The Originator of ‘the 4% Rule’ Thinks It’s Off the Mark. He Says It Now Could Be Up to 4.5%.

Bengen’s research—which became known as the 4% rule—is now one of the guiding principles of personal finance. Millions of Americans use it as a milestone for determining how much money they need to save for a long-lived retirement.

In recent years, as interest rates have plunged, other researchers have estimated the safe withdrawal rate is now as low as 2.4%.

But Bengen, who has continued to do research on the topic, disagrees. His original paper was based on just two asset classes, intermediate-term Treasury bonds and large-cap stocks. He has since concluded that by adding a third asset class, small-cap stocks, investors could safely withdraw as much as 4.5% annually.

Bengen, 73 years old, holds that view despite believing that the current stock market is overvalued. He has slashed the equity allocation of his personal portfolio in half. Nonetheless, he maintains that retirees will be able to keep pulling 4%-plus from their portfolios as long as inflation remains subdued.

We recently talked to Bengen, who retired in 2013, by telephone at his home near Tucson, Ariz. This conversation has been condensed and edited.

Barron’s: Why did you come up with your rule?

William Bengen: I was a relatively new financial planner back in early ’90s. I was just starting to get clients who were baby boomers and developing an interest in retirement. And they started asking me two questions. The first was how much do I have to save to retire? And how much could I withdraw? And I didn’t have answers to either question.

How did you settle on 4%?

So I went through my research material. I got out some information on inflation, about historical rates of return, and just started cranking numbers.

And it blew my mind away because it indicated in the middle range, if your portfolio had somewhere between 40% and 75% stocks, then the withdrawal rate is the same, about 4.2%.

I understand people got angry about the rule?

Oh, yeah. I got some angry calls. I got some angry hate mail. A lot of people had been using higher or lower withdrawal rates without any justification before.

Advisors were unhappy because they had been telling their clients something and here was this freshman advisor coming along and doing some research and saying, ‘No, that isn’t the way.’

Were you surprised it became the default rule of the planning industry?

To say the least. I did this primarily for my clients. And the interest it has generated over the years has really astounded me. I never would have thought that 26, 27 years later, I’d still be doing research on the same topic.

People have done backward research on the 4% rule for every period, and it has held up.

Yeah. After I did my study and published it, other people started doing studies. My greatest fear in my early years was that someone would find a numerical error and blow my whole thing apart but no. It was verified by research. That was very gratifying.

Does the rule still work today with such low interest rates?

I’ve been watching the most recent retirees, and you really can’t be sure because it’s for a 30-year time horizon. But I’ve done studies of the 2000 retirees, and they’re doing well. They’re successful with that withdrawal rate even though they’re in a low interest-rate environment.

I remain unconvinced at this point that the rule is inappropriate. I think there is a good chance of it continuing to work unless we get in a severe inflationary environment.

Why is inflation so bad for retirement savers?

I think of a retirement portfolio as a balloon with two holes. One hole is the returns, and the other is what you’re taking out, and you like to have an even match. But if you have high inflation, if the amount you’re taking out gets big enough, there’s no way you can prevent that balloon from collapsing.

With interest rates this low, retirees are eating into their principal more quickly.

There’s a counterbalance to that, and that is we’re in a very low inflationary environment. Withdrawals are growing at a much slower rate than they otherwise might, Once you raise withdrawals, you’re stuck with it for 30 years. It’s not like a bear market that comes and then it’s over and you go back to normal returns.

How do you have your money invested?

I’m currently allocating far less to stocks than I normally would be. I normally have a 50% allocation of stocks. I’m at about 25%. I just have a very uncomfortable feeling about the speculation in this market, the extremely high valuations, and the disparity between the stock market and the economy with the virus.

Isn’t this violating your own rule about keeping between 40% and 75% of assets in stocks?

My position is a temporary one. The 40% to 75% average is a long-term average you’d like to maintain. I’m doing this because of short-term conditions that I consider dangerous. I’m hoping after this is over, I’ll return to my normal allocation for stocks. I may even go higher than normal.

Some advisors are telling clients to put as much as 70% of their assets in stocks.

Well, it all seems backward to me. When the valuations are high, I think you should at the very least not increase your stock exposure and ideally reduce it a little bit to reduce risk.

The most important thing for retirees is that they have to maintain their nest egg. It’s a completely different scenario when you’re saving for retirement and you’re willing to take lots of risk because you want to get that egg as big as possible.

What did you do before you became a financial advisor?

Well, originally I was trained as an aerospace engineer, and I never practiced in the field. I really wanted to get into the space program. But when I graduated in 1969, there was nothing beyond the moon program that really interested me. Then they let it die.

I swore I would never get into my family soft drink franchise business, which went all the way back to 1887, but I did.

How did you go from working in the bottling business to becoming a financial advisor?

We decided to sell the business in New York. We moved to Southern California, and I drew up a list of things I wanted to do, including writing and financial advising. I had some money from selling the business, and thought maybe I should learn something about it. And as I learned about it, I thought maybe there is a business here where I can advise people about their finances.

What are you doing with yourself in retirement?

Well, I’ve started a new career. I want to become a fiction writer so I’ve written a trilogy of novels, which I still hope to get published. I’ve written to hundreds of literary agents and gotten lots of nice compliments about my writing but no takers so far. I don’t know what they’re looking for.

Here you want to be a fiction writer, and instead your claim to fame remains the 4% rule.

I’ll take what I can get. At least I don’t get rejection over my 4% rule.

Thank you, William.

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