How the 4% Rule Would Have Failed in the 1960s: Reflections on the Folly of Fixed Rate Withdrawals

Abstract

The 4% withdrawal rule was formulated by William Bengen to satisfy a specific historical test. Bengen sought to determine the initial rate which, applied against a balanced portfolio of stocks and bonds, and adjusted annually for inflation, had always sustained withdrawals for at least 30 years over the span of available data. This paper probes the flaws in Bengen's US historical data which led to the mistaken nomination of 4% as a safe withdrawal rate. After documenting the historical failures of the 4% rate, the paper develops the conditions which determine whether any fixed rate of withdrawal can be sustained and assesses the impact of more versus less conservative asset allocations. Planners will gain a new appreciation for the importance of flexibility in designing withdrawal strategies.

Keywords: sustainable withdrawal rate, 4% rule, asset allocation, mutual fund returns, retirement income planning

JEL Classification: G11, G23, G51, N12