Retirement Rules

From the industry research on retirement strategy, we have Bengen’s 4% withdrawal rule for taking retirement income, and we have Pfau’s 16.62% savings rate requirement to be able to draw half of pre-retirement income during retirement.

We looked at two industry research studies about how to attain a sustainable retirement lifestyle. Money management fees and taxes are not included as part of the studies. Retirement income was inflation-adjusted.

Bengen established that the maximum sustainable withdrawal rate (MWR) during retirement is 4% of the pre-retirement assets based on the worst-case retirement year. The retirement period was set to 30 years and the retirement assets were assumed to be invested in a 50/50 portfolio of S&P 500 and intermediate bonds.

The chart shows the retirement year and the MWR (as a percentage of asset value at retirement). At this withdrawal rate, the retiree would have completely used up the retirement asset after a 30-year period.

The worst-case scenario corresponded to the 1966 retiree whose retirement period was 1966-95. Based on the market performance during this period, the MWR was only 4% which was the lowest among all the years in the study, and hence formed the basis of Bengen’s recommendation. Poor initial market performance combined with constant withdrawal led to this year becoming the worst case, which is further explained in our blog “Sequence of Returns Risk.”

Pfau approached sustainable retirement lifestyle from the viewpoint of savings rate rather than withdrawal rate. His analysis showed that if one saves 16.62% (LMSR or Lifestyle based Minimum Savings Rate) of their salary every year, they will be able to withdraw up to 50% of their pre-retirement income as their annual retirement income. Each data point (retirement year) in his analysis is based on market performance for the preceding 30 years (working period) and the following 30 years (retirement period). The retirement assets were assumed to be invested in a 60/40 portfolio of S&P 500 and T-Bills.

The LMSR chart shows the minimum savings rate required by retirement year for a sustainable retirement income that is half of the pre-retirement income. If this retiree also intends to follow Bengen’s 4% withdrawal rule, then he or she must have accumulated a nest egg that is at least 12.5x (= 50% / 4%) of their pre-retirement income. The MSR (Minimum Savings Rate) chart shows the savings rate needed for the 12.5x wealth accumulation target. Clearly, the savings rate prescribed by LMSR is less demanding (lower) than that of the MSR.

The worst-case scenario for the LMSR corresponds to the 16.62% savings rate requirement for the 1918 retiree, which is the maximum recorded in this study.

A prolonged bull market during working and retirement years will result in a low MSR requirement and a high MWR capability. Given how correlated MWR and MSR curves were, Pfau concluded that a prolonged bull market (e.g., a low point on MSR curve) tends to follow a bear one (e.g., a low point on MWR curve), and vice versa.

The recommendations from both of these studies (4% withdrawal and 16.62% savings rate) are based on worst-case analysis of historical market data. It means that all the retirees, except those who retired in the worse-case year, and who followed these recommendations, could have lived a less conservative lifestyle. Given that the variations in the LMSR curve is less than that of MSR curve, Pfau argues that following his recommendations meant less sacrifices for the overall population.

We compared different retirement scenarios, such as when retiring early or with different asset values, using FinCrafters Retirement Planning Calculator in our blog “Retirement Scenarios.”

We specialize in tax-free retirement strategy and investments such as IUL, Annuity and LTC. Prefer a quick and complimentary consultation? Just email us at

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