. small-company stocks, mid-cap stocks, micro-cap stocks, and international stocks.
The results were striking. Just adding small-company stocks to the original two asset classes increased the safe withdrawal rate to 4.5%. As he continued to diversify the portfolio, incorporating seven different asset classes, the safe withdrawal rate climbed from 4.15% to 4.7%.
“This can be tweaked up to 5% without taking on additional risk,” Bengen now states, leading to his provocative conclusion: “The 4% rule is the 5% rule.”
The Mathematics of the 5% Rule
The shift from 4% to 5% might seem modest, but the implications are profound. Under the 4% rule, you need to save 25 times your annual spending. With the 5% rule, you only need 20 times your annual spending.
For someone planning a $50,000 annual retirement:
- 4% rule: Requires $1.25 million in savings
- 5% rule: Requires $1 million in savings
- Difference: $250,000 less needed
This represents years of additional working and saving under the old rule, or conversely, the ability to retire earlier or spend more under the updated approach.
Historical data supports this evolution. A 5% withdrawal rate would have been successful in 98.4% of all 30-year periods since 1926, even without spending flexibility. When Bengen analyzed 400 different historical retirement scenarios, he found that only one retiree—that unlucky person who retired in 1968—would have needed to stick to 4%. The other 399 could have withdrawn more, with the historical average being 7%.
The Two Conditions for 5% Success
Bengen’s updated 5% rule works under two important conditions:
First, you must embrace diversification. His revised asset allocation includes 55% stocks, 40% bonds, and 5% cash (U.S. Treasury Bills). This isn’t the simple 50/50 stock/bond split of his original research—it’s a more sophisticated approach that captures different market segments and international exposure.
Second, you must be willing to adjust spending during market downturns. The 5% rule assumes some flexibility in discretionary spending. During a 20% market crash, you might delay that European vacation or skip the kitchen renovation. This flexibility is what makes the higher withdrawal rate sustainable.
The Art and Science of Implementation
Understanding that withdrawal rates aren’t set-it-and-forget-it rules is crucial for success. Your withdrawal rate will naturally evolve over time.
Bengen emphasizes two critical economic factors that affect safe withdrawal rates: inflation and stock market valuation. When markets are expensive, you’re likely closer to a bear market, warranting more conservative withdrawals. When inflation spikes, your purchasing power erodes more quickly.
The investment strategy also matters tremendously. For those still accumulating wealth with 15+ years until retirement, Bengen suggests being 100% in diversified stocks to maximize growth. But once in retirement, a balanced approach becomes essential. He favors 60% stocks and 40% bonds, noting that anywhere from 45% to 70% in stocks doesn’t significantly affect withdrawal rates. A 100% stock portfolio becomes too risky in retirement because a bear market can be devastating when you’re withdrawing money.
Avoiding the Extremes
Bengen warns against both excessive caution and dangerous aggression. An 8% withdrawal rate is “far too high” in the current environment, overlooking the danger of early retirement bear markets. But 3% withdrawal rates are historically unnecessary conservative, likely leading to large unused wealth accumulation that prevents you from enjoying life experiences while healthy enough to appreciate them.
The sweet spot lies in the 4.5% to 5% range, with flexibility built in for adjustments based on market conditions and personal circumstances.
What This Means for Your Retirement Plan
The evolution from 4% to 5% reflects both better research methodology and the benefits of diversification. But it also requires more sophisticated thinking about retirement planning than simply picking a percentage and sticking to it forever.
Modern retirement planning must account for:
- Market conditions at retirement and throughout retirement
- Spending flexibility during difficult economic periods
- Portfolio diversification beyond simple stock/bond allocations
- Regular monitoring and adjustments based on performance
The Personal Decision
While Bengen’s research provides crucial guidance, your actual withdrawal rate should depend on your specific circumstances. Consider your health, family longevity, other income sources, and flexibility in spending. Some retirees may comfortably use 5% or even higher rates, while others might prefer the additional safety margin of 4% or 4.5%.
Remember that these rules represent the worst-case scenario. Most retirees could have withdrawn significantly more throughout history. The key is finding the balance between financial security and actually enjoying your retirement years.
The Bottom Line
Bill Bengen’s updated research doesn’t invalidate the caution that made the 4% rule famous—it refines it. The shift to 5% reflects 30 years of additional data, better diversification strategies, and a more nuanced understanding of retirement spending patterns.
This evolution could represent hundreds of thousands of dollars in required savings or years of additional working under outdated assumptions. For many current and future retirees, understanding this update could be the difference between a comfortable retirement and working longer than necessary.
The 4% rule served its purpose as a conservative starting point, but retirement planning has evolved. The question isn’t whether you should abandon all caution—it’s whether you should base your life’s most important financial decisions on research that the original creator now considers outdated.