Bill Benzen, the retirement researcher who created the famous 4% rule, has a message for early retirees: You may be living more frugally than necessary.
“I think they’re cheating themselves a little bit,” Benzen told CNBC’s Make It about retirees who strictly follow their original directives (1).
The issue is not that Benzene’s research was wrong. Instead, he argues that many retirees focus on a fixed percentage — 4%, or his updated 4.7% — without considering economic and market conditions that might make withdrawals safely higher or require more caution.
For early retirees, this context is especially important. Retiring at 45 or 50 means managing a portfolio for 40 to 50 years, making the difference between an unnecessarily restricted life and sustainable spending critical.
Benzen’s original 4% rule, published in 1994, suggested that retirees could withdraw 4% of their portfolio in the first year and then annually adjust the dollar amount for inflation without losing money over 30 years. His updated research recommended 4.7% for a 30-year retirement and 4.2% for a 50-year horizon (1).
But these numbers represent worst-case scenarios: withdrawal rates that work even for retirees entering retirement during one of the most challenging periods in financial history.
“My research shows that if you endure a substantial bear market early in retirement, it lowers your withdrawal rates, because it takes more out of the portfolio than you’re attracted to,” Benzen explained to CNBC (1).
Equally important, if you avoid those worst-case scenarios, you may be able to withdraw significantly more.
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So, how can early retirees determine if they are being too conservative? Benzene points to several economic and market indicators that should inform withdrawal decisions:
Market valuation begins at retirement. Stock market valuation strongly affects future returns. The Shiller CAPE (cyclically adjusted price-to-earnings) ratio, which divides current prices by 10-year average inflation-adjusted earnings, provides one measure. According to GuruFocus data, the S&P 500 Shiller CAPE ratio was around 40 in December (2).
That’s above the historical average of 16 and close to levels only seen during the dot-com bubble of the late 1990s. Higher valuations generally predict lower future returns, suggesting caution for those retiring today. Conversely, retirees who begin withdrawals when ratings are moderate or low can historically use safely higher withdrawal rates.
Inflation trends are important. Rapidly rising costs erode purchasing power, potentially forcing retirees to withdraw more or cut spending. Current inflation, at 2.8%, remains above the Federal Reserve’s 2% target, according to the Federal Reserve Bank of St. Louis (3). Early retirees should monitor inflation closely, as persistently high inflation favors more conservative early withdrawals.
Interest rates and bond yields. Benzene’s updated research has the portfolio holding 45% bonds and 5% cash (1). When bond yields are high, that portion generates more income, supporting higher overall withdrawal rates. But when yields are depressed, retirees may need to draw more carefully.
Currently, yields have normalized from their pandemic-era lows but remain below historical averages, creating a moderately supportive environment for exports.
The order of return risk. The sequence of investment returns is very important. Strong returns early in retirement create a cushion, allowing higher withdrawals. Poor returns in the first few years can create a portfolio “hole” that can be difficult to recover from.
This uncertainty means retirees should reassess withdrawal rates regularly rather than set it once and forget it.
Flexibility works in favor of early retirees. Unlike traditional retirees who may have fixed expenses and limited ability to return to work, early retirees often have more options. For example:
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You can reduce discretionary spending during market downturns.
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You can earn income from consulting, part-time work or side projects if needed.
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You can reduce your living conditions if necessary.
The more flexible your spending is and the more options you maintain, the more aggressive you can be with initial withdrawal rates, because you have options if conditions deteriorate.
For early retirees questioning whether their withdrawals are too conservative, Benzene’s research suggests asking these key questions:
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1. What was the market valuation when you retired? If withdrawals begin when stocks are overvalued or undervalued, you may have more room than you think.
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2. How has your portfolio performed in early retirement? Strong early returns can build a cushion. If your first few years provide above-average benefits, you may be unnecessarily restricted in spending.
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3. How flexible are your expenses? If you can cut 20 to 30% of expenses during downturns, you can afford higher basic withdrawals.
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4. What is your earning potential? Early retirees with marketable skills and the occasional desire to earn income can withdraw more aggressively than those without a backup plan.
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5. How is your health and family longevity? A 45-year-old retiree in excellent health with a family history of longevity should plan more conservatively than a 55-year-old retiree with significant health challenges.
Early retirement requires planning for a longer time horizon. Although not fun to consider, realistic longevity expectations are another important factor to consider for early retirees.
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CNBC (1); Master Focus (2); Federal Reserve Bank of St. Louis (3)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
