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Weekly eLetter 10/23/2020 –Great News for Retirees from Bill Bengen!

It’s been more than 25 years since Bill Bengen, a financial adviser in southern California, created the so-called “4% rule.” That’s the concept that if you want to be sure your retirement nest egg lasts at least as long as you do, pay careful attention to spend no more than 4% of the balance in the first year, and then adjust the withdrawals according to the inflation rates each year. He called his rule ‘Safemax’ which he believed was the amount you could withdraw each year and be ‘safe’ as far as running out of money.

Since his article stated his conclusions in the Journal of Financial Planning in 1994 it’s been touted as heresy by some and absolute truth by others. Still the rule has stuck, and it’s been a useful guide. We actually used it as a guideline in our retirement workshops beginning in the 80’s. However- Bengen (who has sold his practice and moved to Arizona) has recently updated his numbers. He says now that the 4% number was a ‘worst-case scenario’ that was based on someone retiring at just the wrong time and holding a balanced* portfolio. Note- he actually raised it to 4.5% in 2006. But now he comments that, at other points in our history, a historically safe rate might be about 7%! Of course, retirees wouldn’t know whether that worked until the end of their retirement. Today in his own work he uses a 5% number as his ‘safe’ withdrawal rate.

How much of a difference does that make? Well suppose that you have accumulated a nest egg of $1,000,000. Under the early rules a 4% distribution meant your starting ‘safe’ withdrawal rate was $40,000 a year. Suppose you opt to use the number he is now actually using personally. In that case your first-year withdrawal becomes $50,000! You’ve just gotten a 20% raise in your retirement income!

As always, we suggest you run your individual specific situation by a qualified retirement planner- but you can tell them that you’re aware that Bill Bengen has raised the magic number!
*His calculations, incidentally, are all based on a conservative retirement portfolio where you keep 30% of your money in the S&P 500 SPX, +0.52%, 20% in U.S. small-caps such as the S&P 600 SML, +1.51%, and 50% in intermediate U.S. Treasury bonds TMUBMUSD07Y, 0.613%.

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