Rethinking Retirement: Bill Bengen’s Latest Insights on the 4% Rule

Bengen's new book is a must-read for advisors and is destined to be a classic text on retirement planning

Bill Bengen has delivered a tour de force of retirement planning. Although written for retail clients, financial advisors and other professionals will benefit from his analysis of the most difficult problem facing retirement planners: how to make one’s “nest egg” last a lifetime. Bengen has quantified the elements and risks underlying how much retirees can spend over a 30-year (or sometimes longer) retirement horizon.

His forthcoming book, A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More, will be released on August 5, but you can order an advance copy here. I was privileged to receive a copy, and my review follows.

Bengen is among the most respected researchers in the field of financial planning. His seminal contribution, the “4% rule,” was published in 1993 and remains a cornerstone of retirement planning. He showed that investors could safely withdraw 4% annually, adjusted each year for inflation, without depleting one’s assets over a 30-year period.

He retired as a financial planner about a decade ago but has continued his research into the financial challenges posed by retirement. This book illustrates the extensions and refinements he has made to the 4% rule.

The two-factor model and the eight elements of retirement planning

Bengen diverges from most researchers through his use of historical data and “bootstrapped” analysis, rather than Monte Carlo simulations. He uses a database of nearly a century of asset class returns, inflation and other data to determine the fate of retirement strategy over a 30-year period. This gives rise to his foundational parameter, SAFEMAX, which is the highest inflation-adjusted withdrawal rate that can be applied to a portfolio over 30 years without depleting the assets.

The 4% rule equates to SAFEMAX of 4%, and Bengen has since increased this to 4.7%. To achieve this, he added five asset classes to his original model of U.S. large-cap stocks and U.S. bonds: international, small-cap, mid-cap and micro-cap stocks, and Treasury bills.

His new 4.7% rule aligns with Monte Carlo simulation research. This is unsurprising, since the assumptions (i.e., asset class returns and correlations) used in Monte Carlo analysis are based on the same historical data Bengen uses. The popularity of Monte Carlo analysis, which is used by virtually every financial planning software application, comes from its flexibility. One can easily modify assumptions or decision rules and, in a few seconds, run 10,000 or more simulations and visualize how one’s retirement unfolds.

But Monte Carlo has its limitations, including a false sense of confidence that can be conveyed by the countless random simulations that are used. Clients can easily be lulled into believing that their finances will follow the median path of the simulations they are shown.

By relying on historical data, the bootstrapped technique has the advantage of illustrating fates that have befallen actual retirees. Bengen uses this to full advantage, showing exactly the regimes that led to the best and worst retirements. You will learn, for example, that the greatest risk retirees face is not a bear market (recovery from those are typically quick), but sustained inflation, as was the case in the 1970s. Likewise, the best time to retire is at the depth of a bear market; one’s assets benefit from the market recovery that inevitably ensues.

Bengen correctly dispels a misconception that often accompanies a SAFEMAX of 4.7%. This should not be treated as a proscriptive withdrawal rate for retirees. Indeed, it is a floor; it is the lowest (most conservative) estimate of a sustainable safe withdrawal rate, based on a retirement that starts at the most inopportune date during the last century. SAFEMAX rates of 7% or more were plentiful in the data, and at times it was more than 10%.

Bengen introduces a “two-factor” model to refine SAFEMAX estimates by considering market and economic conditions at retirement's onset. The first factor uses research by Michael Kitces that shows that stock returns can be roughly predicted by the market’s Shiller CAPE ratio. It is the ratio of stock prices to earnings averaged over the prior 10 years. The higher the CAPE ratio, the lower the projected returns and vice versa. To this, Bengen adds the retiree’s projection for inflation – low, moderate or high.

Bengen shows how retirees can derive a better estimate of SAFEMAX given the CAPE ratio and their prediction for inflation, with one important caveat. The CAPE ratio is now approximately 38, and there was only one time – prior to the 2000-2002 dot-com crash – when it was this high. Today’s retirees have only one historical data point to guide them.

Retirees face eight key choice in the design of their retirement, which Bengen calls “elements.” These are:

1. Withdrawal scheme – this is the method by which withdrawals are calculated. Bengen’s research was based on cost-of-living adjustments (COLA), but other methods, such as a fixed percentage retirement of assets, are possible and yield different SAFEMAX results.

2. Planning horizon – The traditional 30-year horizon is based on 65-year-old retiree who expects to live 30 years. But a shorter horizon will lead to a higher SAFEMAX and vice versa.

3. Tax status of portfolio – Bengen’s analysis was done on using tax-sheltered accounts. But once taxes are introduced, estimates of SAFEMAX must be reduced.

4. A legacy – The greater one’s desired legacy, the lower will be the SAFEMAX.

5. Asset allocation – Bengen shows that SAFEMAX can be increased by increasing the allocation to asset classes that have historically done better – small- and micro-cap stocks. He cautions that there is a diminishing return to adding more asset classes for diversification. More on this below.

6. Portfolio rebalancing – The frequency of rebalancing gives rise to different values for SAFEMAX. I will also comment on this below.

7. Striving for above-market returns – Bengen’s research is based on index-based approaches, and he shows that investors who can identify active management strategies that deliver future outperformance will have a higher SAFEMAX. But he correctly cautions that this pursuit will likely be futile.

8. Withdrawal timing – If you withdraw funds at the end of a calendar year instead of at the beginning, you will have a higher SAFEMAX.

Taken together, these elements also illustrate why retirement planning is a much more difficult endeavor than saving and building one’s nest egg. For almost all investors in the accumulation stage, a low-cost, highly diversified index portfolio of large-cap stocks, along with an allocation to bonds, will maximize their nest egg at retirement. The only decision to be made is the “glide path” – the allocation to stocks and bonds over the accumulation phase. But even a simple portfolio, such as bond allocation based on one’s age, will produce good results.

Not so when it comes to retirement planning. As Bill Sharpe and others have pointed out, retirement planning is far more complex. Bengen expertly navigates this complexity, offering invaluable guidance for securing a sustainable and fulfilling retirement.

Opportunities for future research

Bengen’s research presents opportunities for future research that I hope he and others will pursue.

I would like to see more consideration given to Treasury Inflation-Protected Securities (TIPS). With the current TIPS yield curve, it is possible to construct a TIPS ladder that will deliver risk-free withdrawal rates of 4.7% or more over 30 years. A retiree could, for example, construct a TIPS ladder to cover all their inflation-impacted expenses over retirement, and invest other assets more aggressively.

Single-premium immediate annuities (SPIAs) and deferred-income annuities (DIAs) should be considered. Bengen mentions SPIAs, and notes that an allocation to them has the psychological benefit of giving retirees the freedom to spend more aggressively. The benefits of longevity risk pooling are powerful, and I would like to see SPIAs and DIAs incorporated into Bengen’s framework.

As I noted above, two of Bengen’s elements are candidates for more exploration. Bengen advocates greater allocations to small- and micro-cap stocks to increase SAFEMAX. He also cautions that these asset classes have limited liquidity. But there is another consideration. The total market capitalization of large-cap stocks is approximately $62 trillion; for small-cap stocks, that is $3.6 trillion and for micro-cap stocks it is $500 billion. Investors in the aggregate cannot allocate equally to large-, small- and micro-cap stocks, as Bengen suggests. The market will not clear. The danger is that investors have already over-allocated to small- and micro-cap stocks, and future returns will be less than historical ones. There is no way to reliably measure this, so this is an unquantifiable risk.

My other concern is with rebalancing. Michael Edesess has studied rebalancing extensively (using Monte Carlo simulations) and has shown that it neither increases returns nor reduces risk, and that there is no optimal rebalancing frequency. His recommendation is to rebalance based on whether the portfolio’s allocation aligns with the retiree’s risk preferences and tolerance. I would like to see more research on this topic.

Finally, I would like to see more consideration given to the fees that clients will incur. The book does not mention fees, but clients will incur both advisory fees (often as much as 1% of assets) and fees on ETFs or mutual funds that are used in client allocations.

Advisors and their clients should never lose sight of the primary goal of retirement, which is to not become a financial burden to your children or those entrusted with your care as you age. But there is a secondary goal, which is to enjoy your retirement and spend as much as possible.

Bill Bengen’s latest work is a masterclass in retirement planning, offering a clear, data-backed strategy for making the most of your savings. Whether you're planning your own retirement or advising clients, this book is an essential resource that challenges outdated assumptions and provides a practical path to financial security.

Robert Huebscher was the founder of Advisor Perspectives and its CEO until the company was acquired by VettaFi in 2022. He was a vice chairman of VettaFi/TMX until April 2024.