Michael Kitces, blogger and head of planning strategy at Buckingham Wealth Strategies, recently interviewed Bill Bengen, the “father” of the 4% rule, the “safe” withdrawal rate for retirement savings.
In the discussion, the retired advisor said he actually used 4.5% instead for his clients. In fact, with inflation as low as it is today, he told Kitces the safe withdrawal rate may be closer to 5%.
In the podcast, Bengen stated that at the time of his research — the late 1990s — there were mainly two asset classes: large-cap stocks and intermediate government bonds. Today there are many more investment opportunities, he said.
He told Kitces his thoughts about today: “Right now, I would not be recommending 4.5% to clients as a starting point. Depending upon the inflation level and the level of the market, I might be up to 13%, which historically, there were periods of time when you could take withdrawals that high.
“It’s not a great time to be taking high withdrawals now with the market so expensive, but it’s not awful either because inflation is very low. I think somewhere in 4.75%, 5% is probably going to be OK. We won’t know for 30 years, so I can safely say that in an interview.”
Inside the Numbers
In an article on Morningstar, John Rekenthaler, Morningstar vice president of research, analyzed how a 4% real withdrawal rate as a hard-and-fast rule might fare when considering a portfolio return of 4.1% and inflation rate of 2%.
Beginning with a $1 million portfolio, profit would be underwater already by Year 3. (Year 1 profit $41,000, withdrawal $40,000.)
In Year 2, the portfolio would start with $1,001,000, but profit would be only $241, after pulling out $40,800.