Nearly 30 years ago, financial advisor William Bengen conceived the so-called 4% rule as a guardrail for retirement budgeting. In essence, it holds that people can fund their retirement adequately by withdrawing or consuming 4% of their financial assets annually, increasing it periodically for inflation.

Over the years, Bengen himself tweaked his own guidance. In worst case scenarios, retirees can actually withdraw 4.7%, the now retired Bengen says. Adding small-cap stocks to a portfolio of intermediate-term Treasurys and large-cap stocks can help enhance returns.

Not all advisors agree. As the price of stocks and bonds climbed over the last decade, the income that these financial assets produced declined on a per dollar basis.

Some advisors and academics saw this altered economic environment as a valid reason to advise retirees to slash their asset consumption rate to 3%, in case returns regressed to the historic mean. Few of them were even thinking about a resurgence in inflation.

Mixed Reviews
Few advisors, Bengen included, believe the rule should be set in stone. “While the 4% rule doesn’t really need revising, I’ve been saying since 2004 that a flexible withdrawal approach is best and most realistic,” says Jonathan Guyton, a financial planner and principal at Cornerstone Wealth Advisors in Edina, Minn., who has extensively studied the issue,

Retirees with a solid, evidence-based plan and an advisor to keep them on track, Guyton adds, can manage to live within the 4% spending limit. Retirees “are doing just fine these days even as markets fluctuate,” he argues.

But Bob Kalman, founder and senior portfolio manager at Miramar Capital in Northbrook, Ill., disagrees. “The 4% rule does need modification for several reasons,” he says, citing rising interest rates and stock market returns that were unusually high until 2022. The rule, he says, “presupposes factors that aren’t applicable in today’s environment.”

The Case Against The 4% Rule
For some, the 4% rule is intrinsically flawed.

“The whole thesis for a ‘safe’ 4% income rule is based on backward-looking data,” says Philip Chao, founder and CIO of Experiential Wealth in Cabin John, Md. “Assumptions that worked for the past may and often do not work exactly going forward.”

Marissa Beyer of Fidato Wealth in Middleburg Heights, Ohio, puts it another way. “What happens if the stock market has a great one-to-two-year period and the account balance goes up—does the distribution amount get recalculated?” she asks. “What if the opposite happens, and the account value goes down?”

The rule also doesn’t account for unexpected expenses, she says, such as healthcare emergencies, troubled grandchildren or “bucket-list trips.”

The 4% Stalwarts
Yet others stand by the old standard. Indeed, research conducted by Bengen, Michael Kitces and others found that the rule held up for people who retired at just the wrong time and confronted a potential sequence-of returns shortfall.

Put simply, the sequence-of-returns challenge occurs when someone retires at the start of a bear market for stocks and bonds or a bout of inflation. All three conditions prevailed in the late 1960s which began an extended decade of high inflation and weak equity returns that combined to ravage Americans’ wealth. Multiple sttudies show the 4% rule still worked.

“The 4% rule doesn’t need revision insomuch as it serves as a useful guideline,” says John E. Roessler, senior financial planner at Kovitz, a wealth management firm in Chicago. It is, he says, a sustainable rate even if you retire at “the worst moment.”

Roessler calls it “a very conservative withdrawal rate” and, therefore, appropriate for today’s volatile market.

Retirement Spending Is Clients’ Top Concern
For clients, understanding how much they can safely spend in retirement without going broke is the top reason they seek professional financial guidance, according to a recent survey by the American College of Financial Services’ Granum Center for Financial Security.

Unlike our working years, retirement is “more about preserving assets than growing them,” says Christopher Briscoe, vice president and wealth advisor at Girard, a Univest Wealth Division, in King of Prussia, Pa. “You want to find an allocation that helps you achieve your goals without taking on unnecessary risk.”

Advisors need to provide clients with a reality check, taking into account all their retirement income sources—401(k)s and other retirement accounts, Social Security, possibly real estate—as well as reasonable expense estimates.

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