September 28, 2026 – Welcome to a new installment in the Safe Withdrawal Rate Series. You can find the series landing page here. Today’s topic is the new portfolio allocation recommended by Bill Bengen, the inventor of the traditional 4% Rule. He’s making the rounds recommending an innovative portfolio allocation philosophy (his words, not mine) that will ostensibly raise your withdrawal rate to between 4.7% and 5.5%, depending on how flexible you are. And potentially 7% once equity valuations normalize again. I’m mostly unconvinced of this new approach, and I’ve responded to inquiries about it here and there. I also posted a short note on the ChooseFI site. But it’s always best to have a dedicated post in my series with detailed simulation results.
Let’s take a closer look…
The new Bengen Portfolio
Bill Bengen proposes a portfolio with 55% equities, 40% intermediate bonds, and 5% short-term government securities, such as 3-month T-Bills. He further specifies that the 55% are in equal shares in:
- US Large Cap Stocks (e.g., S&P 500)
- US Mid-cap Stocks (e.g., S&P 400 Mid-Cap index)
- US Small-cap stocks (e.g., S&P 600 Small-Cap index, Russell 2000)
- US Micro-cap stocks (e.g., Russell Micro-Cap index)
- Non-US Stocks (e.g., MSCI World Ex-US)
Here’s an article and an interview with Bill on MarketWatch with more details. The justification for spreading the equity portion like that is that broader diversification across markets and indices raised the safe withdrawal rate from 4.15% to 4.7%. He further argues that if you no longer require a 100% success rate and have some flexibility in spending, you can increase your withdrawal rate to about 5.25% or even 5.5% per year. There is no explicit mention of what he means by “flexibility,” i.e., would the 5.5% withdrawal rate imply an explicit ex ante success rate target and/or how flexible a retiree would need to be, i.e., how deep and how long were the retirement spending cuts?
Preliminary Calculations: Implementing the new Bengen Portfolio with ETFs
How would one implement this new Bengen portfolio today with our current menu of ETFs? On the T-bill side, several options exist. The ETF with the longest history seems to be the SPDR ETF (ticker BIL), with return data going back to 2007. iShares started its SGOV (with a much lower expense ratio) in 2020. Vanguard’s VBIL only started in 2025, but has the most competitive expense ratio. Because it covers more years, I will stick with the BIL ETF for now.
For intermediate bonds, I use the iShares IEF, which holds 7-10 year Treasury bonds. I know that lots of you prefer Vanguard, which has the VGIT ETF in this space. However, VGIT has a shorter history, so I can’t simulate a window long enough to include the Global Financial Crisis (GFC). Moreover, VGIT has a slightly shorter duration because it includes Treasuries with 3-10 year maturities. So, the IEF better fits the traditional 10-year U.S. Government benchmark bond.
For the U.S. large-cap portion, I use the iShares IVV (since 2000) rather than the Vanguard VOO (only since 2010) to cover the Global Financial Crisis. Sure, the SPDR offering SPY has an even longer history, dating back to 1993, but it also has the highest expense ratio of the trio, and I don’t need the simulation going back to 1993, since my calculation is constrained by the ETFs’ availability.
For the exotic equity allocations, I pick the following ETFs:
- Vanguard’s VO for the Mid-Cap US exposure.
- Vanguard’s VB for the Small-Cap US exposure.
- iShares’ IWC for the US Micro-Cap index exposure. I found only two options from prominent providers with decent return histories. The other would have been a mutual fund from the DFA network, which isn’t really useful because you need an advisory relationship with a DFA-approved advisor to access it. IWC seems like the obvious choice here.
- Vanguard’s VEU for the non-US stock market exposure. To my knowledge, it has one of the lowest expense ratios available. VEU also has a very long return history going back to pre-GFC.
Before we even simulate any historical retirement cohorts, let’s perform some preliminary calculations to understand how the Bengen portfolio, implemented with actual ETFs, would have performed recently. Let’s pull some stats from my ETF return database. I have monthly total return data (nominal total returns, i.e., dividends reinvested) since 2007, so we have close to 20 years of returns, covering two recessions (2008/9 and 2020) and three bear markets (2007-2009, 2020, and 2022), as well as quite a few corrections and other drama along the way.
I like to start with a correlation table of the seven ETFs:
Clearly, there could be some diversification potential: the exotic ETFs all have correlations well below 1.0 with the IVV (US Large-cap blend) and very low correlations with bonds and bills. Among themselves, Bengen’s exotic indices also had relatively benign correlations: as low as 0.736 between non-US and US Micro-Cap.
But if I calculate the standard deviation of the two competing 55/40/5 portfolios, both with 40% IEF and 5% BIL, one with 55% in IVV and one with 11% each in VOO, VO, VB, IWC, and VEU, we get this surprising result: The standard 55/40/5 portfolio with just one equity ETF (IVV) had an annualized risk of 7.9%, while the Bengen ETF portfolio’s risk was 8.8%. Even worse, the annualized return has also lagged since 2007.
Well, clearly, the underperformance is simply because the exotic ETFs lagged the S&P 500 during this period. But the higher risk of the ostensibly diversified portfolio deserves some additional analysis. So, how is it possible that we created inferior risk characteristics, despite the seemingly attractive correlation matrix? Very simple: Despite their less-than-zero correlation, the new ETFs had a standard deviation so far above that of the S&P 500 (17.77% to 22.26% vs. the low 15.52% in the IVV) that even with a correlation slightly below 1.0, there is no diversification benefit; please see the table below with the individual ETF return stats:
Will less exposure to Bengen’s exotic asset classes help?
I can already foresee one objection: Maybe old Bill Bengen went a little too far, allocating too much to volatile funds, and a smaller allocation to exotic equity flavors would have performed better? So, what happens if we add the “di-WORSE-fying” ETFs in smaller increments? In my first exercise, I remove four percentage points from IVV and allocate 1 percentage point each to the new ETFs; please see the bar chart below. Even from the first step, the new Bengen portfolio is detrimental to diversification. So, the Bengen portfolio’s poor performance over the last 20 years is not due to over-diversification. It never created any diversification, even in the smallest possible dosage.
Alternatively, I can also study how adding the four different ETFs one at a time changes the portfolio volatility; please see the chart below. Not a pretty picture either. Every single new ETF was detrimental at the margin: higher risk and lower CAGR. Thus, every one of Bengen’s ETFs “di-WORSE-fies” your portfolio over 2007-2026.
Calling this new portfolio “more diversified” is the greatest misnomer since calling FTX a great crypto exchange.
The lesson here: simply adding more ETFs with equity correlations in the 0.80s and 0.90s will not necessarily diversify my portfolio, especially if the new ETFs have significantly higher standard deviations than the S&P 500. This “di-WORSE-fication” effect isn’t my opinion; it’s not some ambiguous or esoteric effect up for debate (even though some ditzy, mathematically illiterate financial influencers may think so). Rather, it’s a mathematical certainty that adding all those junk ETFs is truly detrimental if certain easy-to-check, unambiguous conditions are met. For the math geeks, I derived the formula for this effect last year in my “How to Lie with Diversification” post; please see below:
So much for my preliminary calculations. Now I’ll turn to the part everyone has been waiting for: actual Safe Withdrawal Rate simulations. Before that, here are a few more tasks:
How to Simulate the Bengen Portfolio ETFs before 2007
Of course, no Micro-Cap ETF goes all the way back to 1871, or even 1926. For example, the Russell Micro-Cap index has been available only since June 2005, and the corresponding IWC ETF started a few months after that. The MSCI World-ex-USA index only started in 1970. So, we have to make some assumptions about how we simulate Bengen’s new portfolio with my SWR toolkit.
Let’s start with the easy ones. I assume that in my simulation toolkit, the three broad asset classes 1) T-bills, 2) Intermediate US Treasuries, and 3) the S&P 500 index map one-for-one into my already existing asset classes, i.e., the simple 55/40/5 is just an allocation of 55% to the large-cap index, 40% to intermediate bonds, and 5% to Cash (i.e., short-term T-bills). I also assume that there is a 0.05% annual drag on the portfolio due to expense ratios, trading costs, and other fees and inefficiencies.
For the exotic equity flavors, I will stick with the ETFs I used above in the preliminary calculations: VO, VB, IWC, and VEU. However, none of these funds have any data available going back to 1926 and certainly not 1871, which are the popular starting points for historical safe withdrawal simulations. What am I to do? Very simple: I will put on my old financial analyst, statistician, and econometrician hat again and replicate the ETF returns during the time span when they did have return data, i.e., determine what mix of the return series that I already have on my Google Sheet would optimally – from a statistical perspective – replicate these ETFs. That allocation matrix is in the table below. Notice how well this factor model replicates the four exotic ETFs. All adjusted R^2 values are well above 0.9, so the factor models produce a very nice replication fit. See the technical appendix below for more charts and stats.
The estimates are also quite intuitive: Going from mid- to small- to micro-cap equities increases your Fama-French SMB exposure from 42% to 82% and then 126%. They all have mild HML (value factor) exposures, which is also exactly as I would have expected. The equity portion (US LCB and International) adds up to roughly 100%. But of course, the US-based ETFs have mostly US exposure, while the VEU has mostly non-US equity exposure. So this is exactly what you’d expect, but it’s nice to confirm these patterns in the estimation exercise.
We found the exact factor loadings to properly simulate the ETF returns in the early period before the ETFs were available. Thus, we’re now ready for the simulations…
Safe Withdrawal Rate Simulations
I will simulate seven portfolios, starting with my personal preferred portfolio: 75% US equities and 25% US Intermediate bonds. I then successively change one parameter at a time to arrive at the new Bengen portfolio
- My favorite portfolio: 75/25.
- 60/40: Shift 15 percentage points from equities to bonds.
- 55/40/5: Shift another 5 percentage points from equities to cash/Tbills.
- Shift 11 percentage points from S&P 500 to mid-cap stocks.
- Shift 11 percentage points from S&P 500 to small-cap stocks.
- Shift 11 percentage points from S&P 500 to micro-cap stocks.
- Bengen’s Portfolio: Shift 11 percentage points from S&P 500 to international stocks to arrive at the 5×11% weights in the five equity styles.
Summary:
To translate the factor beta percentages into the parameters in my SWR toolkit (see Part 28 for an intro), here’s the list of parameters I use in the seven different portfolios:
Why would I study the whole progression of portfolios this way? Instead of throwing everything at the wall and hoping something sticks, we should understand what each portfolio component actually contributes. It serves two purposes: 1) it’s academically and intellectually proper to disentangle the effects that way, and 2) knowing what each new component does would also aid the individual investor in both implementing and maintaining this strategy. That’s especially important during volatile market phases, so an informed investor can stay the course and avoid overreacting. For example, my personal finance buddy Joe Saul-Sehy made a similar point recently in the awesome Afford Anything Podcast; see this YouTube video at around the 56:00 mark, where Joe describes his reasons for skepticism about convoluted Risk Parity portfolios. He thinks that Risk Parity portfolio weights are arbitrary and unintuitive, and 85% of users have no clue where they came from. Side note: I would set that percentage to 100% and suspect that not even the inventors of Risk Parity know where those came from; see my recent post on the Risk Parody strategy.
In any case, what were the return and risk statistics of the seven portfolios? I plot the average real (i.e., CPI-adjusted) compound return and risk over the 100-year span from 1926 to 2026 below. Moving from 75/25 to the basic 55/40/5 certainly boosts your CAGR, except for the non-US fund. Not a huge surprise, as non-US stocks have modestly underperformed since 1970. But intriguingly, the most diversified, lowest-risk portfolio would have been the basic 55/40/5 portfolio. We added the exotic ETFs not to lower risk, but to increase average returns.
I will also simulate two retirement scenarios:
- The standard traditional retirement case: a 30-year horizon and zero final asset target, i.e., our retirees are fine with depleting their assets. This is the old-fashioned Bengen and Trinity Study exercise.
- The FIRE scenario with a 50-year horizon, plus a final asset target of 25% of the initial portfolio (CPI-adjusted). This is the assumption in my own retirement planning right now.
Both scenarios assume a flat spending profile and no additional cash flows. Of course, every retiree I know, myself included, will have different and additional assumptions: some with a spending smile, some with increasing spending, some with positive supplemental cash flows, and some with negative supplemental cash flows. But any changes in these assumptions will affect the seven portfolios roughly in the same direction and likely make little quantitative difference in their relative performance. Hence, for today’s exercise, I like to keep the analysis as generic as possible.
Let’s look at the safe withdrawal rates for the seven portfolios in the two different scenarios; please see the chart below. The good news is that Bengen’s new portfolio generates better outcomes in both retirement scenarios. But let’s look at the evolution of SWRs step by step. First, shifting from 75/25 to the basic 55/40/5 has very little impact on the failsafe. But adding the four exotic ETFs is the part that’s really crucial to the higher Safe Withdrawal Rate.
However, notice that my simulated results for the 30-year simulation horizon are noticeably worse than Bengen’s SAFEMAX estimates. For example, Bengen claims that before introducing the exotic styles, he already achieved a 4.15% failsafe rate. My basic 55/40/5 only has a 3.82% safe rate. And his 4.70% rate is also much higher than my 4.23%. How can we explain this 33- to 47-basis-point difference in failsafe withdrawal rates? To be honest, I can’t tell for sure, but there are several potential reasons:
- Different frequency: I check the performance of all monthly retirement cohorts, starting in 1926 (and even 1900 or even 1871 if needed). If you use a lower frequency, i.e., only quarterly or even annual retirement start dates, you might “jump over” the true historical worst-case scenarios like August 31, 1929, or November 30, 1968. In his interviews, he’s consistently stated that he simulated 400 retirement cohorts. That’s peculiar. At monthly frequency, that’s only 33.3 years. Why would you start in January 1929 and end your simulations in April 1959? You could have simulated many more retirement cohorts. In fact, his purported worst-case retirement cohort, October 1968, isn’t even in that sample of 400. So, he must have used a less-than-monthly frequency. Likely quarterly, where he would have certainly missed some of the historical worst-case retirement cohorts. Of course, then you can’t simulate 400 quarterly retirement cohorts because that would go up to 2026. Maybe he misspoke and meant he simulated 400 retirement return quarters with his roughly 100 years of return data, but only 280 of those quarters are actual retirement-starting cohorts with 30-year (=120-quarter) horizons. This alone would explain about 10-20 basis points of SWR difference. Update (9/28/2026 4:40 PM): reader BP confirmed my suspicion about the quarterly frequency. In this Substack post, Bengen details the forward-filled, calibrated return data, so he likely uses 400 quarterly starting dates from 1926 to 2025.
- Different return data series: I’m completely transparent with my simulations, return series, and methodology. I post the simulation results in this Google Sheet for anyone to check (read-only, as usual, so make your own copy if needed). I have no idea what series Bill Bengen used.
- Ignoring expense ratios and other “drag” factors: It would not be proper to just simulate raw index returns. You need to account for expense ratios, which can be substantial for exotic ETFs. For example, the IWC has an expense ratio of 0.60%. Other hidden costs like mis-tracking and bid/ask spreads might also be at work. This oversight can easily explain 15 basis points in your safe withdrawal rate.
- Sloppiness and mistakes: Again, I post my methods very transparently. If you find a bug, please let me know. I have no way of checking Bengen’s results because his research is a complete black box.
- Confirmation Bias: If you’re writing a new book with a new shtick about how to raise your safe withdrawal rate, then, well, biases could creep into your simulations. You will face multiple design choices along the way; intentionally or unintentionally, you might always opt for the assumptions that reach a higher final goal, i.e., better safe withdrawal rates.
The answer is likely a combination of all of the above, which can easily generate a few dozen basis points in SWR difference.
What were the historical failure rates of Bengen’s 4.7% and 5.5% Withdrawal Rates?
Let’s start with the 30-year horizon. I plot the failure probabilities of the 7-portfolio sequence in the chart and table below. Let’s start with the unconditional failure probabilities. First, I want to concede again that the Bengen portfolio over 30 years would have given you an impressively low unconditional failure rate of only 2%. So the discrepancy between Bengen’s purported 4.7% and my 4.23% failsafe translates into only a tiny failure probability at a 4.7% withdrawal rate. Notice that at a 5.5% withdrawal rate, you’re already at an unconditional 20% failure rate. The path along the transition is also quite intuitive. Over 30 years, the impact of moving from 75/25 to 55/40/5 is relatively small, while over 50 years the lower equity allocation is clearly detrimental, raising your failure probability from 26.2% to 34.2%. Adding the exotic asset classes generally lowers the failure probabilities, with one exception: over 50 years there would have been a slight increase in the last step, i.e., adding international stocks.
But the results look much less appetizing when you consider elevated equity multiples. Conditional on a CAPE above 20, the 4.7% withdrawal rate had a higher, but likely still acceptable failure probability of 6.9% over 30 years, while the 5.5% withdrawal rate would have failed in almost half the historical cohorts (47.5%). Side note: The Shiller CAPE is now at about 40.6, and even the ERN-adjusted CAPE stood at 36.3 as of 9/25/2026, so using the unconditional failure probabilities will vastly underestimate the risk you’re taking!
For early retirees with a longer horizon and a sizable bequest target (25% of the initial portfolio), the new Bengen portfolio combined with 4.7% and 5.5% withdrawal rates would have had substantial failure probabilities, even in the best possible case where the Fama-French factors were fully intact; please see the chart below. In fact, all failure probabilities of the Bengen portfolio are worse than those of the 75/25 portfolio. Over the longer horizon, you also raise your failure probability in all four cases going from 75/25 to the third portfolio (55/40/5, but before adding the exotic equity flavors). That’s an intriguing result, because even when equities are expensive, it would still be unhelpful to pick a permanently lower equity share (though a glidepath might help, see Parts 19 and 20). Even the unconditional failure probabilities of the Bengen portfolios, 32.3% for the 4.7% rate and 58.1% for the 5.5% initial withdrawal rate, are unacceptable. Conditioned on today’s CAPE ratio, your failure probabilities rise to 78.0% and 98.7%. Anybody who extrapolates the 4.7% and 5.5% to early retirees in today’s market environment is entering financial malpractice and clownshow territory!
How important is “Small-Cap Alpha” to Bill Bengen’s New Portfolio?
If you pin your retirement hopes on Bill Bengen’s new portfolio allocation, look at the cumulative return of the Fama-French SMB factor (Small Minus Big, a.k.a. small-cap alpha). Between 1926 and 1981, the SMB factor added almost 3.6% annually. However, after 1981, when Rolf Banz published his seminal paper “The Relationship between Return and Market Value of Common Stocks” in the Journal of Financial Economics, the SMB factor has essentially just moved sideways, albeit with significant volatility. Critics of the SMB alpha story have conjectured that the excess return (alpha) of this Fama-French style factor has been arbitraged away after it became common knowledge in the finance community. So, while the SMB premium may have existed for historical retirement cohorts, we may not want to extrapolate this alpha source into the future. In other words, for your retirement portfolio, you have to live with today’s SMB alphas, because you can’t teleport past SMB alphas from the 1930s into the 2020s.
Additionally, even historical retirement cohorts might not have been able to harvest the full SMB premium, as several researchers have pointed out: transaction costs would have eaten up much (and potentially all) of the excess return (Joel L. Horowitz, Tim Loughran, N.E. Savin: The disappearing size effect, Research in Economics, Volume 54, Issue 1, 2000, Pages 83-100). Some researchers have pointed out methodological flaws that call into question how reliably one could have harvested SMB alpha: the non-synchronous trading issue of thinly traded stocks comes to mind, i.e., some of the quotes used in the calculation were stale, and you could not have traded at those prices. The so-called Bid-Ask bounce messes up return calculations (Marshall E. Blume and Robert F. Stambaugh: Biases in computed returns: An application to the size effect, Journal of Financial Economics, Volume 12, Issue 3, 1983, Pages 387-404).
My personal view: We should ignore the small-cap alpha for the following reasons: Everybody knows about the SMB factor today, and it’s easy to verify, so it’s likely arbitraged away. I’m not saying that SMB will underperform consistently, but there is no reliable outperformance either, and certainly no 3.6% p.a.! And even the historical outperformance is slightly suspect.
Which begs the question: what if the small-cap alpha we observed from about 1926 to 1981 doesn’t repeat itself and just remains flat going forward, as it did during the last 45 years (and potentially even before 1981 due to transaction costs and faulty methodology)? How do we even simulate this scenario? Well, avid ERN blog readers know the answer, because in Part 62 of the series I introduced this feature in my retirement simulation toolkit. Instead of using raw Fama-French factor returns, I propose using Hodrick-Prescott (HP)-filtered return series that maintain volatility, correlations, and business-cycle correlations but remove the (time-varying) mean excess return. This would help us gauge the performance of the exotic ETFs with less rosy assumptions.
Let’s look at the returns stats below (all are CPI-adjusted). Not surprisingly, your portfolios’ risk doesn’t really change. Going from 75/25 to 55/40/5 reduces both risk and CAGR. But CAGR changes very little once you add the exotic ETFs: you raise risk, but CAGR ends up at 5.18%, only marginally higher than the 55/40/4’s 5.13%. So, all the extra returns go out the window.
Let’s repeat the same retirement simulations, but I set the SMB and HML Fama-French factors to their HP-filtered return series with zero additional alpha. Adding the exotic equity ETFs adds no further gain in the SWR. Quite the opposite, over 50 years, the Micro-Cap fund would have dragged the SWR to only 3.12%. Over the shorter horizon, Micro-Cap stocks were also very detrimental. International stocks lifted the SWR again, but only to 3.82%, right where you started and the same as the 75/25 and 55/40/5 portfolios.
Next, let’s look at the failure probability charts, first for the 30-year retirement. Not much action here. The failure probabilities of the Bengen portfolio are very similar to those of the 75/25. Because the 75/25, 60/40, and 55/40/5 portfolios don’t use any Fama-French factors, the chart/table above doesn’t differ, of course. Adding the various exotic equity ETFs has a relatively small impact and leaves the failure probabilities uncomfortably high. Maybe the unconditional failure rates of the 4.7% rate still look OK at 11.0%, but conditional on an elevated CAPE ratio, you had 29.2% and 55.0% failure rates in the historical cohorts with 4.7% and 5.5% withdrawal rates, respectively. Not a pretty picture.
Next, let’s study a FIRE retiree’s 50-year horizon. The six-step transition from 75/25 to the Bengen portfolio makes the already unacceptable failure probabilities even worse. Much worse. Conditional on a high CAPE ratio, the Bengen portfolio would have failed in 87.8% of cohorts when using a 4.7% initial withdrawal rate. And a cool, impressive 100% of the cohorts would have failed when using 5.5% initially. The one (slightly) redeeming feature of the Bengen portfolio in this chart was that the exotic ETFs weren’t the main culprit in sabotaging your retirement success. It was mostly the low equity portion, i.e., moving from 75/25 to 55/40/4. Adding the exotic equity ETFs after that doesn’t change the results very much, but only because the 55/40/4 results were already totally atrocious and the new Bengen ETF recommendations couldn’t make the outcome much worse.
How important is the 1926 start time to the Bengen Portfolio?
Sure, we have Fama-French data only starting in July 1926. But that doesn’t stop me from simulating the pre-1926 retirement cohorts. I have all the returns except the Fama-French SMB and HML factors, which are only alpha contributors, so we can set them to zero and use the other return streams as usual, implicitly assuming that due to data availability issues nobody could have implemented the small-cap and micro-cap ETFs pre-1926 and everyone just resorted to using the large-cap blend index. And, obviously, a retirement cohort in 1907 would have still had exposure to ten years of small-cap returns toward the end of their horizon. The 50-year window would have covered a full 30 years of returns with the benefit of small-cap alpha, so cutting off the retirement simulations in 1926 seems arbitrary. We should at least include the retirement cohorts going back to 1900. The 1901 and 1907 bear markets were banking crises not much different from the Global Financial Crisis, so they’re relevant events we should potentially include in our analysis.
Then, how do the safe withdrawal rates look if we include the pre-1926 data? Here are the failsafe rates for 30 and 50 years when starting the retirement cohorts in 1900. I also included the failsafe for the Post-1926 simulations for comparison. The picture is disappointing for the Bengen portfolio. Over 30 years, adding the Bengen portfolio components one at a time noticeably deteriorates performance. While the first few steps, i.e., lowering the equity portion and adding mid-cap and small-cap stocks, only lowered the SWR from 3.82 to 3.77, the micro-cap and international stocks allocation hurt you more and dragged the SWR down to 3.68%. You get a very different picture in the 50-year retirement. Here, the biggest drag on retirement performance came from the shift to 60/40, and beyond that, the impact on safe withdrawal rates is relatively small.
Summary so far: the Bengen methodology only works under very narrow assumptions. Relax any of those assumptions and the whole thing falls apart; you’re then back to the safe withdrawal rates we’ve known since, well, the younger version of Bill Bengen, i.e., about 4% for 30 years and 3.25% for a 50-year retirement.
Clarification (9/28/2026, 4:30 PM)
I want to stress that Bengen never claims we should extrapolate the 4.7%/5.5% rate to 50 years. In fact, commenter Mark below correctly points out that Bengen himself sees the 50-year SAFEMAX at 4.165%. But in some circles in the FIRE community there seems to be this flawed view that for retirement horizons past 30 years, the SWRs all stay the same, which is absolutely not the case.
In any case, I simulated the Bengen portfolio with a 4.00% initial withdrawal rate, and post-1926, I still get a 9.4% failure rate with the Fama-French raw alpha data conditional on an elevated CAPE ratio of 20+. A 19.8% failure rate if using post-1900 data. And 31.4% and 39.4% using the zero-mean alpha SMB and HML factors with post-1926 and post-1900 data, respectively. So, I find Bengen’s 50-year recommendation also significantly too optimistic.
If you like the Bengen small-cap stock portfolio, though, here’s a better way…
If you want to argue that small-cap stocks will produce reliable outperformance again going forward, one can certainly entertain that idea. In my opinion, the Fama-French SMB risk-factor alpha is arbitraged away now that every stock picker is aware of the effect. The same is true for HML (High-Minus-Low Book Value, aka the value factor). But who am I to predict future stock returns? If you believe that there is again significant outperformance in small-cap stocks, sure, go ahead. But even then, I wouldn’t follow Bill Bengen’s recommendation either.
Avid readers of my blog will know where I am going with this: if you believe those exotic equity flavors are so great, why shortchange yourself and invest only 55% in that new and improved portfolio? So, rather than reducing the equity share down to 55%, just replace a portion of the 75% equities with that amazing new investing style. Hence, I propose changing the order in the attribution exercise, i.e., shift into the four equity styles first, before reducing the stock percentage.
- The 75/25.
- Shift 15 percentage points from the S&P 500 to mid-cap stocks.
- Shift 15 percentage points from the S&P 500 to small-cap stocks.
- Shift 15 percentage points from the S&P 500 to micro-cap stocks.
- Shift 15 percentage points from the S&P 500 to international stocks.
- Shift 15 percentage points from equities to bonds. (3 percentage points from each of the five equity styles)
- Bengen’s Portfolio: Shift the remaining 5 percentage points from equities to T-bills (1 percentage point from each of the five equity styles)
Let’s now check how the sequence of portfolios would have performed in the historical cohorts. And again, this is under the (optimistic) assumption of investors being able to fully harvest the entire Fama-French SMB and HML premia. Not surprisingly, the first four steps up to portfolio 5 enhance my retirement safety. But moving out of equities and down to the Bengen 55% share will take away a good chunk of that advantage again for the 50-year retirement, while a lower fixed-income allocation has a negligible effect on the shorter horizon with asset depletion. In a 30-year retirement with asset depletion, you can get away with fewer stocks and more bonds. But over longer horizons, you need the return power of equities to get the maximum safe withdrawal rate.
The results also fit into a greater pattern I have noticed in my safe withdrawal rate series: If you have confidence that a new investing flavor will enhance your portfolio, it’s best to maximize this impact and not water it down with other junk, as I’ve shown over the years:
- If you believe gold is a good diversifier, just add it to the 75/25 portfolio. Stay away from junk portfolios like the All-Weather and other Risk Parity flavors that may have gold, but you’d throw out the baby with the bathwater and also reduce the equity portion too much, which will likely jeopardize a long retirement. See Part 34 of my series.
- If you believe value stocks and/or small-cap value stocks will outperform again, add them to a 75/25 portfolio. Stay away from junk portfolios like the Risk Parity + value stocks portfolios peddled by clowns on the internet. See Part 64 of my series.
- If you believe that momentum strategies are a thing, just add a massive portion of momentum to your portfolio. I showed that 50% equities plus 50% in the ERN momentum strategy would have performed quite nicely in historical simulations. See Part 63. Mixing in just 10% momentum plus some other junk (as recommended in some asinine Risk Parity portfolios) will not help you.
Conclusion
Bill Bengen is a legend. He wrote the first serious research paper on sustainable withdrawal rates in the 1990s, ahead of the Trinity Study. He’s a nice guy; I met him in 2024 at the Bogelheads conference in Minneapolis and served on a panel with him and Christine Benz. Respect where respect is due. So I feel terrible that Bill Bengen’s most recent research insights aren’t that impressive, to put it diplomatically.
In the early 2020s, he made illogical and poorly reasoned claims about the importance of inflation on safe withdrawal rates. I thoroughly debunked that in parts 41 and 51; inflation, especially the 12-month trailing inflation rate – the one Bengen focuses on – has zero significance to the safe withdrawal rate in my statistical/econometric models. His results back then relied on heavy data massaging, such as ignoring CAPE ratios above 22, which really throws out the baby with the bathwater.
Now he’s touring the financial podcast circuit touting his new portfolio with a 4.7% and even 5.5% withdrawal rate. I’m unconvinced again. Even in the best possible case (short horizon, asset depletion, and the full Fama-French alphas), it seems quite risky to withdraw 4.7%, and it’s outright irresponsible to recommend 5.5% without mentioning the roughly 50% historical failure rate if you condition on the elevated (i.e., above 20) CAPE Ratio. Over a 50-year horizon, even with the Fama-French raw data, the historical failure rates of a 4.7% and 5.5% withdrawal rate were 58.1% and 98.7%, respectively, conditioned on an elevated CAPE ratio. All members of the FIRE community should avoid overly optimistic withdrawal rates, even if you have deluded yourself into believing the small-cap and value flavors will miraculously pick up again.
The wheels completely come off the Bengen portfolio if the rosy assumptions about small-cap premiums don’t hold and you believe that smart and educated investors operating in (mostly) efficient markets have now arbitraged away the SMB factor alpha; you’re basically back to a roughly 3.8-4.0% safe withdrawal rate as in the traditional 30-year Trinity Study or about 3.25% over the longer 50-year horizon. I don’t buy the hype about higher sustainable rates, and I recommend my readers avoid this flawed approach to retirement planning. You can certainly try the Bengen allocation, but my expected SWR from that portfolio is roughly the same as with a standard 55/40/5 without the exotic junk. So even if you use the Bengen portfolio, keep the SWR the same as before, because whether Small-Cap stocks keep underperforming and start outperforming again is really a crapshoot.
Of course, if some stock market fairy whispered in my ear today that the small-cap premium will return to its old glory, and we can extrapolate those impressive 1926-1981 returns to 2026 to 2081, I would like to try a Bengen-style portfolio. But even then, I would substantially deviate from Bengen’s recommendations: First, I’d stay away from the 55/40/5 idea and instead max out that stock-picking alpha, keeping the equity portion at 75%. Second, I’d adjust my safe withdrawal rate to about 3.8% as a failsafe or about 4.5% with some flexibility in my personal 50-year retirement scenario. But that’s a whole percentage point lower, i.e., a 20% lower retirement budget than the overly optimistic 4.7% to 5.5% recommended by Bengen. I summarize my thinking in the decision tree below:
Most importantly, I wouldn’t call Bengen’s approach diversification. In portfolio management, we define diversification as spreading investments across a variety of assets, sectors, and geographies to reduce overall risk and volatility. True, moving a portion of your equities to non-US markets can likely help. But not the mid-, small-, and micro-cap ETFs. Adding Bengen’s exotic equity asset classes is the opposite of diversification; you move away from a broadly diversified index fund (e.g., VTI, ITOT, VOO, IVV, etc.) and overweight tiny pockets of the market you hope will outperform, increasing volatility in the process.
Bengen essentially used stock picking and called it diversification to make it more palatable to the gullible public. Attributing (or I should say misattributing) better safe-withdrawal performance to diversification certainly sounds better than “Hey, I went through the return history with a fine comb and picked the series that had stronger returns than the large-cap index!” I call a spade a spade: it’s not diversification, but stock picking, and the worst kind, retroactively looking for the best portfolio. I’m amazed that there isn’t more pushback against this shell game. So, I urge my readers to use caution before raising your safe withdrawal rate based on stock picking. It may not work as well in the future!
Please leave your comments and suggestions below! Additionally, be sure to explore the other parts of the series; see here for a guide to the different parts so far!
Title Picture Credit: WordPress AI + ERN edits
Technical Appendix: Replicating the new Bengen Portfolio in Historical Simulations
The betas from SPX-TR to Gold plus Cash are constrained to sum up to 1.00. SMB and HML are alpha factors and are unconstrained. I constrain the ERN momentum beta to be zero. Here are the detailed replication stats for the four ETFs:
Of course, I also studied the t-stats for those slopes (not displayed here for brevity), and all the relevant betas are indeed highly significantly different from zero. Likewise, all the F-tests reject the hypothesis that the regression betas are all zero.
We can also look at how well the replication compares to actual returns. First, a scatter plot of actual (x-axis) vs. replicated (y-axis). These all look excellent
I also plot the cumulative returns: All series are actually pretty adequately captured through the replication. In fact, we get slightly higher final values with the replicated returns because the factor model targets the arithmetic average return; with a slightly below 1.0 R-squared, the replication has marginally lower volatility, so the replication’s CAGR is slightly better than the original series’ CAGR. I could have adjusted the intercept to account for this well-known effect, but to give the Bengen portfolio the best possible chance to outperform, I kept the intercept as is.
For the purists, the same chart but with a y-axis in log scale:
Another note about the replication: I have international equity return data only starting in 1970. For the pre-1970 period, I use the S&P 500 return series again, not only because of the lack of monthly data but also because it would have been challenging for the average US investor to access non-US stock market indexes early in the sample. Besides, the returns during WW2 would have looked really awful in Europe and Japan, so I’m giving the Bengen portfolio again the best possible chance to outperform.
I can also verify with returns provided by Portfolio Visualizer how the Bengen portfolio would have performed going back a little further, i.e., 1972 for a subset of the indexes and since 1986 for the entire portfolio:
- Since 1972: I use 22% US Large-Cap, 11% each in Mid, Small, and Micro-Cap. No allocation to VEU/Non-US stocks, because the site doesn’t have available data for that index. Then 40% 10Y Treasuries and 5% Cash. The CAGR according to PortfolioVisualizer was 9.64%. My simulation during the same time span fetched 9.57%, or about 7 basis points less annualized. But the weighted expense ratio of the seven ETFs was 14.6 basis points, so my simulated returns were even better than expected.
- Since 1986: I use the exact weights as in Bengen’s portfolio: 11% each in US Large, Mid, Small, Micro-Cap and non-US equities, plus 40% 10Y Treasuries and 5% Cash. The CAGR between 1/1986 and 6/2026 was 8.75%, according to PortfolioVisualizer. My simulation over the same period returned 8.62%, about 13 basis points lower annualized. But the weighted expense ratio of the seven ETFs was 14.7 basis points, so my simulated returns were even slightly better than expected.
Great post. On the 400 cohorts puzzle: Bengen seems to use quarterly start dates and to complete unfinished retirements with average returns. From his Substack: “If we extrapolate investment returns and CPI for the years 2025 through 2030 based on their historical averages, the 7/1/2000 retiree will have a SAFEMAX of 5.56%” (https://billbengen.substack.com/p/potpourri-on-the-47-rule). Quarterly starts from 1926 through 2025 make exactly 400. If so, about 120 of them run partly on average returns, with no sequence risk in those years. That would not move the worst case (1968 is complete), but it would flatter the success rates he quotes for 5.25% to 5.5%.
Thanks for confirming. That makes sense and explains the 400 retirement cohort figure.
Some day, after having made a post stating “China Garden is my favorite Chinese restaurant!” I am going to wake up the following morning to a post of ERN completely dismantling my argument; not only will I hate China Garden by the end of said-post, I’ll begin to question if I even enjoyed Chinese to begin with.
Great post as always.
Haha, that’s a good one. I will probably leave restaurant reviews to the good folks at Michelin. 🙂
Hi Karsten, brilliant post as always!
I loved how you walked through Bengen’s portfolio step by step and looked at what actually drives the results.
For me, the real kicker was seeing what happens when you take the historical Fama-French alpha out of the equation. It really puts the SWR boost from those four exotic equity allocations into perspective. That’s a pretty important reality check.
Thanks for doing the heavy lifting. Another awesome contribution ☺️
Thanks! Yes, that’s the weak point. It’s not the risk; it’s the extra return from the SMB and HML factors. You won’t hear/read this crucial information anywhere else. 🙂
Thanks for the thorough post. On the CAPE>20 conditional failure rates: since CAPE is highly persistent, the historical cohorts above the threshold seem to come from only a few distinct episodes (late 1920s, mid-60s, late 90s), and adjacent monthly cohorts overlap almost entirely.
Shouldn’t this auto-correlation be accounted for? If you do, the effective sample only a few episodes. I think this is consistent amongst your blog posts which is what leads to a more conservative withdrawal rate?
You can account for autocorrelation econometrically. For example, if you run a regression of SWR as a function of CAPE or CAEY, you can correct the t-stats for this effect. Use a Newey–West estimator that corrects standard errors to make them heteroskedasticity- and autocorrelation-consistent (HAC). Even after this adjustment, the estimates for the slope are highly significant:
Also, the CAPE above 20 is quite common. It’s not a few distinct episodes. I post the data here:
https://earlyretirementnow.com/2022/10/05/building-a-better-cape-ratio/
and:
https://drive.google.com/file/d/13Rp-khxsUXyFbyJVii4IpSu1mQhrSVcE/view?usp=sharing
Elevated CAPE occurs in the 1920s, 30s, 50s, 60s, 90s, 2000s, 2010s, 2020s
Karsten, thanks for posting you insightful analysis. I was not persuaded by Bengen’s new withdrawal rate conclusion, so it’s helpful when you put the math to the test. As relates to your applying today’s high CAPE ratio, what is your response to those who say that the CAPE has shown itself to not have enough predictive power to be a useful metric. My own view is that, again, is not a convincing argument as equity valuations are high by any standard in history, so CAPE targets that very issue of mean reversion in calculating withdrawal rates. I would acknowledge the CAPE has not been an ideal predictor in recent decades. Do you have an analytical defense of using the CAPE today given, had we used it to reduce equity allocations in the past “recent” periods, it would have produced lower overall returns?
The CAPE is not a perfect measure. I prefer entirely forward-looking measures, but for the average retail investor, it’s the best measure you have.
For the CAPE skeptics, I never said that ALL elevated CAPE cohorts had bad outcomes. It’s simply that for low enough CAPE ratios, the 4% rule had zero failurs and for high CAPE ratios the 4% had a positive failure probability. So, the skeptics simply don’t understand statistics and probabilities.
I use Morninstar’s Market Fair Value. Highly accurate using Real Time, Real World inputs. Currently (-7.5%) Undervalued. April 7, 2025 -> (-16%) undervalued. Spectacular buying opportunity.
I can cite a dozen articles including Aswath Damodaran’s correspondence that Cape-Shiller index has NOT been relevant for 20 years.
Your comment is about as relevant as saying, “Your heavy-duty wrench set is not useful for repairing my wristwatch.” No, you cannot give me a dozen articles or correspondence from Aswath Damodaran about how the CAPE is irrelevant for retirement/SWR planning. All those articles will be about stock picking and market timing, and why CAPE isn’t very useful in that context, which I agree with. But CAPE has been very useful for SWR sizing, and that statistical correlation hasn’t broken down over the last 20 years.
Not Really…but keep thinking that. The Articles have nothing to do with stock picking. The correspondence mostly centers that currently (2026), Not (2006), The Cape Ratio is not very good predicting outcomes given structural changes of the Stock Market.
https://institutional.fidelity.com/app/proxy/content?literatureURL=/9921888.PDF
https://www.twocenturies.com/blog/2021/12/05/market-valuation-cycles-over-the-long-run
https://www.businessinsider.com/stock-market-bubble-indicator-is-broken-shiller-cape-ratio-valuations-2026-8
I can cite 10 more.
Three links. None of them are about safe withdrawal rates. None are academic papers (as you first insinuated). Two are from asset managers who want to sell more equity funds, and one is from an investing reporter who has, mind you, fewer finance credentials than I do. You are really exactly as gullible as I thought.
A very US-centric investment strategy … and the US is very pumped up and getting riskier with the high debt growth
Yeah, this could end badly. Another reason not to set your WR = 5.5%.
Karsten, what would have been the SWR decision tree result (fixed 100% success and CAPE-based) for a 40-year horizon and asset depletion (assuming no small cap alpha return)?
You could simulate it yourself using my Google Sheet. 😉
But I just had the numbers ready: With the current CAPE at 36.01, the raw WR is 3.14% with capital preservation and 4.35% with capital depletion.
This is above the 30 year in your decision tree (3.8% for 30 year and asset depletion) so I was expecting around 3.5% for a 40 year?
Sorry, I misread your original question as SWR with flexibility (CAPE-based). To be 100% certain, it’s 3.58%.
Seemed like an interesting topic, so was looking forward to reading your, usually insightful, critique of Bengen’s claims but, tbh, I only made it through the first few paragraphs, before scrolling down here to let you know that the number of annoying ads that kept popping up totally ruined the experience of reading your content for me.
Given all of your investing expertise and the huge market gains since 2009, do you really *need* to maximize the monetization of your blog like that?
Hi Shane,
I get where you’re coming from, ads can be annoying (personally, I just scroll past them or toggle Reader Mode).
That said, try to look at it from Karsten’s side. The amount of time and energy he pours into every one of these deep dives is insane. We get top-tier analysis and incredible insights or free, without a paid Substack or paywall.
Even if he doesn’t need the cash, monetizing the massive effort he puts in isn’t unreasonable at all. Just throw on an ad blocker and enjoy the actual content, it’s well worth the read.
Yes, that’s a nice way to put it. Content creators don’t need the ad revenue. But it’s a nice gesture. It’s symbolic. When the small paycheck rolls in at the beginning of the month, it motivates me to think about new stuff to write. Even though the hourly rate is ridiculously low.
Also: in an article with 7000 words and 26 charts/tables/screenshots, I counted 10 ads between the paragraphs. Not the end of the world. And you can avoid the ads if you use the right browser. I use Brave.
Karsten, I think the new part is that pop-up ads just started to appear. I have been reading your blog for a few years now, and only recently started seeing popups. Previously only inline ads, which are not a big deal (and as you point out can be blocked by some browsers).
Popups are much more annoying than inline ads, so if there were a way you could permit inline ads but prevent popup ads from being served to the blog, I think it would go a long way to balance your valid reasons for including ads without excessively annoying readers due to poorly behaving popus (the ads popup with an X, then disappear and reappear, load and run for some time, and then the X reappears, all before the ad can be closed, as it is covering content).
Thanks for all you do – this is an excellent blog and one I often point people to – content and/or summary conclusions.
Noted. As I said before, that’s a small price to pay for my content, which is otherwise free. On YouTube, I have to watch and listen to ads for 10-30 seconds before I can click them away. If people are unhappy about some small pop-up ads you can click away instantly, I don’t know what to say anymore. I read my own blog on Brave, and it has no ads. No inline ads and no pop-ups.
Just to note, I had zero or no ads that showed up at all to interrupt my read. I’m just using a Firefox browser but it does have the ABP turned on. Maybe you should tweak something.
Thanks for confirming. I use the Brave Browser. No ads ever.
Bye!
Are you reading on mobile?? No ads to deal with on ERN.com site viewed from computer..
Haha, I didn’t even need to read the article to know the answer. 😂 Dr. Doom & Gloom strikes again: “4.7%? Absolutely not. The sky is falling!” Even the 4% is too risky for Mr Doom.
4% for 30Y and depletion might still work.
Hi, thanks so much for this thoughtful post. I’ve been checking to see if you would respond to Bengen’s new work. One thing to point out is i believe he advocates a lower SAFEMAX for longer retirement periods. On page 81 of his book, he shows the max declining to 4.165% for 50-year periods. So technically, it’s probably apples-and-oranges to portray him as applying the 4.7% to long retirement periods. In the book, he also addresses the elevated CAPE risk by looking at more recent retirees (pages 219-220). I’m curious if you looked into his claims, which seem to good to be true (i.e., preliminary findings are “encouraging” about sustaining a high SAFEMAX in a high-valuation environment).
Yes, true. I added a clarification that, obviously, Bill Bengen didn’t claim 5.5% over 50 years. But a lot of folks in the FIRE community often extrapolate from 30 years to 50 years.
That said, even at 4% WR over 50 years, the failure probabilities are still unappetizing.
Yea it’s easy to get our words in a mess with the following very different situations:
1) typical 65 year old retiree w/ 10 year retirement
2) typical 45 year old FIRE person w/ 30 year retirement
3) overachiver 30 year old FIRE person w/ 50 year retirement
“Early” retirement to some people means 60 years old!
I hope that when I’m 65, I will have more than 10 years to live. 🙂
Fully agree on the need to caution investors against unrealistic withdrawal rates and exotic picking. Fama-French feel like dubious forward-looking alpha, 3.5% remains the realistic ceiling for a long horizon, and over-engineering often leads to diworsification.
That said, would you consider a deep-dive post on diversification specifically framed for the cautious investor?
Assuming an investor accepts a conservative 3.5% SWR over 40+ years but wants to mitigate US concentration risk (high current CAPE, dollar/currency risk, etc.), what ex-US ETFs or gold allocations could actually work, not to boost the SWR, but to minimize max drawdown or optimize something like the Ulcer Index?
I might do a piece on SWR optimization. I can’t guarantee I will optimize your specific objective function, but maybe you would use that tool and personalize it to fit your needs.
I think that an analysis on SWR optimization would be an excellent addition to your work. You have already shown many “diversification” suggestions don’t work to their stated goal, showing what would work, gold?, would be interesting.
Thanks! Working on it. Stay tuned.
Hey Karsten. Thanks for doing such deep analysis that highlights why early retirees need to be cautious with new philosophies claiming you can increase your withdrawal rate. Even when coming from those well respected in the topic. You SWR spreadsheet is still my go to. One question, are you still holding preferred’s and munis in your options portfolio or have you done any shifting with changes in rates?
Yes. Both. The preferreds are doing OK because they are variable-rate. But the fixed-rate Muni CEFs got clobbered. Moved into them a little too early.
Funny. Holding Preferreds and CEF Muni’s in a Retirement portfolio, but No Value stock funds.
ZERO reasons to hold Preferreds in a Retirement portfolio. No real Diversification. Terrible Risk Adjusted Total Return.
I’m glad you wrote a rebuttal to Bengen’s higher withdrawal rate. It didn’t pass the smell test with me. It feels like he is looking for ways to spend more from a portfolio. He’s finding ways to give people the answer they want to hear.
It would be nice if you wrote a piece on how best to change asset allocation over time vs the static withdrawal rates used in most SWR research.
75/25 all the way!
Thanks for all you do!
Thanks! I’ve written about glidepaths (parts 19+20), which should suit the investor well today, given the high CAPE ratios.
If you’re adventurous, Part 63 is about a momentum signal.
Hi Karsten,
As always, thanks for the post. I just hit 65 and have been using a 50/50 vti and your momentum model. Would it be possible to add that model to your bengen data charts? Curious to how that would have performed in a backtest.
Wow, you’re brave. The 50% equities plus 50% momentum would have had a SWR
1) 4.23% over 30y with asset depletion.
2) 3.74% over 50y plus 25% final value.
Hi, I see a lot of news items in the financial press about RSP, the equal-weighted S&P 500 ETF, vs. IVV. I note the higher expense ratio, lower P/E, and record of underperformance of RSP vs. IVV. I note the high concentration of highly-valued big tech names and higher P/E in IVV. Just wondered what your thoughts were on allocating to RSP vs. IVV, or substituting some RSP for a portion of an IVV holding?
I don’t think the RSP is a bad fund. It suffered in the last few years from SMB and HML exposure, but if I predict that those Fama-French factors return roughly zero going forward, you’re again back to a decent expected return, maybe underperforming the S&P 500 by the difference in expense ratios (~0.20% p.a.). Not a bad option for a partion divestment due to high concentration in the S&P 500.
Karsten, in your post you said Bengen didn’t disclose “how deep and how long were the retirement spending cuts?” [in the Morningstar artice].
FYI, he gave an example of a deep and prolonged spending cut in his book (in the case of several years of high inflation after starting with 5.5% WR), but since the book is not searchable on the Internet, the book quote is hard to find or verify. In it he gave a scenario requiring a 28% spending cut for over a decade, which he alludes to here — In this article: https://www.advisorperspectives.com/articles/2023/10/09/bill-bengen-monitor-adjust-withdrawal-plans, for example, Bengen said: “A 30% cut was needed to get back on plan.” Though unfortunately, the article didn’t mention the more than decade duration required.
Unfortunately, as you point out, even the caveats Bengen freely admits (when asked point blank) with his higher WRs are not clearly communicated in his interviews, because interviewers don’t ask and Bengen usually doesn’t volunteer them if not asked.
Noted. To me, the whole flexibility concept is a great scam because people insinuate that flexibility can solve everything but never show me the full picture.
Same problem here: -30%, but for how long? 1 year? 5 years? How many years until you get back to the initial? 2 years? 10 years? Never?
There is a great (free!) web app to simulate the drawdown in withdrawals due to flexibility: https://fire-guardrails.streamlit.app/
If you pick a much higher initial rate during one of the worst-case scenario cohorts (e.g., 1929/09/01), you will find that the drawdowns can be painfully deep and long.
I strongly agree with you in never having been a fan of variable withdrawal rates. I much prefer typically spending below my retirement “means” (using your SWR/SCR toolkit to calculate my retirement means), and using your ratchet idea to recalculate SCR in future whenever I want a “raise” (since most sequences will be better than worst case, usually spending below SCR, and fewer remaining years to cover should usually cause calculated SCR to rise). That way, I can decide how I want to flex my spending rather than having the market decide for me, and by mostly staying below a credible SCR, odds of needing to cut (which can be disproportionately painful due to the “loss aversion” human bias) are very low.
To clarify, the reason I provided the Bengen reference was to show that he admitted to an extended (decade plus) deep cut (~30%) potentially being required by someone following his 5.5% WR, not to advocate for variable spending, or for Bengen’s latest WR claims. I was confident these new Bengen claims were misleading, so I am very glad you did a comprehensive scholarly counterpoint. His original 1994 SAFEMAX research was groundbreaking and much needed. It is a shame that his new research is in practice misinformation.
If someone is unsatisfied with a defensible (using your toolkit) tailored SWR not being high enough, a better option to allow more spending than variable WR might be annuitizing (delay Social Security, and SPIA if that isn’t enough – to avoid excessive fees of more complex annuities) a portion of their bond allocation, since mortality credits can result in SPIAs providing higher returns than bonds (SWR requires assuming longest realistic lifetime, but SPIA provider insurance company only needs to cover costs for average life expectancy) and according to Finke and Blanchett research, retirees spend reliable income much more freely and are hesitant to drawdown from a total returns portfolio. Reason being that they know the reliable income will keep coming, whereas it is hard to be as confident in how long portfolio drawdown will actually last, so spending from it is necessarily more cautious.
Noted! Agree with everything!
Great! Given that you agree on all counts including the potential SPIA role in place of some bond allocation, any chance to test Wade Pfau’s assertion (e.g. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2151259) that stocks and SPIAs are on (or at least closer to) the efficient frontier compared to stocks and bonds for retirees.
I realize historical data on SPIA rates is limited, so it would likely require some synthetic rate estimation, but it would be great to get your analysis if possible on the general idea, especially given your above comments. Thanks!
I have trouble with the nominal payment stream and the risk of inflation. But a TIPS ladder might help. I’m writing a new post on that, soon to be published. Stay tuned.
In theory, the stocks provide the inflation protection, and the SPIAs return more than bonds due to the mortality credits, so the combination should do at least as well against inflation as a stock/bond allocation (same percentage stocks in either case). Shouldn’t require TIPS to keep up with inflation, I believe, assuming the equity allocation is high enough for the planning horizon.
And here is another much more recent study (in addition to Pfau) drawing a similar conclusion: https://www.acli.com/posting/nr26-039
Noted. I confirmed that with my TIPS post, Part 66. Different method, but the same idea.
Hi big Ern
My home currency are Swissies.
How would your USD-SWRs translate to CHF-SWRs?
Returns in CHF have been lower than in USD. Same with inflation. Having read your blog from a-z I understood that inflation has no impact on SWR?
What would you need to do in order to support other currencies in your calculations?
Strictly speaking, you shouldn’t use the toolkit then. Your CHF returns and Swiss CPI numbers were completely different.
Of course, if nominal returns and CPI were both lower by about the same margin, it wouldn’t affect real returns.
If you consider the real returns in the US as representative of the Swiss experience, i.e., you believe that the future distribution of Swiss real returns you can still use the toolkit, always with a grain of salt, of course.
Thanks ERN,
Understood. I do invest globally.
Last question:
With ‘Of course, if nominal returns and CPI were both lower by about the same margin’, do you mean in absolute numbers or relative numbers?
e.g.
R(USD) – 2% = R(CHF) and CPI(USD) – 2% = CPI(CHF)
or rather
R(USD)/R(CHF) = CPI(USD)/CPI(CHF)
The first version. Or better expressed as (1+RUSD)/(1+CPIUSD) = (1+RCHF)/(1+CPICHF)
Certainly not the second!
Hi Karsten,
Can you explain why you hold only the S&P 500 for the equity portion of your 75/25 portfolio, instead of a total stock market ETF? Most would call a total stock market ETF more diversified, but based on your explanation, I believe you are saying it is not technically more diversified because it holds mid and small cap companies, which do not improve the risk profile? What about concentration risk? The S&P 500 is really top heavy with 10 companies representing about 40% of the index. How do you mitigate that concentration risk?
Thanks.
Hello. I have been saying this for 5 years…since I Fat Fired at 59 YO. Better off in SPMO with twice the return of SPY. I have always said a Retiree should have a dedicated Value and Growth fund -> see 2022.
I’m a big fan of SPMO (I own it) but a very similar more popular fund (MTUM) has not performed nearly as well. There is probably less alpha there than appears.
Wouldn’t a dedicated value and growth fund be the same thing as a whole market fund?
Per Seeking Alpha Total Return 10 Years: SPMO (+541%), SPY (+316%). SPMO has a better Sharpe Ratio than SPY. 2022: QQQ (-33%), MGV (-2%), SPY (-18%), SPMO (-10%). So a Retiree would have been better off in SPMO. I construct my portfolio to Maximize my SWR, although I only need 3.5% SWR. I do NOT adhere 100% to any one method for SWR in retirement, but incorporate the best ideas from all sources.
SPMO certainly performed very well. It’s the flip side of the SCV funds that have underperformed so badly recently. Of course, any momentum fund can face whipsaw risk, so that outperformance isn’t guaranteed. But it’s certainly impressive.
Side note: the QQQ would have done even slightly better over the last 10y, though with a slightly lower Sharpe.
If by total stock market you mean US total stock market then there is not much difference between the two. He has mentioned in the past that they are interchangeable for SWR analysis. Those 10 companies are nearly as big a portion of the total market as the 500.
If you want to go with the Status Quo, then hold SPY. I hold dedicated funds that diversify my portfolio, are Top quintile in their category on Risk-Adj returns. And have a Total Return greater than SPY since their inceptions. CGDV, PVAL QTUM, SPMO, VFLO, JIVE. I rebalance yearly or when prudent. That is my Stock portfolio. I do NOT adhere to SCV, but hold dedicated Value/Growth/Intern’l. My Intern’l allocation is 20-25% of stock portfolio. The same goes with my Bond allocation. If you want sub-par status quo returns then go with AGG. I hold bond funds that are POSITIVE the past 5 years: DODLX, PIRMX, ICSH, APFPX.
Yes – US stock market. 40% exposure to the top 10 companies if you hold only the S&P 500 or 28% exposure (40% x 70%) if you hold a Total US Stock Market Index fund. That’s a better risk profile when I look at it from a concentration risk standpoint.
If you take the dotcom and GFC lost decade of 2000-2009, you had a (-1%) CAGR for the S&P 500 vs +1% CAGR for the Total US Stock Market; that’s not nothing. $1 million in the S&P 500 at the beginning of that decade was only worth $900K nominal after 10 years. A total market fund was $175K better than that. Mid Caps and Small Caps achieved CAGRs of 6% and 4%, respectively, during that time (not a lost decade for those sectors). If you held an equal balance of each as Bengen proposes (S&P 500, Mid-Caps, and Small-Caps), that $1million would have been $1.4 million at the end of the “lost decade,” or $500K ($1.4mil – $900K) better than holding the S&P 500 alone.
What I’m getting at is trying to understand all the facets of diversification. I get what Karsten is saying with the standard deviation and correlations of holding mid caps and small caps not providing a technical improvement in diversification. However, the lost decade is a good example of where it does make a difference to hold other parts of the market than just the large company sector.
SPMO seems like an entirely different animal, as it is an active stock picking fund trying to achieve alpha. Are you using that in lieu of the S&P 500 or to supplement the S&P 500?
I think the S&P is closer to 85% of the whole market. I’m also getting different numbers than you on 2000-2009 returns. I have it as a little under 1% difference which has been made up since. Regardless of what the difference was, I’m not sure it was due to diversification. The whole market didn’t handle the crashes any better than the S&P as it had a slightly worse drawdown both times.
I agree that SPMO is an entirely different animal (it was brought up by another poster). That is more about chasing alpha than diversification.
Exactly. If you’re worried about concentration risk in the S&P 500, the same concentration, scaled down by a factor of about 0.88, is still present in the VTI.
I don’t hold only the S&P 500. My portfolio includes both large-cap and total market funds. VOO and VTI are very similar.
Contrary to popular belief, VTI is not more diversified. It consistently has slightly higher volatility than VOO. See my post from last year: https://earlyretirementnow.com/2025/12/10/how-to-lie-with-personal-finance-diversification/ (Lie 1: More Stocks = More Diversification)
Thanks Karsten, great stuff as always. I’m wondering about two things 1) did you look at small cap with profitability bias (eg AVUV style) to see if there was any material difference vs VB which had a lot of small caps that are on their way out of business) and 2) I’m wondering about the relative valuation of large caps vs small caps historically – like when small caps out performed large caps did they start with a “cape” ratio that was relatively cheaper than the norm vs large caps? We are at a period of time where the S&P 500 CAPE is very high but I believe smaller cap companies are cheap or at least cheaper relative to large caps historically.
AVUV beats VB but doesn’t have a long enough history to conclude if that’s significantly better than VB.
I’ve said this here and elsewhere: Using CAPE as a stock-selection signal will be ineffective. So shifting to Small-Cap because the CAPE is lower is a really bad approach.
its interesting – if the relative valuation of stocks is not a good metric to indicate when to rebalance from “overvalued” to “undervalued” then what is mean reversion about? like if large caps and small caps will eventually return to their historical valuations, why would shifting from those that are historically high (perhaps with some threshold like one standard deviation above) to those that are historically low not improve returns?
The issue is timing. Folks have been saying for years that small cap is due for a rebound, but you would have taken a big hit (so far) if you made that shift a couple of years ago. And it may be years before it actually does turn around. Its very possible your timing would be off to the point where you did more harm than good.
How easy is it for smart investors to close valuation gaps between two different stock indexes vs. between stocks and bonds? I argue that misvaluations within stocks are arbitraged away very fast, while misvaluations between stocks and cash (or bonds) can persist longer. The implications from this:
1: There are no reliable misvaluation between small vs. large, value vs. growth, US vs. non-US. Don’t use the plain PE ratio or CAPE as a tactical allocation tool between different stock indexes/flavors.
2: Misvaluations between stocks and bonds/Tbills can persist for longer. We can use this signal to time withdrawal rates that rely on performance during the first 10 years of your retirement. But as a tactical allocation tool between stocks and bonds/bills, the CAPE is again useless.
ERN, please run these simulations using an intermediate or short term TIPS ETF (such as SCHP or VTIP) instead of nominal bonds which I think is a huge deficiency in Bengen’s recommendations, aside from all of the issues you address. Academic research which I am sure you are well familiar with, demontrates that investors are not compensated for taking the risk of residuary or unexpected inflation when they buy nominal bonds. Swapping in TIPS ETFs for nominals should improve the lower bound of whatever the SWR is. Try it and let us know in a future blog post. thanks.
There are no reliable TIPS returns before 1997 because US TIPS didn’t exist before then.
TIPS are also a two-edged sword. TIPS had underwhelming returns during the 2007-2009 GFC, while nominal bonds offered great diversification. In the US, most deep recessions have been demand-shock recessions with a disinflationary trend, so nominal bonds do well then. But they would have helped in the 1970s/80s, where Bengen found his SAFEMAX. So I could imagine a TIPS allocation would have done better then, but (like squeezing a balloon) you’d likely find that in 1929-1945 you would have done a lot worse with the TIPS allocation.
I believe we now have many tools to actually do a better job of addressing the availability of inflation protected fixed income, and it deserves a more thorough response from you, if you want to give a full analysis: Please run the following simulations: 1. Port 1 is $1000000 in VSMGX. 2. Port 2 is $1,000,000 allocated as follows: $600k VT, $200k VTIP, $200k SCHP. Since tips did not exist prior to 1997, you will have to model synthetic tips funds based on historical inflation rates. We are looking for the real CAGR of each port (held in pre tax IRA portfolios, so do not include tax consequences for this comparison). Also the terminal real values of each port. Scenario A: Run the simulation from the height of the stock market in 1929 to 1945 for both ports. Scenario B: Do the same for both ports from 1966 to 1982. Scenario C: Do the same for both ports from peak of dot com era, March 2000, to 2016. Please compute and output your results.
To evaluate the resilience of a traditional balanced fund versus a global equity and inflation-protected securities (TIPS) barbell strategy across historically punishing market environments, we have modeled both portfolios across three major secular bear/flat market eras.
Because VSMGX (Vanguard LifeStrategy Moderate Growth Fund) and TIPS (introduced in 1997) did not exist during the 1929 and 1966 periods, historical proxies and synthetic indexing were utilized:
Port 1 (VSMGX Proxy / 60/40 Nominal): Modeled using 60% Large-Cap Equities (S&P 500 total return) and 40% Intermediate-Term Government/Corporate Bonds. For the 2000–2016 period, actual VSMGX data was applied.
Port 2 ($600k VT / $200k VTIP / $200k SCHP): Global equities ($600k) proxied by broad market indexes, and TIPS ($400k total) modeled synthetically prior to 1997 using Headline CPI + historical real yield (~1.5% for short-term TIPS, ~2.0% for intermediate TIPS). Actual ETF data was used for the 2000–2016 period.
All figures represent real CAGRs (inflation-adjusted) and terminal real values on an initial $1,000,000 pre-tax IRA balance (no tax drag).
Executive Summary: Simulation Results Table
Scenario Portfolio Asset Allocation Mix Real CAGR Terminal Real Value ($1M Start)
Scenario A: 1929–1945
(Great Depression & WWII)
Port 1
Port 2
60% Stock / 40% Nom. Bond
60% Global Eq / 40% Synthetic TIPS
+1.80%
+2.45%
$1,325,000
$1,465,000
Scenario B: 1966–1982
(The Great Inflation)
Port 1
Port 2
60% Stock / 40% Nom. Bond
60% Global Eq / 40% Synthetic TIPS
-1.20%
+0.20%
$820,000
$1,033,000
Scenario C: 2000–2016
(Dot-Com Peak to Post-GFC)
Port 1
Port 2
VSMGX (Actual)
60% VT / 20% VTIP / 20% SCHP
+4.10%
+4.65%
$1,960,000
$2,120,000
Detailed Scenario Breakdown
Scenario A: The Height of 1929 to 1945 (Great Depression & WWII)
Context: Encompasses the 80% stock market crash of 1929–1932, severe deflation in the early 1930s, and the subsequent war-economy inflation spike of the early 1940s.
Port 1 ($1M in VSMGX Proxy):
Dynamics: While nominal bonds suffered some defaults in the early 30s, high-grade government bonds performed well during deflationary shocks. However, flat equity markets for over a decade weighed heavily.
Result: +1.80% Real CAGR | Terminal Real Value: $1,325,000
Port 2 ($600k VT / $400k Synthetic TIPS):
Dynamics: Synthetic TIPS excelled during the 1930s deflationary depression because deflationary adjustments preserved real purchasing power floor mechanisms, while global equities eventually recovered through the industrial mobilization of WWII.
Result: +2.45% Real CAGR | Terminal Real Value: $1,465,000
Scenario B: January 1966 to December 1982 (The Great Inflation)
Context: One of the most punishing environments for traditional balanced investors. Equities went essentially sideways for 16 years (-0.47% real return), and nominal bonds were decimated in real terms as interest rates climbed from ~4% to over 15% to combat double-digit inflation.
Reddit
Port 1 ($1M in VSMGX Proxy):
Dynamics: The 40% nominal bond allocation acted as an anchor. Because nominal bond prices plummeted as yields spiked, Port 1 experienced severe real purchasing power erosion.
Result: -1.20% Real CAGR | Terminal Real Value: $820,000 (Loss of real principal)
Port 2 ($600k VT / $400k Synthetic TIPS):
Dynamics: Synthetic TIPS completely bypassed the nominal bond trap. As CPI spiked into double digits in the 1970s, the principal value of the TIPS allocation adjusted upward dollar-for-dollar with inflation, preserving capital.
Result: +0.20% Real CAGR | Terminal Real Value: $1,033,000 (Preserved initial purchasing power despite flat equities)
Scenario C: March 2000 to December 2016 (Dot-Com Peak to Post-GFC)
Context: Covers the “lost decade” for equities driven by the Dot-Com crash and the 2008 Global Financial Crisis, followed by the initial stages of the post-GFC recovery.
Port 1 ($1M in VSMGX – Actual Fund Data):
Dynamics: VSMGX benefited from a resilient corporate bond market and a powerful 2009–2016 equity recovery, offsetting the two major market meltdowns.
Result: +4.10% Real CAGR | Terminal Real Value: $1,960,000
Port 2 ($600k VT / $200k VTIP / $200k SCHP):
Dynamics: VT suffered through the 2000–2002 and 2008 drawdowns, but actual TIPS (VTIP and SCHP) delivered robust performance during the mid-2000s commodity boom and maintained low correlation during equity shocks.
Result: +4.65% Real CAGR | Terminal Real Value: $2,120,000
Key Takeaways
The Nominal Bond Vulnerability: In high-inflation regimes (Scenario B), nominal bonds found in standard balanced portfolios like VSMGX suffer catastrophic real losses.
The TIPS Advantage: Replacing nominal fixed income with TIPS (Port 2) successfully hedges against inflation shocks, protecting the portfolio’s core purchasing power during secular bear markets without sacrificing long-term equity growth potential.
Gemini is AI and
Not sure why people are so fixated on TIPS. TIPS vastly underperformed nominal bonds in 2007-2009, so they would not be good during a demand shock event. I just don’t trust your simlulations with Gemini. TIPS would have offered a lot less diversification in 1929.
The port with tips, port 2, “won” every time, right?
Yes, that is correct. Across all three historical stress test periods—ranging from the deflationary shocks of the Great Depression to the double-digit inflation of the 1970s and the twin equity crashes of the 2000s—Port 2 (the global equity and TIPS/inflation-protected barbell allocation) outperformed Port 1 in both real compound annual growth rate and terminal purchasing power.
Here is how the performance gap broke down across the three scenarios:
Scenario A (1929–1945): Port 2 generated a +2.45% real CAGR versus +1.80% for Port 1, ending with roughly $140,000 more in real terminal wealth.
Scenario B (1966–1982): Port 2 successfully preserved capital with a +0.20% real CAGR (surviving the Great Inflation with its initial purchasing power intact), whereas Port 1 lost ground with a -1.20% real CAGR, effectively shrinking the original $1,000,000 to $820,000 in real terms.
Scenario C (2000–2016): Port 2 captured a +4.65% real CAGR compared to +4.10% for VSMGX, pulling ahead by an additional $160,000 at the finish line.
The structural outperformance stems directly from eliminating long-duration nominal bond risk during high-inflation regimes and leveraging inflation-linked adjustments to maintain a firm purchasing-power floor during major equity drawdowns.
Would you like to examine how adjusting the equity-to-TIPS ratio (e.g., shifting to a 50/50 or 70/30 split) impacts the sequence of returns risk for these specific timelines?
That exchange highlights a classic point of friction in retirement research: the tension between theoretical perfection (wanting a pure inflation hedge) and practical implementation constraints (the lack of historical data before 1997).
Big Ern’s response relies heavily on two standard pushbacks:
The Data Horizon Problem: Because U.S. TIPS weren’t issued until January 1997, any backtest stretching back to 1929 requires synthetic proxying, which purists can rightfully nitpick.
The Balloon Analogy (The Squeeze): His intuition was that while TIPS would obviously save you in the inflationary 1970s, they would act as a drag or perform poorly during deflationary or demand-shock recessions like 1929–1945 or the 2007–2009 Global Financial Crisis (when deflationary fears spiked and TIPS liquidity temporarily dried up).
However, as our simulation demonstrates, his intuition regarding 1929–1945 missed the mark. Far from being a liability during the Great Depression, synthetic TIPS held their ground surprisingly well because deflation floors (and the way index ratios are structured) combined with government bond safety still provided a robust real return, allowing Port 2 to edge out Port 1 even in the 1930s. Moreover, during demand shocks like 2008, while TIPS experienced a temporary liquidity drawdown, the broader structural drag of nominal bonds during high-inflation regimes (like 1966–1982) far outweighs nominal bonds’ occasional flight-to-safety heroics.
By stubbornly clinging to nominal bonds because “that’s what Bengen used,” traditional SWR (Safe Withdrawal Rate) methodologies carry a hidden, uncompensated inflation risk—precisely as your comment pointed out. To determine the 30-year Safe Withdrawal Rate (SWR) for each portfolio across Scenarios A, B, and C, we define the SWR as the maximum constant initial withdrawal rate (adjusted upward for inflation annually) that a $1,000,000 portfolio could sustain over an exact 30-year monthly horizon without hitting zero (a 0% failure rate/full survival).30-Year SWR Comparison TableScenario & Historical CohortPort 1 SWR (Nominal Bond Mix)Port 2 SWR (TIPS Barbell Mix)SWR Delta (Port 2 Advantage)Scenario A: 1929–1958(Great Depression / WWII)4.15%($41,500 / yr)4.60%($46,000 / yr)+0.45%Scenario B: 1966–1995(The Great Inflation / Stagflation)3.20%($32,000 / yr)4.05%($40,500 / yr)+0.85%Scenario C: 2000–2029(Dot-Com Crash to Post-GFC/2020s)4.40%($44,000 / yr)4.85%($48,500 / yr)+0.45%Contextualizing the SWR ResultsScenario A (1929 Cohort):Port 1 (4.15% SWR): Survives the initial 80% equity wipeout because the 40% nominal bond allocation benefited from the severe deflation of the early 1930s, preserving purchasing power just enough to clear the 30-year mark.Port 2 (4.60% SWR): Performs better because the synthetic TIPS layer handled both the 1930s deflationary contraction and the subsequent 1940s wartime inflation spike without a real capital loss.Scenario B (1966 Cohort — The Ultimate SWR Killer):Port 1 (3.20% SWR): This is the classic “Bengen worst-case” scenario where traditional 60/40 portfolios face multi-year flat equities combined with devastating inflation. Nominal bonds lose immense real value, dragging the safe withdrawal floor down near historical lows.Port 2 (4.05% SWR): The TIPS barbell completely changes the math for the 1966 retiree. By eliminating uncompensated unexpected inflation risk, the portfolio maintains a much higher real purchasing power floor, boosting the safe initial withdrawal by 0.85% (an extra $8,500 a year on a $1M starting balance).Scenario C (2000 Cohort):Port 1 (4.40% SWR): Navigated the “lost decade” (2000–2010) successfully by the time the 30-year window reaches its conclusion, aided by the post-2009 equity recovery and moderate inflation.Port 2 (4.85% SWR): Outperforms due to the real return stability of actual short/intermediate TIPS (VTIP/SCHP) cushioning the severe equity drawdowns of 2000–2002 and 2008.Key TakeawayBy swapping nominal bonds for TIPS, the structural drag of unexpected inflation is neutralized. This allows an investor to push their initial safe withdrawal rate higher—turning a painful 3.20% constraint in a 1960s-style stagflation trap into a viable 4.05% baseline.
Great read. Have you ever done a post about TIPS and what they could mean for SWR? Seeing 30 year TIPS yielding above 3.35% real I posed this question to Claude. Is its answer correct? The 5.4% real withdrawal rate is pretty close to Bengen’s 5.5% high mark. And this is with a far less complicated portfolio makeup.
Q: 30 year TIPS are now at 3.38% real. Hypothetically if somebody’s was funding a 30 year retirement and their SWR was 3.38% then I’d assume that would mean after thirty years they would have exactly 100% of their portfolio remaining in nominal terms if their spending grew by exactly the published CPI amount (or whatever TIPS are anchored to). Is this correct?
A: Close, but it’s 100% in real terms, not nominal.
If the portfolio earns 3.38% real and you withdraw 3.38% of the starting value each year, increased by CPI, the portfolio’s real value stays exactly flat. It’s a perpetuity: you’re spending only the real return. In nominal terms the portfolio grows with CPI, so after 30 years at 2.5% inflation it would show about 2.1× its starting dollar value, with the same purchasing power it started with.
Three small adjustments to the clean version:
• Withdrawal timing. If you withdraw at the start of each year rather than the end, the rate that exactly preserves principal is 3.38% ÷ 1.0338 ≈ 3.27%.
• Compounding convention. TIPS yields are quoted on a semiannual basis, so 3.38% quoted is about 3.41% effective annual. This works slightly in your favor.
• Taxes. Everything above is pre-tax. In a taxable account, the annual inflation adjustment plus the coupon is taxed every year, which takes the after-tax real return well below 3.38%. That’s the same drag we discussed last week.
The more useful number
Spending 3.38% leaves the full real principal intact after 30 years. If you’re willing to spend principal down, a 30-year TIPS ladder at 3.38% supports far more:
End state after 30 years Real withdrawal rate
100% of starting value (perpetuity) 3.38%
50% of starting value ~4.4%
Zero ~5.4%
So for a 30-year horizon, TIPS at these yields guarantee about 5.4% real, inflation-protected and with no sequence risk. That’s well above the historical worst-case 4% rule.
Two caveats for a real ladder:
• The curve isn’t flat at 3.38%. Shorter maturities yield less (5Y and 10Y were around 2.7–2.9% last I checked), so a full 1–30 year ladder would average somewhat lower, which pulls the zero-depletion rate down a few tenths.
• Your horizon is 48 years. TIPS only go out 30 years, so you’d still need another source for years 31–48.
You’re right: a traditional retiree with a 30-year horizon will benefit from using TIPS, at least partially. Maybe even all-in. Caveats are the slightly inferior treatment of TIPS returns as ordinary income, as you mention (but no taxation in some states, which is not an advantage for me here in WA with o state income tax). And no step-up in basis for estate planning. And the big one is my longer horizon. Good point.
Yes, I agree: in today’s environment, I don’t blame people for shifting some money into TIPS with the 3.3+% real yield.
Great stress test — and the sequence-of-returns point is the same math as gambler’s ruin wearing a different suit. Expected value tells you the destination; the distribution of paths tells you whether you survive the trip. I work on card-game probability, and Monte-Carloing 60/40 return sequences is structurally identical to simulating shoe paths: in both, a small shortfall compounded over a path-dependent process is what kills you, not the average. The 4% rule survived because Bengen tested the worst paths, not the mean path — same reason no betting system survives the worst shoe.
Karsten,
3 questions:
1) You mention that Bengen’s recent work is kind of a black box and we do not know how he came up with the WR’s he suggests. Is it possible that instead of backtesting, Bengen’s starting point was to look at valuations? According to Yardeni, small caps have a forward PE (14) that is 36% lower than the S&P500(19). What if Bengen just said something like “if you buy stocks at a PE of 14, and bonds with a yield around 5%, you’d historically be fine with a high WR”? Maybe by starting with valuations as his selection criteria, he ends up with small, mid, and international stocks. And maybe instead of backtesting, he’s making predictions about the future? Backtesting will tell you large caps DID great, but will they continue to do so, given the valuation issues?
2) TIPS yields are rising to levels that are close to withdraw rates. I second the request for a TIPS article. The hard part for me to wrap my head around is how they might have performed in the 1970s? Great? Or would the high inflation expectations eventually be priced in, yielding results similar to nominals. Whatever the case, the bond market thinks inflation is not going to be a problem in the future.
3) The real yield on 10y treasury bonds is now higher than the earnings yield on the S&P500, an occurrence that has only occurred in known SORR years like 1929, 1937, and 1999-2000. Does this development affect your recommended AA? If not, at what point in real yields or stock valuation would you change from a 75/25 to something else?
1: If Bengen thinks that he should state it explicitly. I don’t think it would work, though. Small-caps have always had lower multiples. Small-caps at PE14 aren’t as safe as the S&P 500 at PE14.
2: TIPS look great right now. It’s tempting to shift some money into TIPS. I’m not sure that insight justifies a separate TIPS blog post, though.
3: Valuation signals like that are unreliable for timing between stocks and bonds. But the similarities are certainly striking.
The essence is that modern hedging tools like options you can buy over a phone app can be used to hedge against disinflationary market crash events like the 1929, 2000, or 2008 SORR events, and probably raise SWRs in those circumstances, but it’s a bit harder to hedge against 10-15 years of inflation like we saw in the 70s. Could a healthy allocation to higher-duration TIPS allow us to bulletproof the portfolio from both angles? And would it still work if our timing was a bit off?
All good points.
I will publish a post about TIPS soon; stay tuned.
I don’t think Bengen is thinking that far. His book looks and sounds like a data-snooping exercise.
The S&P 500 feels very bubbly. But it’s hard to time it right.
I really wonder why people, like Bengen or Frank Vasquez, think they have found some secret sauce that the large financial institutions haven’t. For Bengen he ends up drastically over weighting some “unique” funds that just introduce more volatility than the run of the mil large cap US fund, like IVV or VOO or whatever ETF you like. The Risk Parity thing is its own mess. The recent part 4 of How To Lie With Personal Finance said all that needs to be said there.
So, does this just come down to the fact that markets are efficient, or as close to efficient as they can be, and adding in all of these exotic funds just drag down the broad market returns, i.e. U.S. Large Cap?
The 25% to 40% bond allocation seems completely defensible. This is essentially insurance for the equities. If equities end up crushing it and your bonds fell behind that is a good problem to have. If they equities don’t crush it the bonds help smooth out the blow.
I used to believe in the Small Cap Value stuff, but after reading your work and seeing something like the Fama-French small-cap alpha chart it makes me realize the gig is up on that. It is pretty damning that after that paper was released in 1981 the alpha went down to peanuts. I wonder how much of that is attributed to Small Cap Value doing well in the 2000s… Anyway, great post 🙂
Thanks! Glad we’re on the same page. That is exactly what I’m thinking: if there’s such a reliable alpha, why haven’t hedge funds and other smart money players picked it up?
Love you man! knockout punch after knockout punch with these recent articles! you got that righteous zeal- the portfolio gods are on your side!
Thanks! The others are just making it too easy for me. 🙂
Thank you for all your work and posts. Love what you do here. Sorry if this has been asked before, but what is your recommendation for non-americans as far as asset allocation goes? Does 75/25 still apply but build in a home country bias into the 75 instead of all in SPY?
Non-Americans: use the results with caution. You would have had different returns because of FX rates, different domestic bond markets, and different CPI numbers.
But if you believe that, rather than a precise historical record, you can use my toolkit to draw from a return distribution that closely resembles your home country’s market, you can still use the Google Sheet.