Bengen's 4% Study in Detail — The Meaning of SAFEMAX

In October 1994, U.S. financial planner William Bengen published a paper titled "Determining Withdrawal Rates Using Historical Data" in the Journal of Financial Planning.

Using the actual historical returns of U.S. stocks and bonds, he sought the maximum withdrawal rate at which a portfolio would not be depleted over a 30-year retirement. The assumptions were clear: hold stocks and bonds 50/50, last 30 years, and adjust the withdrawal amount set in the first year for inflation each subsequent year (constant dollar).

Bengen named the maximum withdrawal rate that survived 30 years even in the harshest of the various starting years "SAFEMAX." It means "the maximum withdrawal rate that was historically safe."

For a 50/50 portfolio, SAFEMAX was about 4.15%, and this worst starting year was 1966. In other words, even someone who retired in 1966 lasted 30 years with a 4.15% withdrawal. Bengen rounded this to 4% to make it easy to use in practice, and that became today's "4% rule."

Interestingly, Bengen himself later raised this number in his research. When he added small-cap stocks and others to diversify the portfolio further, the worst-case SAFEMAX rose to 4.5%, and in more recent research he offered about 4.7% as a default.

What's notable is that this increase was not due to optimism that "the market will do even better going forward" but mostly thanks to "portfolio diversification." The logic is that mixing in large-, mid-, and small-cap stocks and even some overseas stocks provides a bit more staying power even in the worst periods. In fact, in most starting years, much higher withdrawals than 4% were possible, and it has been noted that the average safe withdrawal rate across all periods was around 7%.

The key point about SAFEMAX 4.15% is that it is not an "average safe withdrawal rate" but a "floor that survived even the worst starting year." Most retirees could have withdrawn more.

At the same time, all of these numbers are merely the result of running past U.S. data backward and do not guarantee the future. There is also a counterargument that in an environment of low interest rates and high valuations, it may not be as safe as it was in the past. Whether 4% or 4.7%, it is right to see it not as a "correct number" but as a starting point to be adjusted to your own assets, spending, and risk tolerance.