During retirement, the primary concern for many retirees is withdrawing funds at a sustainable rate without depleting their portfolio during their lifetime.

As we continue to navigate the ever-evolving landscape of retirement planning, it’s crucial to stay on top of the latest research and insights.

As we have written in the past, Vista has often advocated for a withdrawal rate closer to 5% rather than the traditional “4% rule” proposed by Bill Bengen in the 1990s.

Is this still the case for 2024?

Evolution of the 4% Rule

Bengen’s initial rule suggested retirees could safely withdraw 4% of their portfolio value annually, adjusted for inflation, without risking depletion over a 30-year horizon.

His advice was a game changer in the world of retirement planning in that it provided a reliable framework for sustainable withdrawals.

Bengen later revised upward the 4% withdrawal rate to 4.3% and subsequently refined it further to 4.5%.

A recent study published in the Journal of Financial Planning reinforces our perspective on the viability of a higher withdrawal rate and sheds new light on the concept of the highest safe portfolio withdrawal rate, otherwise known as SAFEMAX.

Diversification Impacts Withdrawal Rates

So, what are the key differences between Bengen’s original research and the latest study?

In “Revisiting William Bengen’s SAFEMAX Portfolio Withdrawal Rate,” economist Christopher M. Duquette delves into Bengen’s original methodology and presents adjustments that reflect more realistic bond return data. Duquette’s research also suggests that more diversification and stock exposure can further increase the SAFEMAX withdrawal rate.

Bengen’s seminal study that resulted in the “4% rule” was tested against a 50% stock / 50% bond portfolio comprised of the S&P 500 Index and U.S. Treasury bonds.

Duquette’s latest research highlights how adjustments to an investment portfolio composition—specifically, including better diversification and increasing the portfolio’s stock allocation above 50%—can support an increase in the SAFEMAX withdrawal rate.

Enhancing Bengen’s original methodology, Duquette finds the SAFEMAX rate is closer to 4.9%.

While each investor and portfolio is unique, Duquette’s findings align with Vista’s approach. They also highlight the lifetime spending benefits to diversifying portfolios beyond just U.S. large caps to include small cap, value, international, and emerging market stocks.

Taking Stock of Your Financial Blueprint

Duquette’s research underscores the significance of reevaluating conventional wisdom in light of new insights.

While the “4% rule” has long been considered a benchmark for retirement planning, we’ve often championed a withdrawal rate closer to 5%.

Of course, other factors such as personal spending habits, non-portfolio assets, and future income and healthcare expenses all play into this decision.

As always, we encourage you to speak with your Vista advisors to regularly revisit your personal financial goals, so you’re fully confident in the journey ahead.