Updates By Bengen and The Trinity Study

Obviously, 1994 and 1998 was some time ago.  But fear not.  These two articles have since been updated by their original authors.

In 2006, Bengen wrote a book called Conserving Client Portfolios During Retirement and revised his conclusions.  Rather than generically call it “the 4 percent rule”, he now refers to the minimum safe withdrawal rate as his “SAFEMAX” value.  It has been raised from 4.0% to 4.5%.  His revised strategy also calls for a more diverse portfolio.

In 2011, the Trinity Study authors also updated their research taking into account more recent market activity.  You can read the new article here.

Here is what the revised article concluded:

  • A retiree with a 75/25 stocks and bonds portfolio can now use a withdrawal rate as high as 7.0% for 30 years with a 91% success rate if they do NOT adjust annually for inflation.  If you have a 50/50 stocks and bonds portfolio and use a withdrawal rate of 6.0%, your success rate increases to 98%.
  • A retiree with a 75/25 stocks and bonds portfolio can use a withdrawal rate of 4.0% for 30 years with a 100% success rate if they do make annual adjustments for inflation.  If you have a 50/50 stocks and bonds portfolio, that same withdrawal rate will drop to 96% success rate.  Note that that’s 1% more than it was in 1998!
  • No surprise: Portfolios with higher stock allocations again resulted in higher values over 30 years; approximately as high as 6 times vs 3 times for the two scenarios above.  If leaving money behind to heirs is a priority, then a higher allocation of stocks is in your favor.

Weigh-In’s From Michael Kitces and Wade Pfau

Since its inception, many financial researchers have attempted to recreate the studies made by Bengen and the Trinity Study.

In 2010, financial researcher Dr Wade Pfau re-created the Trinity Study and found that a 4.0% withdrawal rate had increased to a 96% success rate (he did this before the revised Trinity Study was published).

Financial researcher Michael Kitces also recreated their experiment, and added some other unique perspective to the discussion.  He investigated a 60/40 stocks and bonds portfolio going all the way back to 1870, and concluded that:

  • Two-thirds of the time, the retiree finishes with two times their original starting balance! The median value was 2.8 times the original balance.
  • Less than 10% of the time does the retiree EVER finish with less than the starting principal.

I find that second point to be especially interesting.  If you are one of the lucky 90% of people who are retired for 30 years and still have more money than what they started with, then you could effectively launch into a “second phase” of retirement with confidence for an additional 30 years using a 4.0% withdrawal rate all over again!

The 4 Percent Retirement Rule

In October of 1994, the Journal of Financial Planning featured an article that would come to be known as one of the most important, often-referenced, and highly debated topics in financial planning.

At its core, the article provided us with something precious.  It gave us a very simple, easy to follow a guideline that virtually anyone can use when thinking about retirement.

It was the birth of what has since become “The 4 Percent Rule”.

Bengen and the Origin of the 4 Percent Rule (1994)

When William P (or Bill) Bengen wrote his now famous article “Determining Withdrawal Rates Using Historical Data”, he didn’t set out to revolutionize the way we planned for retirement.  All he wanted us to do was help us understand that sequence of returns risk was a very real problem when we’re planning for retirement, and offer a better solution.

After demonstrating the dangers of basing a retirement plan on average returns, Bengen presents the reader with a series of data sets designed to do one thing:  Find the greatest amount of money that you could safely withdraw from your nest egg without any fear of depleting your funds.

As a former aeronautical engineer turned financial planner, he used a very data-driven and analytic approach to solving this problem.  It was both brilliant and creative!

How the 4 Percent Rule Was Established

To find the optimal withdrawal rate, Bengen back-tested various withdrawal rates against something called “rolling periods” of market data.

To illustrate how this would work, the first simulation would start with a retiree in 1926. The calculation would find how many years it would take until the entire portfolio ran out of money.  Then he’d do the same thing for 1927, 1928, … and so on all the way up to 1976.

It’s important to note that Bengen didn’t just look at market returns.  He also factored inflation rates for each year into the equation as well.  He knew that the combination of both factors would have a profound net effect on the end result.

Bengen ran the simulation multiple times using withdrawal rates ranging from 1 to 8 percent and using different stocks and bonds ratios.  As you might guess, lower rates lasted for a long time while higher rates lasted only a few years.

Any guesses which rate he decided was optimal?

Bengen’s Conclusion

The take-away from Bengen’s article was straightforward and straight-forward:

A retiree with a portfolio of 50% common stocks and 50% intermediate term treasury bonds could successfully withdraw 4.0% from the starting balance of their portfolio, and then continue to do so with an inflation adjustment for a minimum of 33 years.

Hence, the “4 percent rule” was born.

So how exactly does this work?  Let’s say you retired with a portfolio of $1 million dollars:

  • First year: You could withdraw $40,000.
  • Second year: You would take out the same amount as the year before and adjust for inflation (example 3%): $41,200.
  • Third year: You would again take out the same amount as the previous year and adjust for inflation (example 3%): $42,436.
  • And so on.

Some rolling periods, an inflation-adjusted withdrawal rate of 4.0% worked great for over 50 years!  But since we wanted a “safe” number that used to work for every rolling period (no matter what the sequence of returns was), Bengen choose 4.0 percent as the optimal figure.

(If you’d like, you can read the entire article for yourself here.   I would suggest looking through the graphs!)

But That’s Not All!

Although the 4 percent rule was the main conclusion from Bengen’s famous article, there were plenty of other useful discoveries that his research revealed.

For example, it may interest you to know that:

  • Withdrawal rates of 3.0 and 3.5% with the same inflation adjustment sequence worked for over 50 years in every data set!  (Early retirement seekers, take note!)
  • Asset allocation was a significant influence.  Increasing your portfolio to 75% stocks and 25% bonds increased most periods to last 50 years or more.  But the minimum time dropped by one year to 32 years of success.
  • Portfolios with stocks below 50% or above 75% were counter-productive; meaning these retirees would have run out of money sooner than 30 years.
  • If you had a secondary goal of ending your retirement with the largest portfolio possible (to perhaps leaving to heirs), the higher stock allocation of 75% was the most beneficial.

At last!  Someone had finally offered a way to deal with a sequence of returns risk, and with tangible data to back it up.

But it wasn’t until years later the 4 percent rule actually gained in popularity.


The Trinity Study (1998)

In February of 1998, the AAII (American Association of Individual Investors) Journal published another important milestone for the 4 percent rule.

Three professors of finance from the Department of Business Administration, Trinity University, San Antonio, Texas, Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz, had decided to conduct their own study of safe withdrawal rates.

Their approach would be almost identical to Bengen’s; using the same “rolling-periods” method that he had previously used.   However, rather than focus on how many years your money would last 100% of the time for a given withdrawal rate, the authors instead developed statistical probability rates for a matrix of fixed withdrawal rates (3 to 12%) and time-frame periods (15 to 30 years).

Their paper was dubbed “The Trinity Study”, and you can read it for yourself at this link here.  Again, the table of results they developed is well worth taking a look at.

The Trinity Study Makes Similar Conclusions to Bengen

The take-away from the Trinity Study was very similar to Bengen’s:

A retiree with a portfolio of 50% stocks and 50% bonds will have a 95% chance of success of not running out of money for at least 30 years if they start making withdrawals at a rate of 4.0% and increase those withdraws with inflation every year thereafter.

More Gold Nuggets of Info

In addition to validating Bengen’s earlier claim, the Trinity Study also made the following other valuable points:

  • The analysis was conducted with both inflation adjusted and non-inflation adjusted returns.  Even though we know that a safe withdrawal rate of 4.0% works with inflation adjustment, it was also found that a rate as high as 6.0% could be used if you DIDN’T adjust for inflation every year with a 95% chance of success for 30 years or more.  (More on this point later …)
  • If you bumped up your stock allocation to 75%, your chances for 30 years of success jumped up from 95% to 98%.
  • Similar to Bengen, portfolios with stock allocations below 50% or above 75% were counter-productive.
  • Also similar to Bengen, the authors concluded that a portfolio of stocks closer to 75% would leave you with more money at the end of retirement.

(A quick technical note:  If you’re wondering why Bengen’s 4% rate worked for 33 years and the Trinity Study’s 4.0% rate only worked 95% of the time for 30 years, the difference was in the investments they used.  Both Bengen and the Trinity Study used the Standard & Poor’s 500 index for stocks.  But when it came to bonds, Bengen used intermediate treasury bonds while the Trinity Study used long-term, high-grade corporate bonds.)

With the “magic number” in mind, it is clear that you aren’t going to get that number by keeping your annuity. It makes more sense to do an annuity cash out than to keep an investment which, when compared to the rate of inflation, is going down in value each year. Again, the financial world had more validation to suggest that the 4 percent rule was the magic number to use!


Do You Know About Tax Form 1040 Schedule E

Do you own a property which gives you rental income or losses on a regular basis? Are you eager on earning through royalties or pass through entities? Do you plan to buy a multiple unit property so you can live in one while renting out the others? For successfully getting any of the above done, you must know about IRS form 1040 Schedule E. It is a very important form and something you need to be aware of. So, what is this for, 1040 Schedule E exactly?

The IRS form 1040 Schedule E is used to report income and losses from rental property. It is also used to report income from pass through activities such as trusts and estates. If you are earning via pass through activities and are not receiving any rental income, you should fill out the form 1040 Schedule E. Those who have a pass through entity receive a Schedule K-1 from the entity and using the instructions on it to fill out Schedule E is quite easy.

However, if you have to report rental income for your property, things can get a little complicated. You will have to know and write about your accounts over the year to get a clear picture. It is recommended that you use a tax accounting software for the task and keep track of your income. Here is a list of everything that you need to keep track of.

  • The price at which you bought your property before renting it out. Your property could be a condo, a house, or even an apartment building.
  • Both annual and accumulated depreciation of your property.
  • The rental income you are earning from your property.
  • The security deposits you have received.

Deductible expenses

It is also important to keep track of all your deductible expenses as they have their own separate place on Schedule E. A deductible expense is an expense which you made to facilitate your income. These are made to make your property better and more suited for renting and increase its value. These expenses also produce more interest, revenue, dividends, royalties, and annuities for you. If you do not record them on your form, you will not be reporting exact expenses and will have to pay taxes on an income you never really made. Every dollar which you report on Schedule E reduces approximately 35 cents off your tax bill. This is a big reduction which is why you should diligently report all your deductible expenses. These expenses include:

  • Money spent on advertising
  • Money spent on maintenance of the property such as getting it cleaned, repaired etc.
  • Property management fees
  • The commission you paid real estate professionals for their services. These also include listing agencies.
  • Real estate taxes
  • Reimbursed security deposits
  • Money spent on utilities such as electricity and water, waste collection fees, landscaping of the plot, and more.

It is important to remember that it is not possible to deduct more in investment interest than you earn in investment income. At the same time, it is possible to carry your disallowed investment forward to the next year.

Passive activity

Earning money through rental property is considered a passive activity, that is, the owner is not making any real effort to earn that money. In other words, you hold ownership interest but are not actually participating in any type of work for facilitating earning. It does not matter if you, as a property owner, are spending a lot of time on your property and making it better, the government is still going to file this income under passive activity.

Those who earn through passive activity suffer from a total loss of around twenty five thousand dollars from all their rental properties. This is the minimum amount which you will definitely lose. Any extra amount that you lose will be carried to the next year which can, thankfully, help you reduce your tax liability in that year.

Therefore, if you borrow money to purchase a property so you can rent it out, you will not be able to file it as investment interest. However, this expenditure can be used as an expense item on your Schedule E form.

Partnerships in S corporations

If you are earning through an S corporation entity, you will have to report your share of business income in Schedule E form. This is pretty self explanatory if you receive Schedule K-1 which asks you to report your share of income, losses, as well as deductions. In short, everything needs to be filled according to the details you fill out in the Schedule K-1 form related to the property.

Contacting a tax professional

It is possible that even after diligently filling out Schedule E form 1040, you face a lot of trouble. Situations can get complicated which is why it becomes necessary to bring in a professional into the scene. There are certain things which are best left to a professional who knows about taxes. Hence, when you find yourself in one of those, make sure you consult one. Professional help will enable you to stay with the law as well as minimize your tax liability.

Tax professionals are also very savvy at understanding your complete financial situation and also knowing whether or not is a good idea to sell your structured settlement or to hold onto it in your long term financial plans.


It is necessary to keep a track of all your expenses throughout the year so you can save money on taxes and find it easy to report it all at the end of the year. If you earn with your property as an entity, the best thing to do is fill out your Schedule E form in accordance with the information you fill out in Schedule K-1. Any confusion in your tax form should be handled with the help of a professional. These professionals will help you comply with the law and also minimize your tax liability.