For decades, retirees who worried about running out of money followed the standard retirement-planning advice—withdraw a maximum of 4% of your investments for retirement the first year of retirement, and in each subsequent year, withdraw the same amount plus an annual adjustment for inflation. Result: Your portfolio was almost certain to last at least 30 years.
But when the creator of the 4% rule—retirement-planning advice guru William Bengen, CFP—retired himself, he realized the rule needed to be updated. With a few tweaks to his portfolio, Bengen found that he actually could draw down much more money annually and still be safe for the rest of his life. Bottom Line Personal asked Bengen to elaborate. His new insights…
4.7% is the new golden rule. I initially conducted most of my research from data in the 1970s, a period that was a perfect storm of sky-high inflation and multiple bear markets. The 4% withdrawal rate was extremely conservative. Given today’s environment of moderate inflation, a retiree could comfortably use a starting rate as high as 5.25%. With a $1 million portfolio, that is an additional $12,500 to spend every year.
More portfolio diversification is necessary. To achieve the higher withdrawal rates, you need exposure to other asset classes. Optimal investment allocation for a typical new retiree: 11% US large-cap stocks…11% US midcap…11% US small-cap…11% US microcap…11% international…40% intermediate-term US government bonds… 5% US Treasury bills.
Set it…but don’t forget it. I revisit my withdrawal strategy every few years to see if I’m ahead or behind my projected target. In bear markets, I don’t slash my withdrawals much since recoveries usually restore the portfolio’s trajectory quickly. But in times of heightened inflation, quick spending cuts are essential to keep my portfolio on track.
