As someone who has spent way more time than any normal person should researching the science and history of retirement math, I have always held a special place in my heart for the grandfather of safe withdrawal rates, the great Bill Bengen.
Back in the early 90’s when the state-of-the-art financial advice was to simply spend the average return of one’s portfolio in retirement, Bill had the foresight and technical know-how to test that assumption with actual data. As it turns out, the simple and seemingly reasonable advice which everyone took for granted was provably dangerous. But luckily, there was also a measurable spending amount which survived even the worst times in history.
And with that insight, the famous 4% retirement rule was born. If you have ever had an interest in retirement investing, I’m sure you’ve heard of it. Bill Bengen was that impactful.
Beyond the taste for good historical data and urge to question every assumption that are music to my own heart, another thing I have always admired about Bill is his modesty and intellectual honesty. Over the years, the 4% rule took on somewhat of a life if its own with countless people citing it to the point where even the original author often felt the need to point out that it’s not some law of nature. It was a measured result for a very narrow set of investments in a single country under specific spending conditions. And he has aways been quick to point out that more research is necessary.
That exultation to continue the work he started was a major reason I got into withdrawal rate calculations myself. From expanding the portfolio options and the home countries under consideration to testing any withdrawal strategy you can think of, I have spent a ton of time over the years building on the solid foundation that Bill Bengen originally laid. And my interest is not just intellectual but also personal. Financial independence changed my life, and I have Bill to thank.
So when I heard that Bengen recently published a new book that expanded on his old retirement insights with exciting new data, of course I had to pick it up. It’s called A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More. Spoiler alert — it’s excellent.
The book is full of math, wisdom, and even a new portfolio recommendation that Bill claims raises the old 4% rule to a healthy 4.7% simply by putting additional diversification to productive use. So in honor of the man who has given retirees so much, I intend to give back what little I can. Starting today, there’s a new portfolio on the site — Bill Bengen’s Richer Retirement Portfolio. By studying it in earnest, I believe all retirees can learn something new about the power of smart retirement investing.
The Richer Retirement Asset Allocation
From spending strategies to taxes and even some intriguing data on adjusting expectations based on prevailing stock valuations and inflation rates, the book is about so much more than just a simple asset allocation recommendation. But since that’s my specialty, it’s where I’d like to start.
If anything, I think Bill is perhaps too modest about his ideas to the point where he never even names the portfolio in question, simply referring it to the “standard” option. But to help people find it and provide an appropriately friendly reference point, I decided to name it according to the book title — the Richer Retirement Portfolio.
Richer Retirement Portfolio
| % | Asset Class |
|---|---|
| 22% | Large Cap Blend Stocks |
| 22% | Small Cap Blend Stocks |
| 11% | International Large Cap Blend Stocks |
| 40% | Intermediate Term Bonds |
| 5% | Treasury Bills |
For reference, the original portfolio options that Bengen studied all those years ago were solely large cap blend stocks and intermediate treasury bonds in the US. This time around, he got his hands on much more data and eagerly applied simple diversification principles especially to the stock portion. And while he even went so far as to test the assets to find unconstrained optimal percentages, he ultimately came back to a relatively simple equal-weight collection of large, mid, small, and micro cap stocks as well as international to cover every base. And the end result is quite exciting, as simply diversifiying the assets further raised the 30-year SWR from the classic 4% to an attractive 4.7%
You probably already noticed that there are no mid or micro caps in my version of the Richer Retirement Portfolio. That’s simply because I don’t carry data for those two assets, and I simplified by grouping them into the large and small allocations. For a sanity check of how that may affect the numbers, here’s a Withdrawal Rates chart which calculates the same 30-year SWR which he uses in his standard assumptions.
See that orange diamond at the 30-year mark? That’s the 30-year SWR looking at every retirement cohort in the historical record, equivalent to the “universal SAFEMAX” in Bengen’s terms. Even with different data sources, a simplified asset allocation, and a shorter timeframe under study (my data is since 1970 while his started in the 1920s), I calculate a 4.8% safe withdrawal rate compared to his own 4.7% number. That’s a solid match. Beyond feeling good about accurately representing Bengen’s work, I also enjoy replicating the calculation results of others. Hopefully that speaks well for both of us.
I always recommend that people read the word of the original portfolio author, so I encourage anyone interested in the Richer Retirement Portfolio to pick up Bengen’s book and read about his specific asset recommendations for yourself. If you choose to add mid and micro caps, great! You can still use this simplification for modeling purposes. And likewise — if you prefer the approach with two fewer funds, I think you’ll be in the same ballpark.
While the portfolio is presented primarily in terms of retirement planning, I also want to point out that can be a fine accumulation choice as well. Here is a Heat Map that shows the real CAGR for every investing timeframe since 1970. That’s a pretty consistent sea of blue overall, and I imagine most people holding this portfolio would have been quite satisfied with the results regardless of when they started.
Lessons in Safe Withdrawal Rates
This is the point in the portfolio discussion where I might dig into the underlying portfolio theory, but interestingly I think even that might do Bengen’s intent a disservice. Seriously — read the book. You might be surprised to learn that the asset allocation section is relatively small compared to other topics, including a nice history on withdrawal rate research methodologies in general. In fact, I would argue his discussion on withdrawal rate mechanics is perhaps the part that deserves the most attention.
One of the things that has frustrated me over the years how just how dogmatic the 4% rule has become in certain circles. In fact, I have even seen some people in financial message boards dismiss Bengen himself for suggesting that the number could be higher with just a few simple changes. When not even the inventor of the 4% rule is believed when he calmly explains the limitations of his original research and updates it accordingly, you know an idea is firmly entrenched in the cultural zeitgeist to the point of needing a reality check.
In the book, Bengen clearly expresses some of the same frustration in his own humbly intelligent way.
The so‐called “4% Rule” is not an immutable law, like Newton’s Laws of Motion.
Bengen said that in the context of being smart about it and not treating it like a guarantee. But noting how he often caveats any mention of the 4% rule with the aside (now the 4.7% rule), I believe it carries an important second meaning. The number itself is a simplification.
For example, many people are not aware that it was actually never the 4% rule to begin with. Bengen’s original work found a universal SAFEMAX of 4.15%. He rounded down to 4.1% to be conservative, and people who wrote about it simplified it to 4% to be punchy and memorable.
Even beyond the rounding, the idea that all stocks and bonds from every company and country can be accurately modeled with simple US S&P500 stocks and 5-year treasury bonds is of course ridiculous. Bengen never claimed as much, clearly stating that “two assets hardly constitute the kind of well‐diversified portfolio constructed by most advisors, but it allowed me to obtain preliminary results without drowning in complexity.” Thats exactly why he brought more data to the table now, and it’s the primary reason that the old 4% rule of thumb is out of date.
Diversification matters.
I expected all that, though. Bengen has talked about it for years even if it hasn’t received the same attention until now. What I didn’t expect were a few explanations in the book that mirrored my own to the point where it brought a smile to my face. So no matter whether you’re a Bengen fan learning about Portfolio Charts for the first time or a Portfolio Charts fan who wants outside confirmation for some of the ideas I talk about, let’s talk about a few informative parallels.
Balloons and lakes
Retirement planning is ultimately a dynamic systems problem with lots of time-dependent inputs, outputs, and moving parts. To help simplify the concept into something that someone new to the idea can understand, Bengen uses what he calls the balloon analogy.
Imagine your portfolio as a balloon full of air, only the balloon has two orifices. One is an input where air is constantly filling the balloon from income and investment returns. And the other is an output where air is slowly leaking to fund your spending needs. The trick to making your portfolio last is to allow it to fill with enough air that the slow trickle of expenses lasts for a very long time — even after cutting off the work income input — without depleting the reserves.
Similar to that balloon managing the supply of air, I have written about the same concept using the image of a lake. Rain and rivers fill the lake over time, while the dam on the other end controls the rate of water depletion to feed the farmlands below. Lots of smart planning goes into sustainable water management in the same way that responsible investors plan their retirement. For the full story on the lake metaphor, read How to Replace Income in Retirement.
No matter whether you think in terms of water or air, the core concept revolves around the controlled flow of resources. Master that idea, and your retirement planning goals will become much more clear.
Floors and runways
Another assumption in the original 4% rule research that Bengen addresses in the book is the idea that retirement lasts exactly 30 years. That was a reasonable stake in the ground, since the typical retiree starts at age 65 and may live another 30 years. But with expanding lifespans and the the growth of the early retirement community, it definitely doesn’t tell the full story. What is the safe withdrawal rate for someone retiring at 75? Or 40?
Chapter 5 covers this by introducing the concept of a withdrawal rate planning horizon. Here is a chart from the book that shows how SAFEMAX withdrawal rates for someone who retired in 1968 varied by the length of retirement.
You can see a few things here. First, withdrawal rates start very high for short retirements, which makes perfect sense. After all, if you only need your money to last 1 year then you can withdraw 100%. Also, withdrawal rates always go down the longer out you plan, but the change is not linear. It’s asymptotic, which is just a fancy way to say that it eventually approaches a steady number. Bengen calls this the “floor” which was safe even for perpetual retirements that last could theoretically last forever.
Of course, this chart just shows just one start date. Every start date has different results, and you have to track them all to truly understand the worst case scenario. What if you run the same analysis for every start date on record, collect each number for your desired retirement duration, and find the minimum of the set? That’s what Bengen calls the “universal SAFEMAX”. In layman’s terms, it’s exactly how the safe withdrawal rates you hear about are defined.
Look again at the chart. Instead of red columns, picture it as a smooth blue curve starting high on the left and leveling out to the right. Now focus on the section of the curve below 10% and to the right of 15 years. Does that seem familiar?
Each blue line on the Withdrawal Rates chart represents the exact same calculations for a single start date. Instead of displaying a page of 50+ column charts, it overlays every line on a single image to make the collection of outcomes easier to understand. The orange line tracks the minimum of all outcomes, representing Bengen’s universal SAFEMAX for any retirement duration for this portfolio. Same core insight. Just different approaches.
While Bengen speaks in terms of floors, I think of the long-term limit as a runway for planes approaching a smooth landing. Apparently I also have a thing for water metaphors, as I have also written about it in terms of a waterfall flowing into a riverbed. In this chart, the stat I call the long term withdrawal rate (LTWR) is equivalent to the universal portfolio floor. Plan for that number, and you can manage your retirement portfolio more like a perpetual endowment than a time-limited retirement fund.
I could go on for ages, but I also don’t want this post to be about me. I share these similarities not to boast, but simply to relate to the work of someone I admire in the hopes that it helps some of you connect to the core topic more closely. Artists may perform in a different styles like country, rock, or reggae while all singing about the exact same topic. No matter your music preference, I hope the message comes through.
How to Think Richer
Getting back to the Richer Retirement Portfolio, the last point I want to touch on is not the allocation or even the technical details but the name. After all, Bill Bengen chose the book title for a reason. It makes an important point often lost in retirement planning.
In my experience reading countless discussions about safe withdrawal rates, the topic too often devolves into a competition of who can present the most pessimistic take. The world has changed! 3% is the new 4%! Actually it’s 2.7%! It’s even strangely common for respected finance professionals to argue with a straight face that their clients should keep working for as long as humanly possible because retirement is a dangerous dream that will only lead to depression and even death. Seriously?
If you have ever felt that tug of financial doom-driven anxiety creep into your thoughts when planning for your future, take a moment to reflect on Bill Bengen’s words.
First, the creator of the original 4% rule of thumb is telling you that it was already overly pessimistic because of its unnecessarily limiting assumptions. The number can be revised up to at least 4.7% with some very basic asset allocation changes, and likely even more depending on how you approach your own planning.
Next, let’s assume you find some of the pessimistic arguments compelling. If a few simple changes can positively affect the starting point that all of those other downward revisions are built upon, then the same things can help them, too! You are not a slave to old assumptions that do not actually apply to you, and by mastering a few simple concepts you can build a measurably richer retirement.
And perhaps more importantly, the core idea of proper retirement planning really isn’t about spending so little that you essentially eliminate all risk. That’s the anxiety talking. It’s about constructing a well-designed financial system that supports a happy, fulfilling life. And part of that system also involves having the confidence and positivity to embrace uncertainty and occasionally diverge from decades-old spreadsheets to adjust accordingly along the way.
While it’s definitely not impossible, there’s a statistically very high chance that your own retirement timeframe will not be the worst-case in all of recorded history. What can you do to plan for that likely reality while tightening the belt if needed in the future? Figure that out, and even 4.7% is conservative. A richer retirement is about so much more than simply building your life around fear of the unknown. You deserve better. And with some smart planning, it’s totally achievable.
Bill Bengen covers many of those options in the book, and I highly recommend it no matter what portfolio you personally use for your retirement savings. You’ll be smarter for having read it, and it will also empower you to question similar assumptions the next time they arise elsewhere.
And yes, I even question a few of Bengen’s assumptions. For example, while he includes several new assets to consideration compared to his original research, they are not comprehensive. Add a few ingredients like small cap value and gold, and the data shows that withdrawal rates can be improved even further. So just like I say that you should not take the original 4% rule as a law of nature, the same applies to 4.7%. Continue to challenge assumptions (even mine!) and every day we will all get one step closer to the truth.
So if retirement is on your horizon, I highly recommend learning about the Richer Retirement Portfolio. Not only for how it can directly help you elevate your accumulation experience and raise your retirement expectations, but also for what it teaches that you can apply to other portfolios as well.
You deserve a richer retirement. Reframe your mind to how to build it, and your success rate will be much higher than you think.
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