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Matt Montgomery

In 1994, Bill Bengen, an engineer-converted financial adviser in southern California, changed the retirement planning world with his now-famous “4% rule.” That’s the withdrawal rate on your portfolio you would use for income each year. For example, a $500,000 portfolio should not take out more than $20,000 per year to increase the probability the money would not be depleted for at least 30 years. After starting at 4%, Benegn’s study showed one could adjust it each by inflation and still be safe. The study used a conservative retirement portfolio -- 30% in the S&P 500 Index, 20% in U.S. small-caps, and 50% in intermediate U.S. Treasury bonds. Had one went beyond the 4% rule, the money would only have lasted 14 years before that portfolio would be depleted. Since his article appeared in the Journal of Financial Planning in 1994, the 4% rule has been universally accepted and applied by just about every financial advisor – including yours truly.

However, in a December 2020 column in Financial Advisor magazine, Bengen suggested his 4% rule may have been too conservative. He now uses 5%. His reasoning? He says now his 4% rule was misunderstood and that 4% was always a worst-case scenario. His 1994 study used data from the 1920s to October 1968 – one of the worst times for someone to retire and depend on market gains to produce income. By February 1966, the U.S. stock market had peaked and would do almost nothing long-term for 15 years. In addition, we had runaway inflation starting in the early 1970s that would continue until the early 1980s. Bengen says we’ve seen one of the lowest inflation and interest rate environments in the last 30 years, a new retiree may be safe starting with a withdrawal rate of no more than 5%. While 1% more may not seem earth-shattering, over a long period of time, that 1% difference can be quite a significant boost to retirement income.

The caveat to Bengen’s revision t 5%? He says if we see a sustained spike in inflation combined with a slow-growth economy, i.e., the 1970s again, the 5% rule wouldn’t work.

While Newton’s laws of physics never changes, the laws of money management do change. When the market environment changes, we must change. That’s why I recommend taking a more personalized approach to you financial planning and not relying on some set percentage like 4% and then forgetting about it. You must consistently – at least once per year -- review and revise your withdrawal rate according to the market environment and your personal situation.

Securities offered through Royal Alliance Associates, Inc. Member FINRA, SIPC. Advisory services offered through Matt Montgomery, a Registered Investment Advisor not affiliated with Royal Alliance Associates, Inc., 1504 East Rusk, Jacksonville, Texas, 903-586-3494, * An Index is a portfolio of specific securities (common examples are S&P, DJIA, NASDAQ), the performance of which is used as a benchmark in judging the relative performance of certain asset classes. Indexes are un-managed portfolios and investors cannot invest directly in an index. Past performance is not indicative of future results.

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