Is it the 4% rule, or the 5% rule?

The world of FIRE has been working with the 4% rule for a decade now. For those new to the concept, and analyst/statistician named Bill Bengen rocked the retirement planning world in 1994. He did an in-depth analysis on how much you could afford to spend of your “nest egg” each year, and still have money left over at the end of a typical retirement. He pretty much evaluated withdrawal rates every 6 months, starting in 1926 and going to the 1970s – and seeing what rate would allow you to still have funds at the end.

The rates ranged on average from 5% to 13%, depending on how lucky/unlucky your timing was when you retired. With the analysis he came up with the “Safe” retirement rate of 4% (actually a little higher). Even if you retired at the worst times in history to retire (1929, 1937, 1973, etc.), as long as you maintained a 60/40 allocation, you could safely take out 4% of your nest egg a year, and then adjust upward in line with inflation every year after that. This should leave you with  money at the end.

Since writing it, the FIRE community has lived by the 4% rule, or its derivatives (Fat-FIRE, lean-Fire, etc.). Most FIRE folks have said that, since we’re retiring earlier than 65, the need more than the 4% rule (some believe they can only spend 3% or as low as 2% since they’re retiring in their 30s). Bengen stated that the 4% rule was always the “worst case scenario” based on the worst time to retire (Oct 1968). This was when the stock market peaked, froze for 13 years, and inflation went through the roof..

Now Bill Bengen has gone back and relooked at his analysis in the time of low bond yields, low inflation, and high-priced stocks. He’s had another 25 years of data to crunch to add to what he already did. A lot of folks assumed he would drop the rate to reflect on these items. Instead, he’s come back and said the 4% rule is really now more of a 5% rule.


In fact, he noted that at other points in history (when inflation was low and stocks/bonds were cheap) you could have withdrawn 7% – 13% and still been safe. With a 50/50 split of stocks/bonds, invested in index funds and US treasury bonds, Bengen believes you would be safe with a withdrawal rate of no more than 5%. He actually notes that “the average is 7%.” The key to the whole equation is the very low inflation right now.

Bengen does say there are still variables here (what will the Fed do, government spending, inflation, etc.) and the 5% rule should be a starting point in your analysis. Still, its nice to know that all of us panicking about saving 25X our spending (4% rule) might be ok with only 22X our savings.

Happy Veteran’s Day. Thank a Veteran if you can.

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Mr. 39 Months

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