Forget the 4% rule: This is how much you really should spend in your first year of retirement

The 4% rule is no more. When financial advisor Bill Bengen first offered his expert take on how much retirees should spend once they stop working, he likely never imagined people would still be referring to it more than 30 years later.

Where the 4% rule came from

In case you aren’t familiar, Bengen wrote an article for the Journal of Financial Planning in October 1994 advising retirees to plan to spend 4% of their savings in the first year of retirement, then continue to withdraw that same amount each year, adjusted for inflation. His belief was that this spending rate would allow retirees’ money to last 30 years.

Bengen has admitted that the “4% rule” was not a term he created or popularized himself, especially since the exact figure he cited in his original article was 4.15%. References to the rule initially surprised him, but he has since embraced it and adapted it.

Why the 4% rule has changed

The shift from 4% to 4.7% comes down to what Bengen describes as his research “getting more sophisticated.”

When he first proposed the rule in the mid-1990s, his model assumed retirees split their savings evenly between large-company stocks and U.S. government bonds.

Now, however, he works with a more diverse portfolio that includes large-, mid- and small-cap stocks, international equities, bonds and Treasury bills. This better reflects the portfolios of modern retirees. His latest calculations are also less conservative, given the stock market’s strong performance in recent years. Today, his recommended mix is 55% stocks, 40% bonds and 5% cash.

Financial advisors weigh in

Most financial advisors now recommend spreading savings across multiple asset classes, including various types of stocks and bonds, real estate, cash and cash equivalents.

While Rob Williams, managing director of financial planning at Charles Schwab, told USA Today the 4% rule remains a “good place to start,” Douglas Ornstein, a director with TIAA Wealth Management, says most of his clients’ spending patterns in retirement are “dynamic” rather than “static.” In other words, every retiree’s situation is different.

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