It began with the forging of the Great Rules. Three percent annual returns were given to treasury-bills, immortal, fairest, and surest of all investments. Five percent was given to bonds, disciplined and reliable sources of revenue. And seven, seven percent was given to company stocks, which above all else desire capital return. For within these rules were bound the benchmarks to govern any retirement portfolio. But they were all of them relieved, for another rule was made. Deep in the land of California, under the blistering sun of San Diego, the great financial planner William Bengen forged a master rule in secret, and into this rule he poured all of his foresight, his experience, and his will to encompass any retirement scenario. One rule to ring them all. What I am discussing, for those who don’t fantasize about Lord of the Rings featuring a plucky band of accountants, is the “four percent rule.” I hope to cover what it is, the reasoning behind it, and its validity in current market conditions. And no orcs, I promise. Planning for income needs in retirement is difficult under the best of circumstances. On the one hand is a retiree with a large balance in their retirement account, saved up over a lifetime of hard work. On the other is an unforeseeable number of years of living expenses, with unpredictable market returns and unknowable inflation. Faced with this conundrum, William Bengen researched the historical record to determine not which plan could work, but which one always works. His study, published in 1994, found that a four percent withdrawal rate provided a minimum of 30 years of retirement income. This proved true across many financial crises, from the Great Depression to the stagflation of the seventies. He experimented with a variety of allocations and his insights were far-ranging, but for retirees the take-away was this: the most you can withdraw from your portfolio with (almost)… | Read More »