No. 02Paper1994
Determining Withdrawal Rates Using Historical Data
William P. Bengen
Origin of the 4% rule. Bengen used a more conservative approach (worst-case) than Trinity (probabilities). His SAFEMAX of 4.15% has withstood 30+ years of new historical data.
Abstract
Original paper that established the "4% rule" before the Trinity Study. Bengen, a financial planner, analyzed every rolling 30-year period from 1926 using S&P 500 and intermediate-term government bonds. Sought the "SAFEMAX"—maximum withdrawal rate that would have survived the WORST historical period (starting retirement in 1966 before the lost decade). Found that 4.15% would have worked in all historical scenarios. Bengen used government bonds (less volatile than Trinity's corporates), producing 100% success rate vs Trinity's 95%. Paper also introduced the concept of annual rebalancing and inflation adjustments. Rigorous methodology using worst-case scenarios vs probabilities.
Key Ideas
- 1SAFEMAX of 4.15% would have survived WORST historical scenario (retirement in 1966)
- 2Methodology: seek worst-case in rolling historical periods, not probabilities
- 3Using intermediate government bonds (less volatile) allows higher safe rates
- 450-75% stocks is optimal—more stocks doesn't significantly improve SAFEMAX
- 5Annual rebalancing crucial to maintain target allocation
SAFEMAX represents the maximum withdrawal rate that would have survived the worst historical period. If it survived 1966, it will probably survive your retirement.
4.15%
Bengen's original SAFEMAX—rate that survived worst historical scenario (retirement 1966)