Retirement Income Planning: Is the 4% Rule Too Conservative?

Turning a portfolio into income throughout retirement is a very different task from the accumulation phase of a portfolio. Many are familiar with William Bengen's rule of thumb that found that an inflation-adjusted 4% withdrawal rate in a 50% stock / 50% bond portfolio would make a portfolio last for 30 years in the worst of economic conditions. But some have rightly wondered if Bengen's rule is too conservative. Indeed, well-known financial planning researcher Michael Kitces ran his own models, and he found that

...in the overwhelming majority of scenarios, returns are not so bad as to necessitate a 4% initial withdrawal rate in the first place. In fact, by applying the 4% rule, over 2/3rds of the time the retiree finishes with more than double their wealth at the beginning of retirement, on top of a lifetime of (4% rule) spending! Half the time, wealth is nearly tripled by the end of retirement, as retirees fail to spend their upside!

This is interesting. This means that by withdrawing from one's portfolio too conservatively in retirement, a retiree may actually not spend enough. A natural consequence of this might be that the retiree doesn't enjoy retirement the way she envisaged, or worse, may not be able to meet her financial needs. It can also mean that the retiree leaves a windfall at death, something that may or may not be desired.

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