Bill Bengen, creator of the early retirement rule: “Early retirees may be deceiving themselves”

Many people spend a large part of their lives thinking about retirement. The most common path is to rely on a pension after contributing to the system for several decades, but in some cases there are other alternatives. These include selling a business or living off investments.

In many places, especially in the United States, the FIRE movement is very popular. FIRE stands for Financial Independence, Retire Early. It refers to achieving enough financial freedom to live without working until roughly traditional retirement age.

The goal is to save a large portion of income in order to build an investment portfolio big enough to support ongoing withdrawals. In this context, recent research suggests it may be possible to withdraw more from an investment portfolio each year than previously thought. For years, financial planners have relied on the so-called “4% rule” as a guideline.

What is the 4% rule and what is the change in the withdrawal rate

This rule states that it is safe to withdraw 4% annually from a balanced portfolio over a 30-year retirement. It was originally described by financial advisor Bill Bengen. In his new book, Bengen revises this rate upward. “I think people are fooling themselves a little,” he told CNBC when referring to the 4% rule. According to his updated analysis, the rate can rise to 4.7%, and it may increase further during periods of low inflation.

Bengen originally arrived at his conclusions using historical data dating back to 1926. His goal was to determine what percentage retirees could withdraw, based on history, without anyone in his dataset running out of money. After making several assumptions, he found that a 4% withdrawal rate would have allowed every historical investor to sustain a 30-year retirement without depleting their funds.

Caution with withdrawals

“My research shows that if a major stock market downturn occurs at the beginning of retirement, it lowers sustainable withdrawal rates because it erodes a large portion of the portfolio while withdrawals are already taking place.”

Even so, the creator of the rule urges caution and recommends erring on the side of conservatism. “You do not know how the market or inflation will behave. You do not know how long you will live. You really do not know what your expenses will be in 30 years,” he concludes.

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