I recently borrowed Bill Bengen’s new book A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More to better understand the nuances behind the infamous 4% withdrawal rate that Bengen created 30 years ago.
He does not do projections and based his research on market and inflation conditions during the past few decades, creating a data point for every quarter. So more than 250 data points and he then monitored each 65 year old retiree over the next 30 years.
In his latest research iteration, he actually “proved” that the 4% rule can now be updated to 4.7%, through factors like more ETF diversification, a cash allocation and a slightly higher equities allocation (from 50 to 55%).
This can be pretty significant, since if we can round up the 4.7% to 5% by being a little more flexible with expenses (as Nick Maggiulli mentioned):
“Someone who wants $100,000 a year in retirement only needs to save $2 million (instead of the $2.5 million required by the 4% Rule). That’s $500,000 less in required savings!”
I have a renewed interest in withdrawal rates as *drumrolls*, yours truly is finally approaching the FI of the FIRE part. And I do wonder how safe the 4% rate with regards to my portfolio. So here’s sharing some of my thoughts after reading the book.
Why A 4% Withdrawal Rate Can Be Considered Conservative
- A 4.8% withdrawal rate is deemed a failure because for a few data points, the retiree suffers an expenditure shortfall, likely in the 29th or 30th year of retirement
- Expenditure will increase each year with inflation. The retiree is also assumed to be unwilling to decrease expenditure even in a bear market
- Most of the luckier retirees across the periods end up with high retirement balances during the conclusion of the 30 year period
Why A 4% Withdrawal Rate Can Be Considered Risky
- Dying with $0 at the end of 30 years is considered a success. I cannot imagine the financial anxiety for that fictional retiree with less than a few thousand dollars of assets in the 30th year of retirement
- Prolonged sequence of returns risk. One could argue we have been in a secular bull market for almost two decades and a reversion to the mean is highly likely on the cards. Bad news for people about to retire
- FIRE practitioners who retire at 45 would require the portfolio to last 50 years, much longer than 30 years
- Desire to bequest a significant proportion of the portfolio to family members
My Preferences And Strategy
I hope to leave a bequest to my son that is at least half of the real value of the initial portfolio. That should also be a buffer for unexpected end-of-life medical expenses.
I am also open to working (if body and health permits) and prepared to cut expenses by up to 20% if market conditions sour.
So if the Mrs and I were to retire before 45, a 2% withdrawal rate would mean a very lean FIRE while 5% would be akin to playing with fire (pun intended). Perhaps something like a 3.6% initial withdrawal rate could work. For a $2 million portfolio, that will support $6,000 of monthly expenses. For every additional $100,000 set aside, that also provides an extra $300 of monthly expenses.
Do you think I am too pessimistic or optimistic?
Thanks for reading!
Nice to see you back writing on the blog! I have been playing with codes written by LLMs to run Monte Carlo simulations on my retirement after seeing finfluencer commenting on the Bill Bengen book. Not easy to decide on when or what level of assets to press the R button and also how much to spend.
Hi Wei Xiong,
Hopefully I will be a little more consistent this time round. With regards to your comments, I have nothing really useful to add but to “embrace the uncertainty and choose the most optimal tradeoffs for your situation!”
I have run several scenarios on whether we can retire at 45 years old as well. To be conservative, I use 3% WR.
Yes, 3% WR would definitely be more conservative. The trade-off would likely be a smaller expenditure budget or a bigger portfolio size before calling it a day.
Hello,
Prior to fully retiring before the age of 49 almost four years ago, I based my calculations on what I considered a worst case scenario of zero growth of my investment portfolio (very conservative asset mix), my then annual expenses, and different inflation rates for the next few decades. The numbers gave me the confidence to call it a day in the workforce. Nearly four years later and keeping to almost the same lifestyle when I was working, my investment portfolio (again relatively conservative) is at its highest numbers. Quite mind boggling.
Hi Jerry,
Congratulations! I guess you are benefiting from a favourable sequence of return. Sometimes we can be too fixated on the negative possibilities and forget that most retirees end up in a mind-boggling but fortunate situation like yours.
Hello,
Prior to fully retiring before the age of 49 almost four years ago, I based my calculations on what I considered a worst case scenario of zero growth of my investment portfolio (very conservative asset mix), CPF, my then annual expenses, and different inflation rates for the next few decades. The numbers gave me the confidence to call it a day in the workforce. Nearly four years later and keeping to almost the same lifestyle when I was working, my investment portfolio (again relatively conservative) is at its highest numbers. Quite mind boggling.