Defending the 4% Rule for Retirement

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by Wes Moss

Anyone in the Retire Sooner family—readers of my books and articles and listeners to my podcast and radio show—knows how passionate I am about the 4 Percent Rule. Discovered in 1994 by an MIT aeronautics and astronautics graduate turned Certified Financial Planner (CFP®) named William Bengen, this rule of thumb calculated actual stock returns and retirement scenarios over the last 75 years. It revealed that retirees who draw down 4 percent of their portfolio in the first year of retirement and then adjust this amount yearly for inflation would likely see their money outlive them, assuming a 50 to 75 percent allocation in stocks. Based on Bengen’s calculations, nest eggs last fifty years 80 percent of the time. In the worst-case scenario, the money still lasted thirty-five years.

Then, in 2021, a miracle appeared: a financial headline that was actually exciting. I kid, of course. I’m as addicted to financial updates as the next guy. But even I can admit that for economic news to make a splash, it has to be reasonably earth-shattering. And when Barron’s reported that Bengen was upping his figure from 4 to 4.5 percent, that certainly qualified.

One-half of a percent may not seem like much, but it gave retirees a hefty increase in purchasing power, opening up the possibility of retiring months or even years ahead of previously expected schedules.

We’re big Bengen fans around here, and the serious truth is that I spend a fair amount of time defending the 4 Percent Plus rule of thumb from its inevitable detractors. Whenever the stock market dips, someone feels the need to put out an Op-Ed claiming that 4 percent is too high and warning of calamitous scenarios in which retirees exhaust their financial resources. When the market rebounds, all of a sudden, it’s once again en vogue. But what happened on a recent episode of Dave Ramsey’s show was completely new territory. He told folks to double the 4 percent rule!

I’ll quickly fill you in if you missed his rant and the resulting fallout. A 30-year-old man with $120,000 saved for retirement called into The Ramsey Show to ask what percentage of his assets he could safely expect to withdraw in retirement over 30 years.

The caller brought up a recent video posted by a Ramsey co-host named George Kamel, in which Kamel told viewers to follow a 3 percent withdrawal rate if they want their nest egg to survive thirty years or longer. This revelation baffled Dave Ramsey, and he didn’t try to hide his disdain. If the caller was correct about George’s video, Ramsey said, it needed to be removed from their content library. He claimed, quite angrily, that he’s perfectly comfortable with folks drawing down 8 percent of their retirement each year.

You read that correctly—8 percent!

According to Ramsey, it’s safe to assume the stock market can generate 12 percent returns, and thus, taking out 4 percent for inflation still leaves 8 percent available for use. “There’s all these goobers out there who have always put this 4 percent number crap in the market, and I’m just irate right now that we have joined the stupidity,” he vented. “I don’t know what the hell George is doing with a 3 percent withdrawal rate because that’s absolutely wrong,” he barked. “It’s ridiculous.”

Look, I want folks to enjoy as much of their own money as they can. I call it “maxing out without running out,” and I think it’s a crucial part of finding happiness in retirement. I agree with Ramsey that 3 percent might be too low, in my opinion. I refer to overly conservative rates as vampirically low because they suck out all the hope and joy of folks using their hard-earned retirement money to live happy lives.

Dave Ramsey is very talented, and I respect his optimism. That said, his words went off like a bomb, flinging financial shrapnel near and far and requiring a response. I ran his numbers against data from Robert Shiller, an economist at the Yale School of Management. I had trouble finding any long-term periods that averaged 12 percent—in fact, many fifty-to-eighty-year periods averaged in the 10 to 11 percent range.

I’m not the only one who disagreed with Dave’s math. If you watched the situation unfold, you heard him, not-so-calmly, opine, “The problem is . . . when you go down these stupid nerd rabbit holes and these Reddit threads with these morons who live in their mother’s basement with a calculator and then you . . . put that out into the dadgum community and then people go, ‘I don’t have enough money. It’s hopeless. I’ll never be able to save enough to retire.’”

Again, I get his frustration. If a financially secure retirement seems out of reach, what motivation do hard-working people have? That said, sometimes the math is the math. And those “nerds” Dave referenced did indeed run some numbers. These safe-withdrawal-rate researchers took a $1 million portfolio and divided it between a handful of stock mutual funds from American Funds, which Dave Ramsey is partial to. This group of funds, to their credit, had averaged a 12.6 percent rate of return since inception—even better than the 12 percent Ramsey suggested.

Then, they tested the theory. They set up a scenario where you retired in December 1999 and started withdrawing 8 percent per year in 2000. A $1 million nest egg, taking out $80,000 annually, adjusted for inflation. How long could you withdraw?

Well, due to two bear markets, starting in 2000 and 2007, and ratcheting $80,000 up for inflation, which turned into $100,000+ per year after about a decade—the portfolio ran out entirely sometime in 2013. Despite Dave’s anger being en fuego, his advice was no bueno. Although I love his enthusiasm, he is missing something called “sequence of return” risks. It’s what happens if you get a bad run for your investments in the early innings of retirement withdrawals.

So what’s the answer? In my opinion, three percent seems low, and 8 percent looks dangerously high. But just like the temperature of the Goldilocks’ porridge, the 4 Percent Rule seems just right. Of course, like all guidelines, there is no one size fits all.  Do your own research to determine what fits best for you.

I believe Bill Bengen’s original 4 percent research was correct. Our analytics team redid his study from 1994 and brought it into the modern day. We’ve updated it through 2017, 2020, and 2023, and guess what? It can still work. Even when Bengen upped his rule to 4.5 percent, in the vast majority of cases, the money lasted for thirty years plus.

Remember, the 4 Percent Plus Rule is a rule of thumb, not a straight-line mathematical law of the universe. This number, your withdrawal rate between 4 and 4.5 percent, needs to be somewhat flexible and dynamic. Yes, there’s a high likelihood that using 4 percent of your original retirement balance, plus inflation, over time, has a great chance of lasting for thirty to fifty-plus years.

And guess what? After years of vociferous disapproval, the prominent voices in financial planning have again changed their tune. According to an analysis done by investment research company Morningstar, the 4 percent rule for retirement is back. Just two years ago, they asked if a 3.3 percent withdrawal rate was more appropriate. No wonder everyone’s so confused—and Dave Ramsey’s blood pressure is so high.

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