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.
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Challenging the 4% Rule
I’ve critiqued the 4% Rule, arguing it’s outdated because of how much times have changed since the 1990s when Bill first popularized the concept. Back then, the 10-year bond yield was over 5%, so it made sense that withdrawing at a 4% rate wouldn't exhaust your savings with a 5% risk-free return available.
Today, with financial giants like J.P. Morgan, Vanguard, and Goldman Sachs lowering their stock and bond return forecasts, maintaining a 4% withdrawal rate—let alone considering a 5% rate—feels unrealistic.
I don’t mean to sound dismissive, but it’s in my nature to question established assumptions in a world that’s always evolving. As I mentioned in my WSJ bestseller, Buy This Not That, we must think in probabilities, not absolutes, since even an 80% certainty means we’ll still be wrong sometimes. The key is learning from our mistakes and adapting.
I've Been Too Cautious To Follow The 4% Rule
Since semi-retiring in 2012, I haven’t followed a 4% withdrawal rate—mostly out of caution about outliving my savings. With two young children and a spouse without a traditional job, most of the financial responsibility rests on me. We'd like to have maximum flexibility while our children are still adolescents.
Additionally, I find it hard to let go financially, having spent most of my post-college years in fast-paced cities like New York and San Francisco, surrounded by ambitious individuals.
I’m impressed with husbands who claim they’re financially independent while encouraging their wives to keep working. But to me, retirement feels most fulfilling when both partners are free from work pressures. Besides, my wife would slap me silly if I made her work while I played pickleball all day!
Given these factors, I’ve withdrawn anywhere from +2% to -10% on average since 2012. A -10% withdrawal essentially means increasing our net worth by 10% through active income generation. As a result, our net worth has steadily grown since our retirements in 2012 and 2015. At this pace, we’ll likely end up with more than we need, which would be suboptimal.
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 in America. He encourages flexibility with withdrawal rates, though it’s often treated as a rigid rule in the public eye. This is new to me as I’ve been pushing for a dynamic safe withdrawal rate for years.
- 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 if inflation was 10%. This means your withdrawals fluctuate with your financial needs and economic conditions.
- The Safe Withdrawal Rate it is computed on a “total return” basis: It makes no distinction between principal, capital appreciation, dividends, interest, and other forms of income. For example, if you have a $1 million portfolio that generates $20,000 a year in income, a 5% withdrawal rate would mean withdrawing $50,000, not $50,000 + $20,000.
Key Takeaway: The 4% Rule May Be Too Conservative
After our conversation, my biggest takeaway was that the 4% Rule may actually be overly cautious. Bill argued that a 5% safe withdrawal rate could work well for a 30-year retirement horizon. For workers who want to retire early, his research even suggests a 4.3% rate is adequate for those with a 50+ year horizon.
Since introducing the 4% Rule in 1993, Bill has adjusted his recommendation to 4.5% in 2006 and 4.7% in 2021. He now believes a 5% withdrawal rate is feasible. During his time researching 400 retirees, it turns out their average safe withdrawal rate was closer to 7%.
If you are an investor for the past 30 years, you've probably had many years of excess investment returns, far beyond the historical safe withdrawal rate of 4% – 5%. Therefore, you can take some of that money and spend it, or you could buy back some of your time and retire earlier.
Lowering the Traditional Retirement Age from 65 to 52
Increasing the withdrawal rate from 4% to 5% means retirees need only 20 times their annual expenses, reducing the savings requirement by 20% (from 25X to 20X). If Bill considers age 65 the traditional retirement age, this suggests we could retire 20% earlier, around age 52.
This is a general estimation, and actual retirement age would still depend on factors like investment returns and retirement income sources. The main risk would lie in covering expenses between 52 and 59.5, when traditional retirement accounts incur penalties for early withdrawal.
Further, ages 52 until 65 tend to be more powerful earning years for greater net worth compounding. Hence, you may still want to generate supplemental retirement income as a hedge. Keeping active in your 50s with meaningful work is generally a good idea.
So perhaps lowering the traditional retirement age by 13 years from 65 to 52 is too aggressive. Instead, 55 – 59.5 may be more appropriate. That's still an extra 5-10 years off of needing to work.
Reassessing Retirement Goals: Accumulate 20X Expenses, Then Relax?
While I still believe that accumulating a net worth equal to 25 times annual expenses might not be sufficient for retirement, hearing Bill’s argument for a 5% withdrawal rate has me reconsidering. If Bill’s latest research holds, those of us with diligent savings habits might not need to work as long as we previously thought.
For those of you under 50, now’s the time to plan what you’d like to focus on in early retirement. You’ll likely still have good health in your mid-50s, so consider activities that keep you physically engaged!
Of course, achieving financial freedom and actually retiring from the “money chase” are two separate challenges. The desire for more is hard to break. But for the disciplined savers and investors, take comfort: Bill’s research suggests we may not have to grind as hard or as long as we once thought.
Here's to more Americans retiring in their early 50s!
Readers, what do you think of my reasoning in lowering the traditional retirement age from 65 to 52 if the safe withdrawal rate has indeed shifted to 5%? Do you believe people will actually be able to step away from “the money” in their early 50s? Or will fear of running out and the pull of financial security keep most people working longer?
My Conversation With 4% Rule Creator Bill Bengen
Feel free to leave a comment if you have any questions for Bill and I'll make sure he sees them. Thanks for your reviews and shares of my podcast. Every episode takes hours to record, edit, and produce. Each review means a lot. You can subscribe to the Financial Samurai podcast on Apple or Spotify.
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The 4% Rule: Clearing Up Misconceptions With Bill Bengen is a Financial Samurai original post. All rights reserved.
I tend to agree with previous commenter Jeff’s overall message that the individual investor does not need to factor in current state of 10 year bond yields while comfortably applying the 4% rule throughout their retirement. Adding unnecessary complexity will not help the masses but add to confusion and fear. Bill Bengen’s initial discovery of the 4% rule was based on the 30-year WORST CASE SCENARIO that the US has ever experienced (including if you retired on the eve of the Great Depression…historically 1966 was the worst year to retire and the SWR in that case was 4.2%). The actual “average” successful withdrawal rate was >6%. A few years later, the Trinity Study confirmed Bengen’s work. Since that time more complex studies that included different variations of asset classes have been conducted and they all tend to settle at >4% for a SWR (again, WORST CASE SCENARIO). If retiring early and planning on a 40 to 50 year retirement the SWR drops to 3.5% but anything less than that is considered draconian by the study authors. Michael Kitces has done excellent work in the field and is an engaging speaker. His most recent analyses concur with Bengen’s work. Sam, setting up a pod interview with Kitces would be very interesting and could help clarify reader questions or simmering arguments. Cheers
Good stuff. I hope readers realize there is no one “right” solution to retirement spending and investing, as there are many variables and preferences.
If Bill‘s forecast of a 5% safe withdrawal rate is true, then the vast majority of American workers should be able to retire in their mid 50s.
But as we know, academics is different from real life, and I doubt the average age of retirement will decline by five years, let alone 10 years.
I could interview Michael on how to run an RIA business if that would interest anybody? But I really wanna talk to people who have actually retired about retirement.
Sam,
As always thanks for a great weekly informative email; I looked back to when I retired at age 59 in 2014 and expenses equal very close to 25x. Since that time, portfolio growth has been great and value has more than doubled; expenses have grown as we spend a lot of time traveling overseas, but expenses have not doubled, much less; All investments self-managed, and mostly growth tech stock oriented;
your statement:
…but your investments also need to generate enough passive incometo cover your living expenses.
Most of my retired friends do not self manage investments at all, some say they do but really a lot is “check up calls” from their broker of what he is buying or changing in their accounts; Their brokers seem to be into large cap “big dividend” stocks or ETFs or the dividend aristocrats, etc their training is older or retired people get dividend stocks.
I have always focused on total annual return of a stock or ETF or really any investment, IE growth in value for the year ‘plus’ dividend paid; what is wrong with selling a few shares or whatever you need for expenses, no issue in my book esp in a growth portfolio; income can come from selling shares you are using for expenses, why not esp if you like and believe in the stock or ETF you own over selling and buying another that just happens to pay a larger dividend but little growth potential (utility stock, etc); Am I missing something?
Seems like there was a story about someone asking Warren Buffet at an annual meeting years ago why Berkshire did not pay dividends; I think his answer was something similar to “Because I can make more on the income than you can or something similar. Sell a share or two if you need money for expenses”. (Hope this was a real story, but let’s face it, he could make more than me for sure.)
All that being said, Expenses don’t have to actually equal passive income for me.
Also one of my favorite saying is “One size does not fit all”, comparing your home cost and operating expenses/taxes in SF with mine in rural GA would be very different; but you will enjoy some great value increases in SF for sure I hope, much less so for me; “although I did pay a plumber a minimum call cost of $150 and that was for about 10 minutes of work…and well worth it.
All the best and thanks for all the info and ideas you share,
FS
25 times annual expenses should be fine if you’re retiring around 55 years old and can keep expenses minimal until you can withdraw penalty free in 4 1/2 years.
I agree that if you’re retiring at 35 or even 45, it won’t be enough or it certainly won’t feel like enough. There are too many life changes.
Good to see workers like Jeff debate how much is necessary for retirement. But the reality is, it’s different for everyone and it’s just a guideline. And you won’t really know how much you will be comfortable with withdrawing until about the third year in retirement.
After huge returns in 2023 in 2024, I am comfortable with withdrawing at a 5 to 8% rate.
– Dylan (retired at 59 in 2023)
For those who don’t understand the correlation between the 10-year bond yield and safe withdrawal rates.
Yes, the 10-year Treasury bond yield, often considered a proxy for the risk-free rate, has a significant impact on safe withdrawal rates (SWRs) in retirement, and there is a meaningful correlation between the two. Here’s how:
1. Risk-Free Rate as a Baseline for Returns
The 10-year Treasury yield is a benchmark for setting expectations about future returns on bonds and, indirectly, stocks. Since safe withdrawal rates depend on the real rate of return (investment returns adjusted for inflation), changes in the risk-free rate influence portfolio returns, particularly for retirees holding bonds.
• Low 10-Year Yield: When the risk-free rate is low, bond returns are likely lower, reducing the overall portfolio returns. This limits how much a retiree can safely withdraw without depleting their portfolio.
• High 10-Year Yield: When the risk-free rate is higher, bonds offer better returns, potentially boosting the portfolio’s overall performance and allowing for a higher withdrawal rate.
2. Relationship with Stock Returns
While the 10-year Treasury yield primarily affects bond returns, it also influences stock valuations through the equity risk premium (the extra return investors demand for holding stocks over bonds). A higher risk-free rate can lead to:
• Lower stock valuations (via higher discount rates), potentially reducing future stock returns.
• More attractive alternatives in bonds, shifting some retirement portfolios toward safer fixed-income options.
If stock returns are expected to decline alongside low bond yields, safe withdrawal rates might also need to be lower.
3. Historical Correlation and SWR Adjustments
The original 4% Rule assumes a balanced portfolio (typically 60% stocks, 40% bonds) and a long-term real return averaging 4%-5%. However:
• When the 10-year Treasury yield is historically low (as seen after 2008 or during 2020-2022), studies show that a 4% withdrawal rate may be too aggressive. Lower bond yields reduce the margin of safety for retirees.
• Conversely, in high-yield environments (e.g., the 1980s), retirees could withdraw at higher rates because of robust fixed-income returns.
4. Monte Carlo Simulations and Lower Yields
Financial planners often use Monte Carlo simulations to assess SWR sustainability. These simulations consider the starting bond yield as a critical input:
• A low starting yield often reduces SWR projections, as it suggests that bonds won’t provide enough buffer if stocks underperform.
• A high starting yield increases confidence in withdrawal rates, as bonds provide stable income even if stocks face volatility.
5. Practical Implications for Retirees
• Dynamic Withdrawals: In a low-yield environment, retirees may need to start with a withdrawal rate closer to 3% or lower to preserve portfolio longevity.
• Portfolio Adjustments: Retirees may need to consider alternative income-generating assets, such as dividend-paying stocks, real estate, or annuities, to mitigate the impact of low bond yields.
• Inflation Consideration: If bond yields rise due to inflation expectations, it can erode the real returns of fixed-income securities, impacting withdrawal strategies.
Bottom line
There is indeed a correlation between the 10-year Treasury yield and safe withdrawal rates. Low yields generally suggest lower safe withdrawal rates due to diminished fixed-income returns and potentially lower equity returns. Conversely, higher yields create a more favorable environment for retirees, allowing higher withdrawal rates with less risk of portfolio depletion.
In your newsletter, you asked if I agreed on your assessment if the 4% rule works for early retirees.
1. Include primary residence = No. Agreed with you.
2. Does your 4% stack need to be liquid = Yes. With the added requirement of you need enough in brokerage to cover you through 59.5.
3. Does this liquid stack need to be limited to dividends = No. Selling capital gains is great as well. And, there are some tax advantages to capital gains.
Key Hedges = Social Security/Medicare, Kids moving out of the house and getting independent, selling primary home late in life.
Thanks for all of your content. David
Thanks for sharing the discussion and clearing up some misconceptions about the 4% rule.
I’ve definitely noticed a lot of people who are not retired and not withdrawing anything, comment a lot about safe withdrawal rates, the 4% rule, and what people should do in retirement like Jeff below. It’s funny to read their opinions because they really have no idea until they are actually retired.
I’ll just say that as someone who retired 10 years ago, these rules are just guidelines. You’ll have to adjust your spending and withdrawal rates as conditions change. Life happens, both good and bad, all the time.
And when the 10 year treasury yield increased to almost 5.5% in 2023, it absolutely made me feel more confident about retirement. I shifted some assets to 10 year and 20 year treasury bonds and it felt great to be able to withdraw at 5.5% and not touch principal. I essentially locked in a 35% increase in spending for that new position, compared to withdrawing 4%.
Hi, care to expand on where I have said anything about what people should do in retirement? For example, I am glad you shifted certain assets from, I am assuming, stocks to bonds in 2023, only for the market to go up by almost 50% since then. I could care less about any individual but this is a perfect example of the pitfalls of this bond rate x 0.8 strategy. Relying on the bond rate as some kind of leading indicator of stock market returns doesn’t make sense as the two do not have a correlation (at least this century – you can look it up). Would love for one of your bond rate geniuses to run a back test of this 0.8 x bond rate strategy and publish the results
As a retiree, my focus is on capital preservation and cash flow rather than maximizing returns. I’ve already built a net worth large enough to support a happy and fulfilling lifestyle, which is why I retired 10 years ago at 43.
From what I understand, Bill Bengen’s study of 400 retirees recommends a 60/40 portfolio. When I retired, I was closer to an 80-85/15-20 portfolio due to my younger age and higher risk tolerance. Looking back, I feel incredibly fortunate—any gains above 7-10% annually have been a bonus. In fact, I’ve accumulated about $2 million more than I initially accounted for since retiring.
After 2023, I’ve maintained a 75/25 stocks-to-bonds allocation because I’m still comfortable with some risk. It’s also satisfying to lock in those 5%+ risk-free returns. I’ve been following a dynamic safe withdrawal rate pegged to 80% of the 10-year bond yield. This approach feels practical as it adjusts to inflation, economic conditions, and expected returns. That said, I may end up with more wealth than I’ll ever need.
How is your portfolio structured as a current worker? I’d encourage you to keep working hard and saving aggressively. Based on your other comments, it sounds like you are a little frustrated. But hang in there!
Lol, glad you feel satisfied when the market has given a 50% return since you took your wise decision. And this was after the market took a hammering in 2022. So not only did you lose money in 2022, but then took some of those losses and locked in a 5.5% return. All while the stock market has given about 5x that return each of the past two years. The 0.8 x bond rate withdrawal may ‘feel practical’ but it has no correlation to success because there is no correlation of bond rates to ‘expected returns’. Look up the data retired genius. The bond rate has LITTLE TO NO CORRELATION to stock market returns. You are a walking example of why this strategy doesn’t work.
And if Sam feels so strongly about it, he should have brought it up to Bill. Why is Bill advocating a higher withdrawal rate (4.7% or even 5%) than the current bond rate which is lower than either of those withdrawal rates? All of Sam’s criticisms of the 4% rule to date has been based on that theory, that it’s no problem withdrawing lower than than the bond rate but it’s a losing proposition apparently when the bond rate is lower than the withdrawal rate. When he had to chance to question Bill on it, crickets. And I challenge you or anyone to ask Bengen about this theory – he will give you the exact answer I am giving you. The bond rate has no correlation to retirement withdrawal rates because the bond rate has little to no correlation to stock market returns.
And looks like age hasn’t taught you manners either, but you still have time, hang in there!
The statement “The bond rate has little to no correlation to stock market returns” is not accurate. While the correlation can vary depending on the specific context and time period, bond rates (often represented by yields on Treasury bonds) generally have a negative correlation with stock market returns, though the strength of this relationship fluctuates.
Why Bond Rates Impact Stocks:
1. Discount Rates: Bond yields influence the discount rate used to value future cash flows of stocks. When bond yields rise, the present value of future cash flows decreases, making stocks less attractive.
2. Cost of Borrowing: Higher bond rates increase borrowing costs for companies, potentially lowering profitability and growth, which can negatively impact stock prices.
3. Risk-Free Alternative: Rising bond yields offer a more competitive, safer return, which can shift investment away from riskier assets like stocks.
4. Economic Signal: Bond yields often reflect expectations about economic growth and inflation, which also impact stock market performance.
Correlation in Practice:
• During normal economic conditions, bond rates and stock market returns may show some inverse correlation.
• In periods of high uncertainty (e.g., financial crises), both stocks and bonds can move in tandem as investors seek safety in bonds.
• Over long-term horizons, other factors like corporate earnings and global economic trends may dilute the bond-stock relationship.
This is basic finance that anybody who studied finance in college, got an MBA, and has been investing understands. But it’s never too late to learn.
A lot of inexperienced investors who’ve only been investing in stocks since after the financial crisis don’t understand the value of diversification into bonds, given stocks have generally gone up. Put the longer you invest, the more downturns you will see, and you’ll want to protect yourself from sequence of return risks.
You don’t have to feel bad for me. I am over eight figures invested in the stock market, and probably made way more this year than your entire stock portfolio or net worth.
Good job googling what bond rates mean but perhaps you should re-read the answers Mr. MBA. There basically is no correlation between bond returns and stock market returns – since you are adept at googling, you can google actual data on that lack of correlation.
Now you are shifting goal-posts to portfolio composition. No one denies that one needs to have bonds in their portfolio both pre and post retirement. That is not what any of this discussion on withdrawal rates is about – either in this post, or previous ones, or the podcast. In the midst of thinking of up insults, you apparently have a reading and comprehension problem as well. The issue is tying withdrawal rates to the bond rate. Using the bond rate as some kind of indicator to change overall withdrawal rates INSTEAD of using what Bengen advocates (4 or higher %) is the question. Sam’s acolytes such as yourselves seem to think WITHDRAWAL tied to bond rates is the way to go. Google this withdrawal method (bond rate x 0.8) and see the results over a long term and across many different portfolio compositions – the results are horrible. Wish Sam or one of you acolytes would challenge Bengen on that point and see the response you get. It would be exactly what I am telling you – that withdrawal strategy doesn’t make sense because the bond rate is not some kind of leading indicator of overall market returns. In fact you end up draining your portfolio faster because of the negative correlation.
And trust me, you don’t want to compare portfolios internet tough guy. Yours makes me laugh.
Sure, the success rate is even higher if you only withdraw at 80% of the risk free rate of return. If you always withdraw at a rate less than the guaranteed income amount you can earn, you’ll never run out of money.
I’m surprised you do not understand this. But maybe that’s why you’re arguing so much and still have to work? I guess Bill is right that there is still so many more people to educate.
Ha, game set match Mr. MBA. The fact that you think withdrawing 80% of the risk free rate from a retirement portfolio is some kind of infinite money glitch, proves the point. You don’t have a clue about withdrawal strategy versus market returns.
Let me break it down slowly for you since 10 years out of the workforce may have atrophied all that ‘knowledge’ you gained during your prestigious Finance degree and your MBA. Just because the bond rate is a certain number, it doesn’t mean withdrawing a lower number than that bond rate from a portfolio that is a MIX OF VARIOUS ASSETS is some kind of infinite money glitch.
Take a practical example – during Covid, the bond rate fell to under 1% which is why Sam advocated for a <1% withdrawal rate at that time. However the bond rate had no correlation to the overall market, as the S&P returned >16%. On the other hand, the bond rate increased to north of 4% by the latter part of 2022 but the market went down almost 20% that year. I am not cherry picking data – feel free to look up correlation analysis and you will see there is no correlation between bond return and stock market returns, at least since the dot com bubble.
If you play out this scenario over several decades, you will see that failure rates get quite high since you are withdrawing more FROM YOUR PORTOFLIO based on a false indicator (bond rate) in down markets, and potentially not maximizing withdrawals in other years. It’s a sub-optimal strategy at best, and a much higher risk of portfolio depletion at worst. This is not just some opinion of mine – someone has done an analysis of this Financial Samurai Dynamic Withdrawal rate that is tied to the bond rate and the results are published online for all to see. There is no opinion there – just plain data analysis. Feel free to look it up and do your own back test using data and not emotions if you want. I am sure Sam would even appreciate a rebuttal guest post from you.
There are many strategies that adjust based on the market and make sense, e.g. reducing your withdrawal in a down market, and increasing it in an up market. But those decisions are made based on the overall market and actual returns, not thinking about some kind of non-existent leading indicator such as the bond rate. There are also other strategies for example a bucket strategy where you keep a certain number of years of expenses in safer assets such as bonds and use those when the market is down. Again, totally makes sense but that’s a different methodology, not just applying a blanket withdrawal rate on your portfolio – a withdrawal rate that’s pegged to the bond rate. If Sam wants to advocate for any of those kinds of withdrawal methods, no problem, but the only explicit guidance he has given on his strategy is this 0.8 * bond rate
Lastly, its hilarious that you think Bill has something to educate me about as opposed to Sam. All of Sam’s critiques to date of the 4% rule have been in the context of the bond rate at the time of the 4% rule being developed (1990s) – but when he had a chance to question Bill, why did he not bring this point up? He could have brought up his original critique / question regarding the 90s, or even today when Bill is advocating for a higher withdrawal rate than the current bond rate, or even in the future by stating that how can we land on a 4.7 or 5% withdrawal rate for infinity when we don’t know what risk free rates will be in the future? I will be charitable and not assume much but one could easily surmise that he knows Bill would dismiss the concern based on exactly what I have stated in all of these posts. Withdrawal strategy is very different from pure investment decisions – and a bond rate based WITHDRAWAL strategy is sub-optimal at best since the bond rate has no correlation to stock market returns.
All good. A <1% withdrawal rate can also mean investing the cash flow between the original higher SWR, not just spending less. This is why having a dynamic mindset is important.
I understand these concepts are hard to understand when you’re still working and don’t have a finance degree. But once you do retire, it’ll get easier.
A < 1% withdrawal rate will discourage some people from retiring because they will not be able to have an investment portfolio large enough for the withdrawals to cover the gap between Social Secuity/pension and living expenses.
Hi Sam, big fan of the blog and your work but you continue to show a lack of understanding of how the ‘4% rule’ (or more accurately as discussed on the podcast, 4% guideline) came about. Even in this article, you state that Bill came up with the 4% rule in the 1990s when bond yields were close to 5%. You seem to be reasoning that Bill made the rule / guideline based on the fact that you could, in the 1990s, get a risk free return of 5%. However that is NOT how Bill came up with the guideline. He came up with the guideline by examining 30 year blocks of returns, starting in 1929. Practically speaking, he ran a withdrawal model for years 1929 – 1959, assuming someone retired in 1929. He used the actual market returns for the following 30 years, and various portfolio mixes (stocks/bonds), and withdrawal %s. Then he did the same modeling exercise for 1930 – 1960 returns while testing various withdrawals %s. And so on for every 30 year block. The exercise showed that a roughly 4% withdrawal rate had a very high rate of success, regardless of when a retirement started. He ran 30 year simulation so I believe the last 30 year block he ran was from 1964 – 1994. The bond rates in the 1990s have no relation to his work because he came up with the guideline using historical returns, not by looking at the conditions as they were in the 1990s. I am actually surprised Bill himself didn’t bring this point up since apparently he’s an active reader of the site and I am sure he has come across your (incorrect) reasoning multiple times. And as he mentioned, we now have almost 30 additional years of data since his original work and hence his revision upwards. Again, he’s using 30 year rolling blocks of time / returns / withdrawal rates – not looking at safe free yields available today which is the mistake you continue to make.
And before you ask, no, I am not retired and am considering a safer 3% withdrawal rate which has shown to have a 0% failure rate regardless of market (as long as the portfolio has at least 50% stocks).
Thanks Jeff. I know what Bill did to come up with a 4% SWR. Please listen to the podcast.
I’m simply stating that a retiree would never run out of money withdrawing at a rate lower than the risk-feee rate of return – like withdrawing at 4% when we could locked in 5.4% Treasuries for 20-30 years in 2022.
Let me know what you think of the conversation and anything else you think I may be misunderstanding and I can add it to the post.
Why only withdraw at a 3% rate given the 4% rate didn’t have any failures with the 400 people Bill studied, and Bill is now suggesting a 5% SWR is more appropriate?
Thanks for the response. I was going off of the following paragraph which makes it fairly clear that you are drawing an inference that Bill’s 4% withdrawal guidance back in the 1990s was based on the risk free return at that time:
“I’ve critiqued the 4% Rule, arguing it’s outdated because of how much times have changed since the 1990s when Bill first popularized the concept. Back then, the 10-year bond yield was over 5%, so it made sense that withdrawing at a 4% rate wouldn’t exhaust your savings with a 5% risk-free return available.”
Additionally, this post (https://www.financialsamurai.com/proper-safe-withdrawal-rate/) further clarifies what you believe the safe withdrawal rate to be – “If there’s one thing to remember from this article, it’s this Financial Samurai Safe Withdrawal Rate (FSSWR) formula: 10-year bond yield X 80%. We can call this the Dynamic Safe Withdrawal Rate because as times change, so will your withdrawal rate.”
You may not be misunderstanding Bill’s guidance but the posts, both this one and the prior one I linked above, doesn’t educate the reader that withdrawal rates, the way they are generally understood by most people, are based on an analysis of historical market performance and inflation data. By continuing to mention bond rates, you make it seem like a certain withdrawal % works at certain times, but not at others (due to the changing bond rates). That is NOT what Bill’s or any other withdrawal guidance is based on – in fact it’s the opposite. The idea is that a 4% withdrawal works with a high probability of success, regardless of market conditions, e.g. great depression, the great recession etc. Also the 4% guidance doesn’t care about what’s occurring with the bond markets, treasuries etc. Said simply, most people do not link withdrawal strategies to current bond rates or other such details but rather based on a historical analysis of actual market performance and inflation data. Bringing up bond rates when speaking of withdrawal rates is at a minimum confusing, and at a maximum setting people up for saving way more than they will ever need.
Regarding the 3% versus 4% question, while I have much respect for Bill’s work, other analysis I have seen does show failure rates when you start to creep up over 4%, especially if one wants to preserve capital. In no scenario has a 3% withdrawal rate not ended up in capital preservation.
Love your work – one request, I would also like you to do a review of the dynamic withdrawal strategy that basically states that during retirement, one can give themselves a ‘raise’ during up markets and throttle back spending in down markets. See this article for more details: https://www.vanguardinvestor.co.uk/articles/latest-thoughts/retirement/flexible-approach-support-retirees-good-bad-times
From my minimal research, it seems like its also a fool proof way as long as one has sufficient ‘fat’ in the budget in order to take cuts if the markets take an extended downturn.
Thanks again for the response.
Got it. Do you think it would help if I explain things further so you and other people are not confused? Or at least explain it so that readers don’t think I’m confused? What are some areas in the podcast interview that demonstrates my lack of understanding so I can do a better job next time?
All investment decisions are based off the risk-free rate of return. Then there is an equity risk premium above the risk rate to return, as the demand investors require to take on such risk in stocks and other risk assets. The trick is to explain in a way that most people can understand. If you have some suggestions, I’m all ears.
How old are you and when do you plan to retire? Deciding on a 3% SWR after reading this post and listening to this podcast is a failure on our part to convey our point. So you may like this post: 25X Annual Expenses Is Not Enough To Retire Early
Here is a post on using my dynamic safe withdrawal rate: Dynamic Safe Withdrawal Rate In Action
If you would like to write a guest post about your experience with safe withdrawal rates and retirement, I’m all years. There is a big difference between crunching the numbers and following the numbers. So it’s always good to hear from others on what they did.
Thx
Ha I think you are just joking at this point. I have pointed out several parts of this post and your other one where you clearly state a linkage between bond rates at the time of retirement and safe withdrawal rates. Here’s another quote from your post:
“Let’s look at where the 10-year bond yield was back when the Trinity Study was published in 1998.
In 1998, the 10-year bond yield was between 4.41% to 5.6%. Let’s say the average 10-year yield rate was 5% in 1998.
Therefore, of course you’d likely never run out of money in retirement following the 4 percent rule. Back then, you could earn 1 percent more on average risk-free! And if you looked at the 10-year bond yield in 1994, it was even higher.”
You are conflating the year of the study (and the bond rate at the time) as the basis for the safe withdrawal rate. Said differently, you basically make the claim that one’s withdrawal rate is different based on when they retire. And this is directly opposite of what the Trinity and other studies show – they provide safe withdrawal numbers with related probabilities of success regardless of what’s occurring with broader macro conditions at the time. Also by the way your inference that someone lock up their money into bonds at retirement (thereby enjoying the risk free return) would lead to failure, since a bout of high inflation will quickly eat away into the principal.
If you think you are explaining withdrawal %s in ‘a way most people will understood’, I fail to see how bringing in a completely unrelated matter of bond rates is helping to simplify the matter. Rather look at returns and inflation data against time and portfolio compositions, or analyze various withdrawal strategies, e.g. the dynamic withdrawal one that I suggested.
Its disappointing that you do not take ownership of making such a mistake. I have given you several examples of your own words where you are stating that the withdrawal rate is dependent on the risk free rate of return at the time of retirement, when it reality, it has no correlation and no serous person uses it as a basis for determining a safe withdrawal rate. I know you won’t admit the mistake but to act like I and a few others are confused that you were advocating for a withdrawal rate that’s correlated to the bond rate at the time is frankly surprising. Read the comments under your own post, and for further clarification, I would suggest you read the following – its not like there’s a small band of confused people out there. You clearly advocated for an extremely low withdrawal strategy that’s linked to the bond rate.
Lastly, I don’t need to write an article on my experience since as I stated, I am not retired. And there are many excellent articles already on the topic, the summary of which is between a 3 – 4% withdrawal rate is more than safe enough.
Got it, thank you for sharing your thoughts, Jeff. Indeed, based on my dynamic safe withdrawal rate formula, not Bengen’s 4% Rule, when the 10 year bond yield declines, so does the recommended withdrawal rate.
I think it’s important to differentiate between Bill‘s work and my work. That’s the beauty of financial analysis. It’s like a dance with no hard rules.
Check out my dynamic SWR post and podcast and let me know what you think. Thanks!
You either didn’t listen to the podcast episode or don’t understand finances as well as you think.
It’s up to you if you want to withdraw at a 3% rate. But it’s inconsistent with your understanding of the 4% rule and what was said by Bill in the podcast given he’s advocating a higher rate.
Given you are not retired and don’t have a finance background, I would be more humble in telling people who are retired with a finance background what they understand and don’t understand.
The smartest people are the ones who are open to different possibilities.
I will be polite and assume you think I have an issue with the 4% rule / guideline. I do not. I completely agree with Bill’s analysis and suggestions. My personal preference for 3% is not to discredit or disagree with Bengen’s analysis.
My issue is when Sam posts the Financial Samurai Safe Withdrawal Rate in the context of the 4% rule. If Sam simply posted and preached that one should withdraw at 80% of the bond rate, no problem. That’s his prerogative and perspective. However he has always stated these resulting extremely low withdrawal rates, e.g. <1% by stating that the 4% rule came up in an environment of higher bond rates, when in fact, the bond rates at that time or any other time have no bearing on either Bengen’s study or other safe withdrawal strategies.
And if you think my 3% preference is some kind of low ball number, you should look at Sam’s suggestions (https://www.financialsamurai.com/proper-safe-withdrawal-rate/) which basically advocates for a <1% withdrawal rate. My issue is with him disagreeing with the 4% rule in all of his posts to date, by basing it on the fact that the bond rate in the 1990s was much higher. This is not an inference of his writing but directly what he states. Please review the above post. My point is that that is incorrect – just because Bengen’s work was done in the 90s doesn’t mean that Bengen was using some kind of available bond rates or other macro economic factor at that time. In fact, Sam in his earlier post linked above says that the withdrawal rate should change with the bond rate – again, this is the opposite of what Bengen’s study tells us. The 4% rule has generally worked through all sorts of markets. I just wish Sam had brought up his theory around basing the FS Safe Withdrawal Rate around the current bond rate to get Bengen’s reaction.
I am assuming you are aligned with Sam’s thinking and planning for a <1% withdrawal rate – good luck to you if that’s the case.
Hi Jeff,
Thanks for being polite.
Bill’s research hinges on analyzing historical returns, inflation, and bond yields. So, referencing the 10-year bond yield being higher than Bill’s 4% in the 1990s is entirely relevant. Sam is simply highlighting—and rightly so—that withdrawing at a 4% rate when the 10-year bond yield was over 5% isn’t exactly groundbreaking. It’s just logical since expected stock returns would naturally be higher, given the equity risk premium.
A sub-1% safe withdrawal rate in March 2020, when the 10-year bond yield was at 0.6% and the world seemed to be unraveling, makes sense to me. Saving more for a rainy day or reallocating those savings to investments was the prudent move.
However, maintaining a sub-1% withdrawal rate today, with the 10-year bond yield at 4.43%, doesn’t align well with current conditions. Based on the dynamic SWR approach, retirees could withdraw 80% of the bond yield, or about 3.54%, which makes your point less relevant.
Interestingly, your 3% desired SWR aligns more closely with Sam’s dynamic SWR formula than you might think—especially during September and October 2024, when the 10-year bond yield ranged between 3.74% and 4%.
Stay flexible, my friend.
I think I have made my points clear but based on your response, I will hold up a mirror and request that you read Bengen’s work carefully. Bengen did not sit around in the 90s and say, geez, bonds are giving 5% so people can withdraw 4%. If that was so, he would keep updating the safe withdrawal % every year based on the bond rate. Sam’s criticism of the 4% rule was not through proving it has a higher than acceptable failure rate, it was by stating that 4% may have worked in the 90s when the bond rate was high. Since I am not allowed to post outside links, I will just ask that you google some analysis of this approach (tying withdrawal rates to bond rates) to understand that it has high failure rates. Also, bonds and stocks do not have a positive correlation all the time so thinking about withdrawal rates in the context of bond rates makes no sense.
This is all proveable mathematically. Simply google failure rates since 1929 for a 3 or 4% withdrawal rate. You will see plenty of data tables that show the results. No need to be changing withdrawal rates every time the bond rate updates. To put it simply, the bond rate has little to no bearing on a safe withdrawal rate, and as I said, Sam is well within his rights to give that guidance. However he has criticized the 4% rule several times until this podcast, and the criticism was NOT BASED on actual performance, but a hypothesis that Bengen’s rule came about in the time of high risk free returns so it made sense then but doesn’t make sense now. If you don’t believe me, here’s another excerpt:
“The 4 percent rule was first published in the Journal Of Financial Planning in 1994 by William P Bengen. It was subsequently made popular by three Trinity University professors in 1998 called the Trinity Study. Inflation and interest rates were much higher and pensions were common. The 4 percent rule is the most common safe retirement withdrawal rate cited.
Some like to naively claim that they are financially independent once they achieve a net worth equal to 25X their annual expenses. But if you think logically, there’s a big problem with the 4 percent rule.
Let’s look at where the 10-year bond yield was back when the Trinity Study was published in 1998.
In 1998, the 10-year bond yield was between 4.41% to 5.6%. Let’s say the average 10-year yield rate was 5% in 1998.
Therefore, of course you’d likely never run out of money in retirement following the 4 percent rule. Back then, you could earn 1 percent more on average risk-free! And if you looked at the 10-year bond yield in 1994, it was even higher.”
The point is that some version of the Trinity study has been re-run almost every year. You wouldn’t not run out of money in the 90s by following the 4% rule because the bond rate was high – you wouldn’t run out of money simply because the 4% guidance works regardless of market. It’s really not that difficult a point to understand.
Clearly, you are quite passionate about the subject. The 10 year bond yield is the basis by which to calculate expected returns for stocks and other risk assets. So to proclaim a one to one and a half percent lower withdrawal rate than what you can get risk free is not that interesting.
But if Bill were to suggest a 7% withdrawal rate, the average withdrawal rate from the 400 people studied in his study that didn’t run out of money, now that would be interesting.
Being able to share this perspective takes greater courage given it is one and a half to 2% above the risk right at the time in the 1990s. That is the point I am making, and so is Sam.
And my point is exactly that – Bengen wasn’t doing anything based on courage but simple math. Comparing the 4% withdrawal strategy in the context of the bond rate at the time of the guidance makes no sense. If it did, we would assume for example we could critique Bengen’s updated guidance (closer to a 5%) against the current bond rate which you right pointed out is about 3.7 – 4%. So Bengen is clearly advocating for a higher withdrawal than the risk free return but I don’t see you or Sam criticizing him now for that (as opposed to critiquing the original 4% guidance in context of the bond rate at the time).
Not that difficult a point to understand – safe withdrawal rates for long retirement periods of time don’t have any correlation to bond rates, either at the beginning, middle or end of retirement. Centering a critique of the original guidance mainly based on the bond rate at the time of the guidance makes no sense.
And my point is exactly that – Bengen wasn’t doing anything based on courage but simple math. Comparing the 4% withdrawal strategy in the context of the bond rate at the time of the guidance makes no sense. If it did, we could for example critique Bengen’s updated guidance (closer to a 5%) against the current bond rate which you right pointed out is about 3.7 – 4%. So Bengen is clearly advocating for a higher withdrawal than the risk free return but I don’t see you or Sam criticizing him now for that (as opposed to critiquing the original 4% guidance in context of the bond rate at the time).
Not that difficult a point to understand – safe withdrawal rates for long retirement periods of time don’t have any correlation to bond rates, either at the beginning, middle or end of retirement. Centering a critique of the original guidance mainly based on the bond rate at the time of the guidance, makes no sense.
As a 30 year professional in the finance industry, it is absolutely vital to compare the risk rate to return to any potential investment return. And when you’re talking about safe withdrawal rates, your livelihood, it is even more important to compare it to what you can get guaranteed.
Looking at this dialogue, it seems like you have a fixed mindset and are unable to approach the 4% rule from different angles. But as we learned from investing, life experiences, and business school, having a growth mindset is better.
It sounds like you are still young and a long way from retirement. And it’s hard to not know what you don’t know. So it’s probably best for you to do whatever you think is best. And once you get to financial independence, to share your thoughts.
Lol, I wouldn’t tout your 30 years in Finance as a positive. The industry is such a mess that the it’s most famous personal finance guideline, the 4% rule, came from someone who just 3 years earlier was running a soft drink plant. Active fund managers cannot outperform a simple market index over any reasonable time period. Experience in Finance is more like touting experience being a ship builder of the Titanic – might want to hide that fact.
The fact that you are saying retirement withdrawal rates should be looked at in the context of bond rates is in fact a bug, not a feature. Look-up correlation analysis of stocks and bonds – in this century, there is no correlation. I will repeat since I am not allowed to post links to content that critiques Sam, you should do a google search of this flexible withdrawal strategy that’s tied to the bond rate. It has a high failure rate simply because stocks and bonds do not have a high correlation over extended periods of time. So when the bond rate was high and you would theoretically withdraw more, market returns have generally been poor and would have cratered your portfolio. If you want to say that Sam is advocating for a 100% bond portoflio when the bond rate is high, you would be at the mercy of periods of high inflation which would again, crater your portfolio.
Lastly, your online perception of who I am is as bad as your acumen regarding retirement withdrawal rates. Stick to the facts and not potshots.
Why not share your background? This way, we don’t have to guess solely based on your comments. It’s worth providing some context for who you are so we can understand why you disagree with the dynamic rate concept and risk free rates. As risk free rates change, so do SWRs and expected returns.
I’m trying to understand what your ultimate point and goal is of the commentary?
My background is irrelevant to the discussion because I am not stating anything based on my supposed authority (or lack thereof). If I was claiming something as correct due to my background, that background becomes relevant. I could care less about any else’s background either which is why you touting your finance one is hilarious. We are anonymous strangers on the internet – let’s discuss facts and ideas, not try to be dismissive of someone just because of prejudiced feelings about their background. Me giving you a 2 line biography doesn’t do anything to validate or invalidate the facts.
I am glad you asked for the ultimate point of this commentary. There are a few:
1 – Sam has long been a critic of the 4% rule (and yes, a critic). His main critique was that Bengen came up with the rule in the 90s when the risk free rate was higher than 4% so of course 4% made sense then. I have pointed that the timing of the rule being created (the 1990s) had nothing to do with 4%. It’s not like Bengen revised his rule up or down based on the bond rates. To give you a silly example, I could say the rule came up when the Yankees were doing well in the 1990s but they aren’t doing as well any more so we need to change. That may be the case but the rule has nothing to do with the Yankees.
Furthermore, (and more critically), I am not against a dynamic withdrawal strategy. I am however against a dynamic withdrawal rate based on the bond rate because it has a much higher failure rate than the 4% rule and several other strategies. The reason as I have stated is that just because the bond yield is high doesn’t mean the stock market returns will be high. There isn’t a strong correlation. As a recent example, someone in this thread said that the risk free return around Covid was 0.9% so it made sense to drop down your withdrawal. As we all know, the stock market had terrific returns in 2020. On the opposite, the bond rate crept above 3.5% in 2022 but the market got absolutely hammered. I am not cherry picking data, you can easily look up correlations between bonds and stocks and there has been none for this century. I wish Sam or someone gifted in Finance like yourself would run a backtest and publish the results of this dynamic safe withdrawal rate. Hint: someone has done that already, you can find the results online and they are not good. Would welcome a rebuttal since Sam continues to give this recommendation. At a minimum it is sub-optimal and at a maximum it may cause severe harm to someone in their retirement if they are indeed using this strategy of 0.8 x the bond rate.
2 – Since Sam has shown significant pushback on the 4% rule on his posts, I would think he would challenge Bengen more directly on the podcast when he had the chance. He should have brought up this point that ‘Hey Bill, I know you came up with the 4% rule in the 1990s but the risk free rate at that time was higher, don’t you think we should knock it down, now that risk free rates are lower’. I can assure you Bengen would have dismissed this by stating some version of what I stated above – the risk free rate while helpful for other things regarding investment decisions, is not in any way helpful when determining withdrawal rates (since there is minimal correlation as I stated above). On a side note, Sam’s other minor critique has been that Bill and others don’t follow the 4% rule themselves since they have income coming in, and I will commend him for bringing that point up on the podcast. And Bill quickly dismissed it by saying (I am paraphrasing) while that’s true, it has no impact on withdrawal strategy as that money is gravy.
Many look up to this terrific blog for guidance. I just wish Sam or one you Finance geniuses ran a backtest, similar to Bengen’s, to come up with success rates for this bond rate x 0.8 withdrawal strategy. I have seen someone else do it, and again, its published work, and it shows a high degree of failure. Would love to see a counter if that’s not the case.
I pulled the plug at 52 so good to see that in his analysis! However, I did go into entrepreneurship and make a little money during my “retirement”. ;)
Enjoyed this interview and learned a ton. One question that I have is how to allocate the 40% to bonds. What kind of bonds and duration, etc. comprise the bond portion of a 60/40?
That chart forecasts the best returns in either emerging markets or ex-US markets. I’ve been hearing the same thing for decades yet they always suck. Although emerging markets can have good years, the bad years are very bad. The 10-year return is 3.43%. https://www.msci.com/documents/10199/c0db0a48-01f2-4ba9-ad01-226fd5678111 The ex-US return is a little better, at 5.7%.
Hi Sam,
I really enjoyed this episode with Bill Bengen—it’s always fascinating to hear the origin story and evolution of the 4% rule straight from its creator! Bill’s insights about flexibility and how market conditions have shifted over the years were particularly enlightening.
Listening to the discussion, I couldn’t help but think about the incredible potential to pair Bill’s extensive knowledge with today’s AI tools to make his insights even more accessible to the average person. As you both mentioned, the formulas and variables involved in retirement planning can be complex, which is why financial professionals often rely on software. What if Bill’s knowledge could be simplified and scaled to reach a much broader audience?
With AI, his methodologies could be transformed into interactive tools where individuals could input their unique financial details and receive personalized recommendations. This could empower people who might otherwise feel overwhelmed by financial planning. Tools like Google’s Notebook LM, for example, could even be used to explore more advanced theories or get deeper explanations on the recommendations generated by AI.
It’s exciting to think about how this kind of tool could bring Bill’s work to life for millions, ensuring that his insights remain actionable for generations to come. The combination of his expertise and AI’s accessibility could be a game-changer—not to mention a fantastic way to expand the reach of his upcoming book.
Sam, your strong relationship with Bill and your knack for recognizing transformative opportunities make you the perfect person to help bring this idea to his attention. I’d love to hear your thoughts on how this could complement his book and potentially revolutionize how people approach financial planning.
Thanks again for the great conversation and for always exploring ways to simplify financial independence for your readers and listeners!
Pam
Yay! I happen to be 52 and I just sort of retired, so I’m a fan of the new plan to retire @ 52 with a flex 5% withdrawal rate! Off to Margaritaville!
Well…
We asked one of our financial advisors for a conservative retirement plan. It has my wife and I pulling in another couple million dollars before fully retiring to margs and naps. However, that plan makes the following assumptions:
1. I’ll spend at the same rate from 52 years old to my 95th birthday, the exact day I’ll drop dead.
2. I’ll have an average return of 4% for the next 43 years.
3. Neither my wife nor I will earn another penny after we stop working.
4. We’ll get full social security benefits
5. We die with 10s of millions in net worth
I don’t believe any of those assumptions except the one where we die with too much money. That one is especially silly because our kids are already working adult homeowners who don’t need our money now, much less in 43 years. Also, if I actually live to 95, my robot will eat my hat.
Instead of following the “earn another $2M before you stop working” plan, my wife plans to work full or part time for less than 3 years, and I plan to work part time work for the next 3 years, and then we’ll reassess. We plan to work enough to cover our expenses and max IRA contributions, and we’ll reinvest passive income from rentals & taxable accounts.
I left my full time job last year with a severance package and I tell people I’m retired because I got tired of explaining why I quit full time work, have played for a year, and now will work part time. My wife and I each have our own target numbers we want to hit for additional retirement savings. I took the last year off because my severance package put me well ahead of my plan for hitting my number.
It’s been pretty amusing to see how people react when they hear my wife is working but I’m not. With few exceptions, they condemn me as a freeloading loser with disparaging comments and/or disgusted facial expressions. My wife and I laugh about how sexist that is, as we know most of those folks would think it’s fine for me to work while she doesn’t. We usually choose not to explain ourselves and just allow people to think I’m a wretch.
I’ve also been surprised by the number of people who think I’m wasting my life if I’m not working in exchange for money. “You’ve got too much to give – you can’t just quit!” sums up the sentiment. Makes me feel like I’m leaving a cult, and that feels good. We’ll see what the near future brings…
What is $2 million extra as a percentage of your existing net worth now? Dying with tons of millions of dollars seems suboptimal. YOLO!
You’re in the sweet spot for the new 5% safe withdrawal rate. Time for both of you to let go.
Part-time work, however, is always nice though, especially if it is meaningful work.
True! We’re gradually processing the potentially endless “what if?” questions that make it tough to let go, but we’re getting there. Without getting into the details of our current NW and future plans, I agree it’s time for us to continue transitioning away from lives organized around making money to lives in which we use the money we’ve made to invest in other priorities.
I am 43 with 3MM and very burnt out. I think I could retire on 4% of that, or definitely on 4% of 4MM which I may reach soon if the markets don’t crash. The problem is 75% of that total is in my 401K and ROTH IRA and only 25% is taxable. I presume the Bergen rules don’t are agnostic about things like Roth Conversion Ladders, 72T, withdrawing historical roth contributions, etc?
Yes, that is one of the problems with retiring on 25X annual expenses or 4%… it depends on the net worth / investment composition. I’ll discuss this in a follow up post.
Call me a cynic, but I would advise caution making investment/retirement withdrawal decisions based on future return forecasts made by J.P. Morgan, Vanguard, and Goldman Sachs, etc. They are frequently wrong. Highlighted by the recent firings of prominent strategists Marko Kolanovic, JPMorgan Chase chief market strategist and co-head of global research as well as Mike Wilson, Morgan Stanley’s Chair of Global Investment Committee… because they were consistently wrong in their prognostications. Also, these firms will likely benefit by their recent negative 10-year outlook as it will encourage retail investors to chase alpha via moving from passive investing to active management. It may also leave the retail investor more open to investing in these firms nascent private equity offerings (it seems like there is a lot of marketing of these products now a days with the results favoring the house more so than the retail investor). If these strategists took the safe but boring route by saying ” Yeah the market will return and average of 8% +/- 3% over the next X time frame” they would correct >70% of the time and still have a their jobs. My favorite financial witticism is “100 years of stock market return data is a better indicator of future return expectations than whatever fancy metric you just came up with.”
I wouldnt call You a cynic but realist. This 4% strategy sounds completely delusional and misguided, at least in the current times.
Feel free to elaborate why you think it is delusional. It’s always nice to read a cogent argument. Thanks
The % number actually is not that important. it could a 1% withdrawal rate if you want. Filling a bag with coins and expecting to live from it the rest of your life without refilling it at least from time WHILE depending solely on external factors expecting everything to staty the same, sounds extremely risky to me, to say the least. What if the bag has a hole and coins begin to drop off? what if it has 3 holes?? what if the bag gets stolen? what if the coins become worthless?
Im not saying we should not fill the bag. We all should, Its just this “i dont want to work after 40s attitude” that i find completely irrational and symptomatic of something much more rotten lurking in the dark but very close to us.
Technically, all these early retirees havent been retired long enough to prove otherwise.
Given the case, what is the implication for what a good safe withdrawal rate is and do you think more people should be able to retire earlier, depending on your answer?
I should have been more clear that my initial comment was tangential to the main points of your article. I am dubious of big banks and their 10 year outlooks of the US stock market because they are often wrong and have incentive in making the retail investor fearful of future returns so as to heard them to their businesses. I am a believer in Bengen’s work and the follow up Trinity study results. It is nice to have a comprehensive analysis of US stock market returns based on 100 years of history that can give the world of personal finance some evidence based guidance towards retirement planning. Otherwise it would all be dogma. Also, as far as I know, there haven’t been any studies disproving Bill’s work. The 4% Rule is part of what gave me the impetus to retire earlier this year at 47. However, I am playing it extra safe for a few years by not withdrawing from my investment accounts and living off of semi-passive real estate income – don’t tell Bill B ;)
does the 4% safe withdrawal rate include the income? if i have 5m portfolio and spins off 100k in yield, is it still safe to withdrawal another 200k (4%) of principle? so i could budget 350k per year in spending and be fine?
Good question. I will double check with Bill or forward your message. In your example, that would seem to equal a 7% withdrawal rate instead.
But then let’s say your portfolio has a 7% yield. If you only withdraw at a 4% rate, you’d never exhaust your principal, which goes against the assumption that after a 30 year timeframe, your portfolio would be exhausted to zero. so in this regard, you can “double dip“ and withdrawn down 4% of principal AND get to spend all the income.
Start listening at the 24 minute mark. I kinda ask the same question.
Whatever safe withdrawal rate is used, it is computed on a “total return” basis, making no distinction between principal, capital appreciation, dividends, interest, and other forms of income. So, if, in this environment, you were to use a 5.25% withdrawal rate from a tax-deferred account (lower for a taxable account), you would not add it to your yield; it would represent the total sum of your withdrawals. So, from a $5MM portfolio, that would dictate a first-year withdrawal of approximately $263,000.
Wonderful! Thanks Bill. Sounds like all one has to do is construct a portfolio yielding higher than your safe withdrawal rate. But then that would also mean the portfolio would never run out of money in 30 years, a key part of your assumption.
This makes the power of locking in those 20 year and 30 year treasury bonds, yielding 5.5% so enticing back in 2022 and 2023! Even though stocks have outperformed, it’s always nice to know you’re set for life.
thanks bill. two follow up. does it matter if i withdrawal 263k january 1 each year verses about 22k the first of each month? and does it matter if i withdrawal from the bond side or the stock side of port? i have read each jan 1 you would withdrawal from the asset that performed the best the prior year.
Really enjoyed the podcast episode and this article with Bill Bengen. What a relief to hear that 4.5-5% is a safe number for withdrawals. I keep forgetting about the inflation adjustment too, so that was a good reminder. My parents have recently started a 30 year retirement so I can’t wait to talk to them about this!
Thanks for reading and listening. It is nice to get some really from the grind of finances. Whether we take that relief or not, it’s up to us. But at least it’s nice to know. We have more options to take things easier.
If you don’t mind dropping a review in my podcast on Apple or Spotify, I’d appreciate it. Every review means a lot. Thank you.
Have you considered how healthcare costs would likely affect those retiring before the age of 65? It seems this would be a significant cost for anyone with less than 150k yearly income
I retired from the State Dept like your parents when I was 53 and while the pension is great, the health insurance is likely even a greater benefit especially given that it provides worldwide coverage.
Sounds like healthcare costs are no big deal for you then?
we pay $2500 a month in unsubsidized healthcare premiums for a family of four. It is expensive, but at least it’s a business expense.
What I have noticed is that many early retirees, get subsidized healthcare, even as multi millionaires. So long as your household income is less than 400% of the federal poverty level limit, you can get subsidies.
I pay about $200 per month for a single HDHP and I contribute th max to an HSA. The tax savings basically cover the premiums. Unfortunately I turn 65 next year and will no longer be able to contribute to an HSA since the SSA will automatically enroll me in Medicare part A and it is not possible to decline it.
Sam, and Bill, both your contributions towards the personal finance community has been phenomenal, over the years. Not only in America, but you have readers globally.
I understand one more point that you can clear the air in your “Misconceptions” Section by stating explicitly: “USA” as the applicable Geography.
Thanks to the internet, and spread of FIRE construct across the Globe, such valuable research from Bill (the 4% Rule/Guideline), and ongoing insights from Sam are accessed and sometimes just extended to other countries – “as is”, assuming good intent. However, the applicability may differ, and more often not apply altogether, like the 4% rule would need serious recalculation for India. Other examples can be Japan, China where returns on stocks have had entirely different trajectories over long periods, and so are the investment options and Asset classes. Mature/Immature markets, consistent High Inflation, or deflation, etc. Variations.
With genuine interest, I wanted to ask if either of you have thought over the idea to scale your ideas at a global scale? Sam, many global readers might benefit tremendously if at least some of articles can be scaled for global audience. There is serious shortage of data, information, analysis, and insights, available globally, and corresponding risks of misinterpretation of US based data/insights that just gets promoted by local ‘Finfluencers’ without much country level due diligence, thus putting local retirees in tremendous (future) risk.
Thank you for your contribution to the personal finance community. Big fan of both of you (Bill and Sam).
Thanks and regards,
Arun Aich.
Hyderabad, India.
Nice to hear from you Arun. Expanding retirement guidelines around the world is something a person can certainly do. Perhaps the most efficient way is for every enthusiast in their respective country to figure out what is most appropriate for their country using historical inflation, various asset, price returns, life, expectancy, and other variables.
Is there no Financial Samurai of India? Surely, many Indians have the same questions, goals, and struggles as we do in America.
Maybe you are the one to be the change you want to see!
Hey Sam, have you ever published a table showing the median or average net worth amounts for different age and asset levels for late retirees. Example, top quartile of asset balances for 70s, 80s, 90s, 100s year-old’s. The 4% rule is a top down approach that is useful for a safe withdraw. However, you also produce bottoms up metrics for accumulation which is also a great comparison tool. Why don’t we have something similar for deaccumulation? That would then provide a great bottoms-up measure for a safe withdraw. Thanks a ton for all your work and honesty when you adjust your outlook.
I have not, as I have presumed late retirees would start withdrawing and spending down their 401(k) balances so as to not die with too much money.
More people have trouble accumulating retirement accounts, so focused on the traditional working years.
But I’ll look into balances for later ages as well. Come to think of it, I think I have written about retirement balances in people 70s. I just have to go look.
Don’t forget SS payments also, some tax free returns for capital (or lower taxes), and of u can manage your withdrawal rate that 4-5 can go higher in good years. All about being nimble.
SS and Medicare are not sustainable. By mid 2030s they will both be underfunded. As of now any plan to move them back to 100% funded will result in:
a) more taxes putting drag on economic growth (though it inherently increases money velocity which could be good)
b) fewer people on rolls. Raising retirement age and denying Medicare benefits
c) higher deficits.
Or we live with them being underfunded. Americans couldn’t live with two yrs. of inflation without blowing up in anger. No way we will make optimal moves with these programs. Retirement for most will be delayed and poverty will increase, Homeless already run over most cities in America. Give it a decade and we will want to make less homelessness great again, too. Unless DOGE saves us! I would laugh, but then I’ll start crying.
Thanks for highlighting this podcast episode. I genuinely enjoyed your dialogue and what a treat to hear about the 4% rule from Bill himself. Very insightful to hear about the most common misconceptions as well. And so nice to hear the clarifications straight from the source!
There are some really boring podcast out there, but not yours. I really like the style of your episodes and interview style because you make it so much fun to listen to personal finance discussions. Please keep up the great work, thanks Sam!
Thanks! I appreciate the listen. It’s fun to speak to guests about who they are and what drives them. Human interest stories are the most interesting in my opinion.
Telling people that 4% rule is not enough does your audience a great disservice and may leave many to suffer and under save because they will just give up!
Super saver will always save and work too long but most people are under savers
Some of those people given a realistic goal like4-5% rule will give them hope and something to strive for.
I have never heard of anyone running out of money because they followed the 4% rule
But I have heard of many die at work from stress and suicide or poor health
You yourself were suffering at work with stress related health issues
Why would you want others that have saved millions stay just one more year??
I love your work but I feel like the message
Is save millions then leave work and keep working because you never know
Not a very up lifting message.
Ask yourself how many people retired before 60 when you stared writing and how many people do now?
Maybe the message from my podcast and my post is not clear. So I need to work on this in my messaging.
My main message is that people can consider retiring earlier – in their mid-50s – because Bill Bengen has shared with us his work and clarified that 4% withdrawal rate is a conservative percentage. And that from his research, the average safe withdrawal rate of the 400 retirees he studied was about 7%.
Do you think it would help if I bolded this statement or wrote it again in the conclusion?
I believe most people will act rationally based on their goals and risk tolerance. However, I have yet to meet any early retiree who has achieved 25 times their annual expenses, and have stopped working completely. And if they have completely stopped, generating, active income, they have forced their spouse to continue working.
What’s your situation now? Always great to get some perspective and background from those who disagree with my beliefs. Thx
I actually think you’re messaging is fine and it could be that Brian didn’t read the entire post or listen to the podcast. Or maybe English is a second language for him.
Your sub-titles say as much, which suggests people can save less and retire earlier if they want.
* Key Takeaway: The 4% Rule May Be Too Conservative
* Lowering the Traditional Retirement Age from 65 to 52
* Reassessing Retirement Goals: Accumulate 20X Expenses, Then Relax?
The lack of comprehension skills and a lot of short-form TikTok content is one of the reasons why so many people feel like they understand financial concepts, but don’t really.
Great to know that 7% was the average withdrawal rate for the 400 people in Bill’s study.
From the blogs I have read the wife’s are Still working for the same reason you are they want to and or enjoy it.
Your wife works on this blog are you forcing her?
If most early retirees are still earning income then we should be encouraging people to retire on 15-20x of their annual expenses because they will still be earning income.
I think most people under save because they don’t believe that 200-300 dollars saved each month will amount to much so why not have that nicer car or order food every week. Because the world tells them 1millons dollars is nothing.
So they try to get rich fast lose all their money and give up.
The truth is you could have retired sooner and worked less after, and so could many
Others.
Yes, if she doesn’t work on Financial Samurai, I withhold food and childcare from her. Just kidding.
What’s your story and where are you on your financial independence journey? Don’t feel shy to share. It’s a safe space.
I want to learn more about why you think this post latest podcast is encouraging people to work longer and accumulate more when my message is the opposite. Have you accumulated over 25 times your annual expenses?
Thanks!
Don’t mean to be to hard on you I just don’t think you believe in the 4% rule based more on your past posts and also the fact that you say things about early withdrawal penalties
Even though we both know many ways to pull money out of retirement accounts penalty free.
As far as my situation we should be fine with a 6k per month spend at age 50 with a almost paid off house two rentals(4k net income) and 1.5mil in retirement accounts
My wife will most likely still work because she wants the freedom to spend as she pleases and independents.
Maybe you could help convince her to quit
The thing I admire most about your story is that you did walk away from a high paying job
That will be my biggest challenge
Although my job does not give me the same level of stress yours did.
I used my early financial income and took a less stressful more flexible path because I did not need to chase every dollar.
Why not just walk away this year? I think the missing variable is what is your net worth in terms of a multiple of an annual expenses. That may help explain the situation. Thanks.
I guess I don’t walk away now because my job is kind of like your blog
I don’t need it but it keeps me busy and I have the flexibility for my hobbies
Also hoping that more money will help convince my wife to walk away.
If things get stressful or I get fired
I would be fine
I am also still looking for a purpose though I think that may not happen.
For me the point of FI is options
What is it that you do? To be able to find a job you enjoy is a great blessing and I would definitely keep doing it.
There might be two levels of hard. The first level of hard is one spouse walking away. The next level of hard is the other spouse walking away.
If both spouses can quit the money, and stay retired, I think that’s the ultimate test.
I do enjoy the psychology of men who say they are retired with a working spouse, while women say they are a stay at home spouse instead of retired. Fascinating.
At the end of the day, everything is rational. If we aren’t changing, we are choosing.
Just got back from afternoon Pickle Ball. Plenty of people under 40 choosing to play instead of work. In fact, the courts were packed and there was a wait after every single game. And there are 8 courts.
Please share what you do that gives you so much joy!
I’m reading to quit my job and I’m encouraged by this post and Bill’s research.
Why walk away if it’s not a bad job? To post pictures from third World beaches?
Are we reading the same post Brian? The message is that we can retire earlier and save less because a 5% safe withdrawal rate may be the new safe withdrawal rate after Bill’s studies.
Study these subtitles of the post:
Key Takeaway: The 4% Rule May Be Too ConservativeLowering the Traditional Retirement Age from 65 to 52Reassessing Retirement Goals: Accumulate 20X Expenses, Then Relax?
It seems like you seeing what you want to see and are just frustrated with your own net worth accumulation path. Let me know what I’m missing.
Seems like bad math to just drop retirement from 65 years old to 52 years old because it takes 20% less money to retire. You likely aren’t adding anything to your net worth the first 13 years of life, whereas you are losing high earning and saving years in your 50s under your proposal.
Question should be how long will it take to get to 20x annual expenses? And how long to go from 20x expenses to 25x expenses? If you’re getting 7% returns on your investments leading up to retirement, it would take 3-4 years to go from 20x expenses to 25x expenses (25% increase), assuming no additional money is added to the pot from savings. If being more conservative with investments up to retirement, it would take longer. So I think you’d cut off some years going with a 20x annual expenses approach, but likely far less than the 13 years you’re proposing.
It’s more like lazy math and a shortcut to helping people think bigger picture about a higher safe withdrawal rate in retirement, in this case what 5%, means for someone currently working today.
I don’t think 20X or 25X annual expenses is enough, as I’ll write in a follow up post. However, I also believe Bill has done tremendous work that indicates a 5% withdrawal rate is definitely possible. Listen to my conversation with him and let me know.
I think the vast majority of personal finance enthusiasts will die with too much. And given I’m middle age now, I’m focused on decumulation, so Bill’s words are encouraging.
We are targeting 33-35x annual expenses. What is your target and how are you working there?
That sounds reasonable. I like the stretch goal of 20X average annual income for the past three years. It forces you to continue saving and investing as your income goes up. Order to treat your way to financial independence by just slashing expenses to the bone.
https://www.financialsamurai.com/net-worth-targets-by-age-income-work-experience/
https://www.financialsamurai.com/minimum-investment-threshold-amount-work-optional/
Hi Sam. This comment seems contradictory. You don’t think 20-25 x annual expenses is enough. However, you think most personsonal finance enthusiasts will die with too much.
Think the commenter above, Brian, was highlighting this point. Most of you past posts reflect having a significantly lower SWR than 4%. That’s why I got a little excited you posted 4-5% might be a comfortable number, but it sounds like that’s not what you believe, it’s what Bill believes.
Indeed. I’m more inclined to believe Bill’s 4%-5% assertion after our discussion. But I’m unwilling to follow it until I’m closer to death, ie 55-65 age range.
But there’s also another reason why I don’t think 25X works for most people. It’s all about net worth composition, which I’ll share in an upcoming post.