The example used on this page
Each strategy below is run through the same five made-up years, so you can see how differently they react. You start with 1,000,000 €. Markets fall 15% in the first year and 10% in the second, then rise 25% and 12%. Inflation is 3% every year. Money is taken out once a year, at the start of the year.
It is an illustration of the rules, not a backtest: real history is what the Backtesting page is for.
Bengen (the 4% rule)
Take a share of the starting portfolio in year one, then the same amount every year, raised by inflation.
Where it comes from
William Bengen, a US financial planner, published it in 1994 in the Journal of Financial Planning ("Determining Withdrawal Rates Using Historical Data"). He ran every retirement start year in US data through a portfolio of half US stocks and half intermediate-term government bonds, and found that someone who took 4% in the first year and raised that amount with inflation never ran out of money in less than about 33 years. In 1998 three professors at Trinity University (Cooley, Hubbard and Walz) repeated the idea with success rates for different rates and portfolios, and "the 4% rule" became the standard rule of thumb.
How it works
- In the first year, take your rate (say 4%) of what the portfolio is worth.
- Every year after that, take the same amount again, raised by that year's inflation.
The value of the portfolio never comes into it again. Only prices do.
In the example, at 4%
| Year | Portfolio | Withdrawal | Share of it |
|---|
| 1 | 1,000,000 | 40,000 | 4.0% |
| 2 | 816,000 | 41,200 | 5.0% |
| 3 | 697,320 | 42,436 | 6.1% |
| 4 | 818,605 | 43,709 | 5.3% |
| 5 | 867,883 | 45,020 | 5.2% |
The withdrawal climbs by 3% a year whatever the market does. By the third year it is 6.1% of a portfolio that has shrunk by 30%. That is how a bad start empties a portfolio under this rule: the money taken out in the bad years is not there for the recovery.
What it is for
An income that buys the same every year, so that your standard of living does not depend on the market.
Strengths
- The income is known in advance and keeps its purchasing power.
- It is simple: one number, set once.
- It is the most studied rule there is, so results are easy to compare.
Weaknesses
- It ignores the portfolio, so after bad early years it can run out.
- After good years it leaves a lot unspent, for the same reason.
- The 4% comes from US history. It is not a law, and it has held up worse outside the US.
On this site
You choose the rate. Inflation is that of the region chosen at the top of the Backtesting page. We also looked at how the rule holds up for an investor in euros: The 4% Safe Withdrawal Rate Is About to Fail in Europe.
Fixed %
Take the same share of whatever the portfolio is worth, every year.
Where it comes from
Nobody invented it. It is the simplest rule that follows the portfolio, and the idea behind how many endowments and foundations set their spending. In withdrawal research it is the usual opposite to Bengen: where Bengen fixes the income and lets the portfolio take the risk, this fixes the share and lets the income take it.
How it works
- Every year, take your rate (say 4%) of what the portfolio is worth on that day.
There is nothing else. Inflation plays no part.
In the example, at 4%
| Year | Portfolio | Withdrawal | Share of it |
|---|
| 1 | 1,000,000 | 40,000 | 4.0% |
| 2 | 816,000 | 32,640 | 4.0% |
| 3 | 705,024 | 28,201 | 4.0% |
| 4 | 846,029 | 33,841 | 4.0% |
| 5 | 909,650 | 36,386 | 4.0% |
The share stays at 4.0% and the income moves instead: from 40,000 € down to 28,201 € in the third year, almost 30% less, while prices rose 6%. It recovers with the market, but two years later it is still below where it started.
What it is for
Never running out, and spending what the portfolio can afford at the moment rather than what was planned.
Strengths
- The portfolio cannot be emptied: a share of something is always less than all of it.
- Good years raise the income by themselves.
- It needs no inflation data and no decisions.
Weaknesses
- The income swings as much as the market does.
- Nothing protects it from inflation: after a long slump it can buy far less than at the start.
- It is hard to live on if your costs are fixed.
On this site
You choose the rate. Because the rule ignores inflation, the inflation region makes no difference to it.
Guardrails (Guyton-Klinger)
Start like Bengen, with a higher rate, and adjust the withdrawal when it drifts too far from that rate.
Where it comes from
Jonathan Guyton, a US financial planner, argued in 2004 (Journal of Financial Planning) that the "safe" rate was too safe: retirees could start higher if they agreed in advance to adjust. In 2006, with William Klinger, he added the two rules that gave the method its nickname, describing them as financial guardrails ("Decision Rules and Maximum Initial Withdrawal Rates"). Their simulations, on US data and over 40 years, put the sustainable starting rate at about 5.2% to 5.6% for a portfolio with at least 65% in stocks.
How it works
The first year is Bengen's: take your rate (say 5%) of the portfolio. Every year after that, three checks, in this order:
- Inflation raise. Raise the withdrawal by inflation, as Bengen does. The exception: if the portfolio lost value over the past year and the raised amount would be more than 5% of it, there is no raise that year, and it is not made up later.
- Upper guardrail. If the withdrawal is now more than 6% of the portfolio (1.2 times the starting rate), cut it by 10%.
- Lower guardrail. If it is less than 4% of the portfolio (0.8 times the starting rate), raise it by 10%.
In the example, at 5%
| Year | Portfolio | Withdrawal | Share of it |
|---|
| 1 | 1,000,000 | 50,000 | 5.0% |
| 2 | 807,500 | 45,000 | 5.6% |
| No raise after a losing year. 50,000 is 6.2% of the portfolio: cut by 10%. |
| 3 | 686,250 | 40,500 | 5.9% |
| No raise again. 45,000 is 6.6%: cut by 10%. |
| 4 | 807,188 | 41,715 | 5.2% |
| Raised by inflation. Between 4% and 6%: no adjustment. |
| 5 | 857,329 | 42,966 | 5.0% |
| Raised by inflation. |
Two bad years cost two inflation raises and two cuts: the income goes from 50,000 € to 40,500 €. Once the market recovers, the yearly raises come back. Compare the fifth year with Bengen's: 42,966 € here against 45,020 € there, from portfolios of nearly the same size, although this one started out paying 10,000 € a year more.
What it is for
More income at the start than Bengen allows, paid for by accepting cuts when the portfolio is in trouble.
Strengths
- A higher starting income.
- It reacts to trouble early, so it is far less likely to run out.
- In good times the income rises faster than inflation.
- Changes come in steps of 10%, not in market-sized swings.
Weaknesses
- The income is not guaranteed: a long slump brings several cuts in a row.
- After cuts and skipped raises it can stay below its starting purchasing power for years.
- There are more rules to follow, every year.
- The thresholds come from simulations on US data.
On this site
You choose the starting rate. The guardrails are the paper's own: 20% either side of that rate, and adjustments of 10%. Two parts of the paper are left out. It also says which investments to sell from first; here a withdrawal is sold from everything in proportion. And it stops cutting in the last 15 years of a planned retirement; a backtest has no planned end, so the cut applies throughout.
Try them on real history
The same starting amount under two or three of these strategies, side by side, shows more than any description: add the same fund or asset class to the Backtesting page once per strategy.
Open Backtesting This page explains how the strategies work. It is not advice on which one to use, or on whether any of them suits you.
