Now, Let’s Talk About What You Really Can Spend in Retirement
Last week I wrote a piece about what current research shows people typically spend in retirement. Most people spend far less than they could. Over a 30-year period, people with a net worth of $560,000 or more could typically spend over $1 million more than they do and still never run out of money. I discussed several factors as to why this occurs, but the most important is simply not being educated on what a safe withdrawal rate looks like.
William P. Bengen is one of the fathers of safe withdrawal rates. His research over 20 years ago established what many call the “4% Rule” which in reality was the 4.15% rule– it just got rounded down to make it easier to remember. The purpose of the “4% Rule” was to establish a safe annual withdrawal rate that would assure retirees that they would never run out of money. Bengen tested 400 retirees (1926-1976) and found that the absolute worst performing retirement portfolio (for the person who retired in 1968) still lasted over 30 years using an initial 4.15% withdrawal rate.
Here’s the details of how it worked:
- Add up all of your retirement accounts and then multiply the total by .0415 (4.15%) and that gives you the safe withdrawal amount for year 1 of retirement.
- In subsequent years (Years 2-30, assuming a 30-year retirement) simply increase the dollar amount you withdraw each subsequent year by the inflation rate. For example: a $1 million investment portfolio would have a safe withdrawal amount in year 1 of $41,500. ($1 million x .0415). In year 2, assuming a 2.5% inflation rate, the safe withdrawal amount would be $42,538 ($41,500×1.025). In year 3, assuming a 2.75% inflation rate, the safe withdrawal amount would be $43,708 ($42,538 x 1.0275). Each year thereafter you check the annual inflation rate and apply the same formula.
- For the original rule, Bengen relied upon an asset allocation of 60% stocks and 40% bonds, and only used two asset classes: “US Large-Company Stocks” and US Treasury Bonds.
I just finished Bengen’s new book A Richer Retirement, Supercharging the 4% Rule to Spend More and Enjoy More wherein Bill shows his new findings primarily based on the expansion of asset classes. He revisited safe withdrawal rates using equal investments in 5 equity classes: US Large Cap, US Small Cap, US Mid Cap, US Micro Cap and International stocks. For bonds, he used 5% US Treasury Bills and 40% Intermediate Government Bond Funds. Overall, he primarily tested an asset allocation of 55% stocks, 40% bonds and 5% cash.
The result of using a much more diversified portfolio and then retesting the withdrawal rates over 30 years is a new safe withdrawal rate (now called SAFEMAX) of 4.7%. There’s no change in the formula set forth above; just start with 4.7% instead of 4.15%. While that is a great starting point to see if you are on track to retire, you should also be aware of the following:
- No one, not even William P. Bengen, can guarantee that what has worked in the past will continue to work in the future.
- The SAFEMAX of 4.7% is based upon the absolute worst investing environment he tested. Most of the retiree time periods allowed for a greater “safe” withdrawal rate and the average SAFEMAX for all retirees studied was 7.1%. On average, even with the 4.7% withdrawal rate the average retiree will die still having about 5 times what they started with.
- While not 100% guaranteed under the research a 5.25% withdrawal rate had a 95.7% success rate.
- The SAFEMAX withdrawal rate does not factor in leaving a legacy to heirs or charities. Decrease the withdrawal slightly to do that.
- Bengen’s website offers updates even to his recent book. On September 18, 2025, he updated the research to now recommend an allocation of 65% stocks, 30% bonds and 5% cash for higher upside potential.
As I mentioned last week, life was so much easier for retirees when they could just add up their guaranteed income from pensions and Social Security to figure out how much they could spend each month. Times have changed and now with large defined contribution plans like 401(k)s and 403(b)s, retirees must find a way to create their own “pension” to be added to their guaranteed income like Social Security.
The 4.7% rule is a good starting point. Figure out what your expected monthly expenses will be and then subtract Social Security and any pension income. Whatever you have left is what you are going to have to cover with your retirement nest egg and now you can apply the 4.7% rule to see where you stand.
Fun Fact: Michigan’s only bear is the black bear, which has a lifespan of about 10 years. Male black bears live in an area of about 100 square miles, females live in a 10-20 mile area. There are about 12,000 black bears in Michigan and the number is increasing annually. A male black bear can reach 500 lbs.
