In 1994 Bill Bengen, an obscure financial planner in southern California, came up with a simple guideline his clients could use for determining a safe (minimum) withdrawal rate in retirement. Based on historical data, he calculated that an individual starting retirement should be able to spend up to 4% of their investment assets for a period of thirty years without running out of money. The portfolio allocation that maximized this return was about 60% stocks and 40% bonds. His research was a breakthrough in helping retirees plan for the financial risk of longer retirement lifespans. The 4% safe withdrawal rate has evolved into a rule-of-thumb across the financial planning industry.

Since that time there has been extensive follow-on research attempting to confirm as well as improve on Bengen’s seminal work. Among other things, researchers have discovered the following:

• The 4% safe withdrawal rate does not take taxes into account, making it potentially overly optimistic for those in higher marginal tax brackets.
• The returns experienced early in retirement will weigh disproportionately on the final outcome. This is known as sequence of returns risk and, depending on market performance during the early years of retirement, could significantly impact your safe withdrawal rate in future years.
• The relationship between bond yields and stock prices (to each other and relative to their historical averages) can impact the optimal allocation model supporting the safe withdrawal rate.
• Slowly changing your portfolio allocation model from conservative at the start of retirement to more aggressive in the latter years can improve the overall average withdrawal rate.
• In other countries safe withdrawal rates have been considerably lower than in the U.S.

Last month Bengen came out with a new book titled, A Richer Retirement: Supercharging the 4% rule to Spend More and Enjoy More, in which he has increased the minimum safe withdrawal rate to 4.7%. He explained that over the past hundred years the average safe rate was actually closer to 7%. There was only one case study from his research who was forced to limit withdrawals to as low as 4.7%. He considers 4.7% to be a stingy ultra-conservative spending policy for a retiree.

The one thing that could impact the 4.7% withdrawal rate is inflation, which Bengen calls the greatest enemy of retirees. Not, as he puts it, simply one bad year, but when it occurs over a protracted period with the inflation rate exceeding 7% or 8%, such as what happened during the 1970s. That’s when you’d likely have to breach the safe rate and cut well back on spending.

How can you use this information for your own retirement planning? It’s certainly helpful to have a simple guideline for quickly determining the possible likelihood of insolvency during retirement. But relying on it is no substitute for creating a comprehensive retirement plan specific to your own family’s savings and spending goals. The latter utilizes many detailed assumptions about your future, and I have found that the more detailed the plan, the more accurate it turns out to be.

If withdrawing 4.7% (or less) of your savings should cover your spending and charitable needs for the rest of your life, congratulations! But don’t stop there. Spend the time to put together as thorough a plan for your retirement as you can. You may discover opportunities you’d never thought of before. And you’ll feel a lot more confident about being able to achieve them.

(Artie Green is founder of Cognizant Wealth Advisors dba Perigon Wealth Management, LLC, a registered investment advisor. For more information visit cognizantwealth.com. More information about the firm can also be found in its Form ADV Part 2, which is available upon request by calling 877-977-2555 or by emailing compliance@perigonwealth.com).