William P. Bengen is an author and a certified financial planner, who published what has come to be referred to as The Four Percent Drawdown rule for withdrawal rates from retirement savings (also referred to, idiomatically, as 'tapping into the Nest Egg').
Bengen conducted a number of empirical simulations of historical market behavior and concluded that a person could "draw down" up to 4 percent annually from their portfolio without fear of outliving their money. He published his research in the October 1994 issue of the Journal of Financial Planning. He subsequently published 3 additional papers in the same journal (see References). He is also the author of the book Conserving Client Portfolios During Retirement.
Early life and education
Bengen received a B.S. from MIT in aeronautics and astronautics. He is a co-author of Topics in Advanced Model Rocketry, originally published by the MIT Press in 1973, and recently republished. He worked for 17 years with his family-owned soft-drink-bottling franchise firm in the New York metropolitan area, during which he served tenure as president and COO. Bengen migrated with his wife and two daughters to Southern California, where he began his practice, earning his CFP certification in 1990 and his master's degree in financial planning in 1993.
The Four Percent Drawdown rule
Based on his early research of actual stock returns and retirement scenarios over the past 75 years, Bengen found that retirees who draw down no more than 4.2 percent of their portfolio in the initial year, and adjust that amount subsequent every year for inflation, stand a great chance their money will outlive them. In the same article, his analysis showed that "Retirees who draw down 5 percent a year run a 30 percent chance their nest egg will run out of steam before they do."
In his book titled 'The Number,' Lee Eisenberg has written in detail about 'the Four Percent Draw Down.'
Journal of Financial Planning Articles
Bill Bengen has published five articles in the Journals of Financial Planning. His October 1994 article, on calculating "safe" withdrawal rates and asset allocations based on historical data is the one that led to the formulation of the 4 four percent draw-down rule. The Journal reprinted this article in 2004, the journal's 25th anniversary, counting it among the best content of the Journal. For his other articles published in the same journal, see External Links & Further Reading section.
Bengen has also authored a comprehensive book on his research, titled "Conserving Client Portfolios During Retirement", published by FPA PRess in 2006. It updates and supplants all his earlier published research. An updated edition of the book is planned for release in 2013.
- Lee Eisenberg. "The Number"
- "Journal of Financial Planning"
- DSpace@MIT: Topics in advanced model rocketry
- Topics In Advanced Model Rocketry - Apogee Components
- Bengen's earlier research, which resulted in the "4% drawdown rule", was based on a study of portfolios using only 5-year government bonds and the S&P 500 index. Bengen's more recent research incorporates other asset classes, such as small-company stocks, money market funds, and long-term bonds~~~~. His conclusion from his expanded research is that an initial withdrawal rate of 4.5% to 5% is probably more appropriate for the majority of retirees, who seek to maximize their retirement withdrawals, and who use a diversified portfolio of investments. In him most recent research (2007), Bengen warns that financial planning software is probably required to adjust the raw withdrawal rates generated by his earlier research to accommodate the unique cash flows of any particular client during retirement. Adjustments could be as much as half a percentage point (greater or less) than the 5% rate. "Portfolio strategies for new retirees"
External Links & Further Reading
- William P. Bengen, Determining Withdrawal Rates Using Historical Data Journal of Financial Planning, October 1994, pp. 14–24.
- William P. Bengen, Asset Allocation for a Lifetime(pdf) Journal of Financial Planning, August 1996, pp. 58–67.
- William P. Bengen, Conserving Client Portfolios During Retirement, Part III Journal of Financial Planning, December 1997, pp. 84–97.
- William P. Bengen, Conserving Client Portfolios During Retirement, Part IV Journal of Financial Planning, May 2001.
- William P. Bengen, Baking a Withdrawal Plan 'Layer Cake' for Your Retirement Clients Journal of Financial Planning, August 2006.
- Review of Bengen's book: Conserving Client Portfolios During Retirement - by Gary W. Silverman