Bill Bengen, who wrote the first serious paper on retirement withdrawal rates, now recommends splitting equities five ways and claims a 4.7% to 5.5% safe withdrawal rate; re-run on twenty years of real ETF data, the portfolio adds risk instead of removing it, and the higher rate rests almost entirely on a small-cap premium that was arbitraged away decades ago.
The man who wrote the first serious paper on retirement withdrawal rates in the 1990s is now touring the podcast circuit with a new portfolio.
What the new portfolio actually is
Bill Bengen proposes 55% equities, 40% intermediate Treasuries and 5% short-term T-bills.
The equity slice is then split five ways: US large cap, mid cap, small cap, micro cap and non-US stocks.
Spreading stocks that wide, he says, lifts the safe withdrawal rate from 4.15% to 4.7%, and to 5.5% if you are flexible about spending.
Spreading wider made it riskier
Re-run on real ETFs from 2007 onward, the result flips.
A plain 55/40/5 holding a single S&P 500 ETF carried 7.9% annualised volatility and higher returns.
Swapping in Bengen's five slices pushed volatility to 8.8% and returns down.
The reason is simple: those small and micro-cap ETFs are far more volatile than the S&P 500 to begin with.
Low correlation does not save you when the volatility is that much higher — it swallows the benefit whole.
The author tried shifting as little as one percentage point at a time. Every step made the portfolio worse.
Calling the result diversification is the industry's biggest misnomer.
What the 4.7% is really made of
Bengen's edge comes almost entirely from small caps beating large caps over the long run.
That premium was worth roughly 3.6% a year from 1926 to 1981.
After the 1981 paper made it common knowledge across finance, it went flat.
Over the last four decades it has been 0.08% a year.
Zero out that premium and Bengen's withdrawal rate falls back to about 3.8% — no better than the traditional 4% rule.
Long horizons fare worse. Over thirty years, with the portfolio spent down, a 4.7% rate still looks survivable.
Over fifty years, with 25% of the portfolio left to heirs, 4.7% failed in 58% of historical cohorts and 5.5% in 98.7%.
And US valuations today sit well above their historical average — the worst possible starting point.
The short version: that 4.7% was not earned by diversification. It was picked out of the history books after the fact.
Why it matters
One percentage point of withdrawal rate is a fifth of a retirement budget. When someone raises that number without spelling out which assumptions have to hold, whoever takes it is underwriting optimism with the rest of their life.
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