Historical Results of a 4% Withdrawal Rate (1928-2023)

One often-quoted rule of thumb in retirement planning is the 4% withdrawal rate. It suggests that retirees can withdraw 4% of their initial investment portfolio balance annually, adjusted for inflation, without significantly depleting their savings over a 30-year retirement period. But how does this rule hold up under the scrutiny of historical data, particularly for a balanced investment portfolio?

The Origin of the 4% Rule:

The 4% rule originated from a study by William Bengen in 1994. Bengen analyzed historical market data and concluded that a 4% withdrawal rate was sustainable over 30 years for a portfolio invested in a mix of stocks and bonds. The rule gained popularity because it allows retirees to withdraw the same amount most years even when the market is down. This provided comfort around one of the biggest unknowns in retirement planning – future market returns.

Historical Results:

JPMorgan stress-tested a 40% stock, 60% bond portfolio (All Country World Equity and US Aggregate Bonds - not a recommendation) from 1928 through 2023. There were 67 separate “30-year” rolling retirements within this timeframe.

For a retiree that started with $1M and followed the 4% rule, only 15% of the time did they run out of money. 66% of the time, they ended retirement with more than they started with (over $1M). Nearly 50% of the time, they had 2x as much as they started with ($2M). And almost 25% of the time, they had 5x what they started with ($5M)!

Considerations:

Despite its historical success, the 4% rule isn't without its caveats. Several factors can impact the sustainability of a withdrawal strategy, including market fluctuations, and inflation. In addition, retiree’s spending is lumpy, not flat. You may want to spend more in the first decade and cut back later. Or you may have a big, unexpected expense that changes all the original calculations.

For this reason, I advocate for dynamic withdrawal rates that adjust based on the market environment and actual spending. In periods of strong market returns, you may be able to withdraw more if you are also willing to reduce withdrawals during a downturn.

Consider this – Using the 4% rule, a retiree who starts with $1M intending to spend it all during their life, has a much higher chance of dying with more than they started with than running out of money. While this might be a good investment outcome, I would argue it’s not a good life outcome! They likely left many opportunities to spend or give on the table. Most don’t spend or give more because they don’t know how much is reasonable without risking their future. Dynamic withdrawal rates solve this problem.

The historical performance of a 4% withdrawal rate has proved a useful long-term predictor of success and is a great starting place for retirees. But to get the most out of your retirement, it’s important to go beyond this. More on that next week!

Happy Planning,

Alex

This blog post is not advice. Please read disclaimers.