Where Does the 4% Safe Withdrawal Rate Come From?

Where did the 4 percent withdrawal rule come from? The 4 percent rule comes from an October 1994 Journal of Financial Planning article penned by William Bengen called “Determining Withdrawal Rates Using Historical Data.” The methodology is based on an earlier 1952 paper by Andrew Roy, “Safety First and the Holding of Assets,” published in Econometrica: Journal of the Econometric Society. 

In a May 11, 2004 press release, Merrill Lynch recommended a 4 to 6 percent annual withdrawal rate. A more recent 2013 study published by Morningstar, “Low Bond Yields and Safe Portfolio Withdrawal Rates,” lays out a 2.8 percent rule.  The study is an excellent review of the underlying concepts and theories of withdrawal rates. 

Is there a magic withdrawal rate?  As an investment counsel whose expertise is structuring and managing retirement portfolios of $5 million plus, I can tell you that there is no magical percentage withdrawal rate that applies across the board to all retirees. 

I can also tell you that investors are not likely to know what’s best for them. When individuals were asked in 2004 (Merrill Lynch's Retirement Preparedness Survey) how much they could safely withdraw each year, the answer was over 20 percent, and the “average expected rate of return from assets” during retirement was 22 percent.  Remember that 2004 was just a few years after the Internet Bubble burst.

This blog is na excerpt from Julie Jason's column (Nov. 4, 2016).  If you would like the full version, email readers@juliejason.com.

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