The 4% rule is out of date, but not in the way you think it is. It actually is too conservative.
I’m referring to the retirement spending rule that was made famous by a 1994 article by financial planner William Bengen. He arrived at this rule by examining the historical performance of U.S. stock and bond markets, calculating what constant inflation-adjusted amount you could withdraw from your portfolio each year and, even in the worst case, not run out of money over a 30-year period.
There have been numerous studies in recent years suggesting that this 4% rule is way too high. One study, which I discussed last fall, looked at more history than Bengen, including for non-U.S. markets, and found that a 1.9% rule would be more realistic.
Crucially, however, this history doesn’t reflect what retirees can receive by investing in inflation-protected government bonds, which are a relatively recent creation. The first U.S. government inflation-protected bond (TIPS) was introduced in 1997, for example. Currently, given that TIPS are yielding more than at almost any other time since 2011, you can lock in a 4.3% inflation-adjusted spending rate for the next 30 years that is virtually guaranteed.
To review, TIPS pay interest above and beyond CPI inflation. Currently, for example, a 30-year TIPS yields 1.64%. By buying and holding it until maturity, your guaranteed return is 1.64% better than inflation, no matter how high or low inflation may be along the way.
The key to locking in a...
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