The Father of the 4% Rule Finally Sets the Record Straight

#560: Bill Bengen, the former rocket scientist who discovered the "4 percent rule" of retirement planning, joins us at the Bogleheads conference in Minnesota.

Bengen clarifies that calling it a "rule" is misleading since it doesn't fit everyone's situation. The 4 percent figure came from studying the worst-case scenario since 1926, when someone who retired in 1968 could only safely withdraw 4.2 percent annually. Out of 400+ retirees in his database, that was the only one who had such a low safe withdrawal rate — most could take out much more.

Recent research has pushed the "safe" withdrawal rate closer to 5 percent. But Bengen identifies eight key factors that affect how much you can withdraw, including how long you'll be retired and whether you're drawing from taxable or tax-deferred accounts.

For early retirees planning for 50-60 years, Bengen says the safe withdrawal rate asymptotically approaches 4.2 percent — meaning even with an infinite time horizon, it won't drop below that. He thinks the common advice to use 3 percent for early retirement is unnecessarily conservative.

Bengen shares what he calls the "four free lunches" in retirement planning:

1. Using an equity glide path (reducing stocks at retirement, then increasing later)

2. Diversification across asset classes

3. Regular portfolio rebalancing

4. Slightly overweighting higher-returning assets like small-cap stocks

When it comes to market drops versus inflation, Bengen has clear advice: Don't panic during bear markets — they typically recover. But if you hit extended high inflation early in retirement, it's time to "head for the bunkers" and cut expenses drastically.

Beyond finance, Bengen shares his excitement about space exploration as a former rocket scientist who graduated from MIT just months before the moon landing. He hopes to live long enough to see humans reach Mars and believes space tourism helps people appreciate Earth's beauty and fragility.

The interview ends with a light-hearted discussion about whether Pluto should still be considered a planet (Bengen still calls it one, out of habit) and speculation about future tourism to Saturn's moon Titan once the sun's expansion makes it warmer in a few hundred million years.

Timestamps:

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0:00 Paula introduces Bill Bengen, creator of the 4% withdrawal rule

2:19 Bengen explains how the 4% rule represents a worst-case scenario from 1968

10:14 Bengen warns against using a fixed percentage withdrawal method, as it could lead to dangerously low income in down markets

17:32 Discussion of the "smile" pattern in retirement spending - high at start, dips in middle, rises at end for medical costs

23:22 Bengen shares the four "free lunches" in retirement planning, including equity glide path and diversification

34:25 Conversation shifts to bonds and stocks no longer being inversely correlated in 2022

35:44 Deep dive into Black Swan events and how to prepare for unpredictable market crashes

42:14 Bengen advises when to panic (inflation) and when not to panic (bear markets) during retirement

49:20 Analysis of spending categories that rise faster than inflation, like healthcare and housing

51:27 Bengen discusses graduating MIT in 1969, just before the moon landing

51:56 Conversation turns to current space exploration and plans for Mars missions

53:39 Bengen speculates about future tourism to Saturn's moon Titan

54:17 Light-hearted debate about Pluto's planetary status

Resource Mentioned

https://affordanythi