For nearly three decades, many financial advisors have relied upon a total returns strategy to generate retirement income for their clients. According to this conventional wisdom, if retirees stay 50% to 75% invested in equities and withdraw 4% annually to fund spending, their nest eggs will be sufficient to get them safely through a 30-year retirement, regardless of market conditions.
This 4% rule, created by financial advisor and researcher Bill Bengen in his famous 1994 study, is rational, historically proven advice. But here’s the thing: In today’s inflationary climate it’s super difficult to follow once you’re retired. How do I know that? Because the now-retired guy who invented it isn’t sticking to it. In a recent Wall Street Journal article Bengen, citing unprecedented economic conditions and high market valuations, recommended that retirees rein in their spending and lower their 4% drawdown. (A November 2021 Morningstar report endorsed a 3.3% withdrawal rate.)