For decades, the “4% rule” has served as a cornerstone of retirement planning, a simple, reassuring guide to help retirees avoid running out of money. But as markets evolve and retirements lengthen, so too must our strategies. Bill Bengen, the architect of the rule, has revisited his research and offered a fresh perspective that could help Australians retire with greater confidence and flexibility.
The origins of the 4% rule
In the early 1990s, Bengen sought to answer a pressing question: how much could retirees safely withdraw from their portfolios each year without exhausting their savings? His analysis, based on historical market data and a portfolio comprised of 50% US stocks and 50% bonds (50/50), led to the now-famous conclusion: a 4.15% withdrawal rate (rounded to 4%) would sustain around 30 years of retirement funding—even through the worst market conditions.
This rule became a powerful planning tool and rule of thumb. For example, if you wanted $50,000 per annum in retirement income, you’d need a $1.25 million portfolio ($50,000 ÷ 4%). Simple!
Why it’s time to revisit the rule
While the 4% rule remains a useful benchmark, Bengen now argues it may be too conservative for many retirees. In his new book, “A Richer Retirement”, he introduces strategies to “supercharge” the rule, allowing for higher withdrawals without increasing risk.
By diversifying beyond the conservative 50/50 portfolio, adding smaller, and mid-cap stocks, as well as international equities (a novel idea for US based studies), Bengen found that retirees could safely withdraw up to 4.7% per annum, and potentially even up to 5.25–5.5% in today’s environment.
The four “free kicks” of retirement planning
In working with retirees, I have observed four key strategies that can enhance your retirement’s financial outcomes without adding undue risk:
- Diversification (the golden rule): Broaden your asset mix across and within the staple asset classes of domestic and international stocks, listed property and bonds. Interesting to note this was a key to Bengen’s updated research findings to expand the 4% rule.
- Regular Rebalancing: Maintain your target allocation to manage risk and effectively capture portfolio gains.
- Systematic Portfolio Tilts: Slightly favour quality small-cap, underpriced and consistently profitable equities to target long-term growth.
- Retirement Glide Path: In anticipation of your portfolio providing your lifestyle income, gradually decrease your investment in equities in favour of high credit quality and liquid bonds until your desired asset mix is achieved. This approach helps mitigate early-retirement market shocks while providing some “dry powder” to take advantage of market recoveries in the future.
While some of these strategies may be beyond the management skills of many retirees, it should be easily achievable with the guidance of a qualified advisory professional.
Customisation is key
While Bengen’s research is US-based, the maths holds true and the principles translate well to Australian retirees, especially when adjusted for our unique financial landscape and benefits available in our superannuation system.
However, the most important takeaway from Bengen’s updated research is this that your retirement is personal. Your spending patterns, health outlook, family dynamics, and view on risk all shape your ideal strategy. The 4% rule is a starting point, not a one-size-fits-all solution.
At Capital Partners, we believe in finding your ‘True Prosperity’, helping you align your wealth with your life. Whether you’re approaching retirement or already enjoying it, get in touch to schedule a conversation about stretching your retirement rules.
Bill Bengen’s updated work “A Richer Retirement” is available online here.
