Rethinking the 4% ‘Golden Rule’

by Marc Bastow | November 11, 2013 7:00 am

Since 1993 when it was formulated by Bill Bengen, the owner of San Diego-based Bengen Financial Services, the “4% Rule” has sufficed as the standard for determining how much to withdraw from retirement savings to last for a 30-year time horizon.

That rule is coming under some scrutiny today, and from a surprising source — Bill Bengen himself. A recent Barron’s article (paywall) [1] revealed that as Bengen enters retirement, he’s questioning whether the 4% rule is remotely realistic in the current investing landscape:

“I’m not sure 4% is wrong, yet. But we could have low returns for a long time, which could threaten it. And I suspect the prospect of much higher inflation is an even greater threat,” Bengen says.

The playing field has changed a lot since Bengen’s research that yielded the 4% rule. From 1979 to 1999, returns over 10% for a 50/50 allocation between stocks and bonds weren’t unheard of, but today’s investors are looking at more like 3% to 4% yields, and that’s with stocks reaching new highs all the time.

The good news? Inflation levels are tame for the most part, and as long as the Fed keeps up its policy of quantitative easing, even for the near term — say through 2015 — purchasing power should remain fairly constant against those smaller returns.

The big question now is what might be a more appropriate “Golden Rule” figure that meets the dual criteria of lasting 30 years while providing enough extra income for a comfortable retirement.

Here’s the rub — there is no “right” answer. But for at least one research team, what’s clear is that the old model doesn’t hold water anymore.

A paper[2] co-authored by Michael Fink, Wade Pfau and David Blanchett tested the model using today’s intermediate-term (5-year) rates — which they suggest are about 4 percentage points less than their historical average — and the same 60/40 stocks-to-bonds ratio used in 1993 to determine a “failure rate” over a 30-year retirement horizon.

The results are pretty stunning:

The authors’ takeaway: “The 4% rule cannot be treated as a safe initial withdrawal rate in today’s low-interest-rate environment.”

Well, where do we go from there?

The easy answer is to spend less money in retirement than originally planned. It’s a solid plan actually, as spending habits are a function of your income (just as they are during your working years).

But the reality is it’s going to take a bit more planning on the “income” side of the equation to make that money last. The old rule of 4% withdrawal might just go the way of the old  “100 minus your age” adage to determine your stock vs. bond portfolio mix.

Indeed, Jay Wertz, director of Wealth Advisory Services at the Johnson Advisory Council cautions that keeping 40% of your assets in investments that yield under 3% is a losing proposition for long-term retirement planning.

So should you just adjust on the fly and dump your fixed-income investments, which are the major drag on yields today, altogether?

Heck no. Bonds are still a great hedge (though not a perfect one), acting as a bit of ballast against market downturns. InvestorPlace‘s Dan Burrows points out[3] that the Vanguard Long-Term Bond Index (BLV[4]) declined less than 2% over the last market crash period. And of course I recently advocated for building your own bond fund[5] by purchasing individual bonds.

No, the best way to fight this for the near term is by putting more money to work in equities. Those stodgy old dividend-paying machines like Emerson Electric (EMR[6]), Sherwin-Williams (SHW[7]), and Chevron (CVX[8]) will provide income (and yield) for many years to come, and at least to this point, lots of appreciation upside, too.

Even looking into the tech sector can provide some help, with these four companies[9] looking like long-term winners for both income and yield.

Want to think just a little bit out of the box? Look toward master limited partnerships. Once you understand the quirky tax rules[10], MLPs can provide some serious yield boost to your portfolio. InvestorPlace Editor Jeff Reeves provides three solid plays[11] in this asset class, and they’re well worth some research time.

You can move your portfolio mix toward a greater exposure to stocks without necessarily taking on much more risk — and given the retirement math involved, it’s worth taking that extra risk.

The rules of the game have changed — and sure, they will probably change again before you get to retirement. But don’t ignore those changes. Get ahead of the curve as much as possible, and act accordingly. Today that means revisiting your portfolio mix to account for lower earnings in fixed-income investments and finding ways to supplement those returns.

More on planning your retirement:

Marc Bastow is an Assistant Editor at As of this writing he does not hold a position in any of the aforementioned securities.

  1. A recent Barron’s article (paywall) :
  2. paper:
  3. points out:
  4. BLV:
  5. building your own bond fund:
  6. EMR:
  7. SHW:
  8. CVX:
  9. these four companies:
  10. the quirky tax rules:
  11. three solid plays:
  12. The ‘Right’ Time for Social Security:
  13. How to Better Understand Your Social Security Check:

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