Think the 4% Rule Is About Spending? Think Again
It’s not your withdrawal rate that matters most — it’s what’s backing it up.
Last Friday, we asked the question: Could 4.7% Be the New Retirement Magic Number? The short answer? Yes — under the right conditions.
But here’s the thing: the withdrawal rate is just the headline. The real story lies under the hood — in the portfolio itself.
Because even Bill Bengen, the creator of the 4% rule, never claimed the number worked in a vacuum. His now-famous formula assumes a very specific kind of portfolio backing it up — one that’s built not just for stability, but for growth.
And that raises a question too many retirees overlook:
How much stock exposure is enough to keep up with inflation? And how much is too much in a fragile market?
Let’s dig in.
Why Conservative Portfolios Can Be Dangerously Misleading
Many retirees instinctively reach for safety as they leave the workforce. They shift heavily into bonds and cash, thinking these “stable” assets will help preserve capital.
But in a long retirement, that caution can backfire.
Bengen’s original research found that portfolios with less than 40% in equities often failed when stress-tested against historical data — especially during high-inflation periods like the 1970s. Bond-heavy portfolios simply couldn’t keep up with rising costs of living. In some cases, the “safe” withdrawal rate dropped below 3%.
That may not sound dramatic, but it’s the difference between $40,000 and $30,000 in annual income on a $1 million portfolio — for life.
The problem? Inflation compounds. And when your returns don’t, your lifestyle shrinks year after year.
Bengen’s Sweet Spot: 50–75% in Stocks
So what did Bengen find actually worked?
A portfolio with 50% to 75% equities hit the sweet spot. It delivered the best odds of sustaining a consistent, inflation-adjusted income over 30 years — even during the worst markets in modern history.
That’s because equities, while volatile in the short run, have historically offered the best long-term protection against inflation. They’re the growth engine that keeps your income from falling behind.
But there’s a tradeoff. The more stocks you own, the more exposed you are to sequence of returns risk — the risk that a market crash early in retirement, when you’ve just started withdrawing, permanently damages your portfolio.
Bengen’s point wasn’t to ignore volatility. It was to balance it.
Too little equity, and you risk falling behind inflation. Too much, and you risk getting hit hard before your portfolio can recover.
The 50–75% range provides that balance — enough growth to keep up, enough stability to avoid disaster.
Why 100% Stocks Isn’t a Free Lunch
Some investors take the logic one step too far.
“If stocks beat inflation, why not go 100% in equities and maximize long-term growth?”
It’s a tempting argument. But Bengen’s simulations tell a different story.
Once equity exposure moves past 75–80%, the risk-reward equation starts to deteriorate. The portfolio becomes too volatile — and too exposed — in the fragile early years of retirement.
In some historical scenarios, that volatility led to early depletion, even though long-term returns were strong.
Markets don’t move in straight lines. And when you’re making withdrawals, that matters. If you sell into a downturn early on, you’re not just locking in losses — you’re reducing the capital base that future returns can grow from.
Static Models Are Useful. Real Life Isn’t Static.
Bengen’s original models assumed a fixed allocation throughout retirement — for consistency in testing.
But even he acknowledges that real retirees live in the real world, not in spreadsheets.
That’s where dynamic strategies come in. Consider:
De-risking: Reduce equity exposure during bull markets to lock in gains.
Re-risking: Increase equity exposure during downturns, when prices are more attractive.
Glidepaths: Shift gradually from higher equity to lower equity (or vice versa) over time.
Bucket strategies: Use time-segmented portfolios (e.g., cash for near-term, bonds for mid-term, stocks for long-term).
Guardrail withdrawals: Adjust spending up or down based on market performance to avoid depleting too quickly.
For investors looking for a practical way to implement these ideas, our Tactical Income and Growth Portfolio offers a flexible, ETF-based model grounded in Bengen’s logic. While the model typically maintains a 50% equity allocation, it serves as a strong foundation for both more conservative and more aggressive investors. You can dial up or down your stock exposure using the model as a base.
The latest update of the “Tactical ETF Playbook” — walks through exactly how we’re positioning for both inflation resilience and early-retirement risk.
Bottom Line: Stocks Are the Fuel. The 4% Rule Is Just the Frame.
Think of your retirement portfolio like a car.
The 4% rule is the frame — it gives you structure. But it doesn’t get you anywhere unless there’s fuel in the tank.
Stocks are that fuel. They drive long-term growth, power your inflation protection, and sustain your income over decades.
If you shortchange equity exposure, you risk running out of gas halfway to your destination. But if you overload on it without a seatbelt, a crash in the first few miles could total your plans.
That’s why Bengen’s message is so important — and often misunderstood.
A good retirement strategy isn’t just about finding the right withdrawal rate. It’s about owning the right portfolio to back it up.
Disclaimer: This analysis is for informational purposes only and does not constitute financial advice. Investors should conduct their own due diligence and consult with a financial advisor before making investment decisions.