From Dividend Growth Stocks:
William P. Bengen is an author and a certified financial planner. In 1994, he published a study concluding that if retirees withdrew 4% (the 4% rule) of their nest egg in the first year, and then increased the dollar amount by the inflation rate every year, their savings would easily last 30 years.
At the time of the initial study, he assumed the portfolio was held in a tax-deferred account and was evenly split between large-company stocks and U.S. Treasury bonds. In a subsequent study, he revised the withdrawal rate to 4.5%. The higher rate was supported by adding U.S. small-company stocks to the portfolio. This increased the portfolio’s potential return, and also increased its volatility.
Bengen notes that people who retired in 2000 are of the greatest concern. Since retiring, they have endured two major bear markets. The next five years will be critical for this group. A surge of inflation above its historical average of 3%, could derail the 4% rule for this group.
You have to be able to survive worst-case scenarios. There is a better way…
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