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Investing Specialists

Unpacking the 4% Rule for Retirement-Portfolio Withdrawals

It's a useful starting point for retirement planning, but it's crucial to understand the assumptions behind it.

The so-called 4% rule has been in vogue for almost 20 years now, taking off in popularity since financial planner William Bengen introduced his research in 1994. This rule back-tested data to demonstrate that retirees withdrawing 4% of their portfolios per year for 30 years had a low probability running out of money during their lifetimes. Several years later, the Trinity study, so named because it was authored by three professors at Trinity University in 1998, looked back at market data and generally corroborated Bengen's findings. The study concluded that retirees using a 3%-4% withdrawal rate, combined with annual inflation adjustments, had a good chance of not running out of money during a 30-year period.

Some critics, notably William Sharpe and a team of researchers from Stanford, have since assailed the 4% rule as being too simplistic; others have asserted that Bengen's assumptions about asset allocation were too aggressive for many retirees. Financial planner Michael Kitces has argued in favor of a withdrawal rate that's sensitive to market valuations, an approach that he discusses in this video. More recently, critics have called the 4% rule as too ambitious given the feeble return expectations for the bond market as foretold by today's tiny yields.  

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