Inflation and Market Conditions Have the Creator of the 4% Retirement Rule Changing Course

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Remember the 4% retirement rule – the one that says you should spend no more than 4% of your investments during the first year of retirement, and then adjust the total every subsequent year to account for inflation? It might be a good time to rethink that strategy.

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Even the man who came up with the 4% rule says it no longer applies in the current environment of skyrocketing inflation and high stock and bond valuations. Bill Bengen, who devised the rule in 1994, now recommends taking a more conservative approach until more is known about how long high inflation will last, the Wall Street Journal (WSJ) reported.

“The problem is that there’s no precedent for today’s conditions,” Bengen told the WSJ.

Under the original 4% rule, retirees would have been protected from running out of money in every 30-year period since 1926, no matter the economy. Bengen later revised the rule because of changes in investment portfolios. In 2006 he started recommending spending no more than 4.7% of your investments during your first year of retirement.

Now Bengen, who retired in 2013, recommends scaling that back to around 4.4%. That’s what he plans to do.

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“I won’t eat in restaurants as much,” he told the WSJ. “I live a fairly simple life. I don’t take a lot of trips and I’m happy with a deck of cards and three other bridge players.”

Other financial models recommend an even more conservative approach. A recent report from Morningstar recommends a 3.3% initial withdrawal rate for those retiring this year.

Meanwhile, the current high stock valuations pose an additional threat, the WSJ noted. Stocks have been trading at about 36 times corporate earnings over the past decade, according to Robert Shiller’s CAPE (cyclically adjusted price-to-earnings) ratio. That’s double the historic average, Bengen said.

“While low-interest rates justify higher stock valuations to some extent, I think the market is expensive,” he added.

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In the past, it usually took a bear market to move stock prices back down to normal. When this happens, retirees have to take money out of portfolios that are getting smaller rather than bigger. This could be especially problematic for recent retirees because they need their savings to last for many years.

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About the Author

Vance Cariaga is a London-based writer, editor and journalist who previously held staff positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal and Business North Carolina magazine. He holds a B.A. in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting earned awards from the North Carolina Press Association, the Green Eyeshade Awards and AlterNet. In addition to journalism, he has worked in banking, accounting and restaurant management. A native of North Carolina who also writes fiction, Vance’s short story, “Saint Christopher,” placed second in the 2019 Writer’s Digest Short Short Story Competition. Two of his short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. His debut novel, Voodoo Hideaway, was published in 2021 by Atmosphere Press.
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