William Bengen is a legend in the world of retirement finance. In 1994, this MIT-trained engineer published a study that would change the lives of millions of future retirees: the now-famous 4% rule. The idea is simple: a retiree can withdraw 4% of their portfolio each year, adjusted for inflation, without risking running out of money over 30 years. Thirty years later, Bengen revisits his work. His new book, A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More (2025), proposes an updated portfolio: the Richer Retirement Portfolio. His conclusion? The 4% rule was too pessimistic.
But wait: an annualized return of 3.53% in CHF over 25 years — is that really enough to declare victory? That is the question we will explore in this article, with a full backtest, a critical analysis of the allocation, and an answer to the apparent paradox of this portfolio.
William Bengen and the 4% Rule: Back to Basics
In 1994, Bengen analyzed historical US market data going back to 1926 and reached a conclusion that surprised the financial world: a portfolio of US stocks and intermediate-term treasury bonds could sustain an annual withdrawal rate of 4.15% for at least 30 years, even under the worst market conditions ever recorded. Out of caution, he rounded down to 4.1%, and the public simplified it further to 4%.
What is often forgotten is that Bengen himself was always the first to acknowledge the limits of his own rule. His original study covered only two assets — US large cap stocks and intermediate treasury bonds. As he put it: two assets hardly constitute the kind of well-diversified portfolio constructed by most advisors, but it allowed me to obtain preliminary results without drowning in complexity.
Thirty years later, with far more data available, he decided to set the record straight.
The Richer Retirement Portfolio Allocation
The Richer Retirement Portfolio is an evolution of the classic 60/40 portfolio. Bengen preserves the core structure — a majority of bonds for stability, stocks for growth — but subdivides the equity sleeve into multiple capitalization segments and adds an international component.
| ETF | Asset Class | Weight |
|---|---|---|
| IEF (iShares 7-10 Year Treasury) | Intermediate-Term Bonds | 40% |
| IJR (iShares Core S&P Small Cap) | US Small Caps | 11% |
| IWC (iShares Micro-Cap) | US Micro Caps | 11% |
| IWR (iShares Russell Midcap) | US Mid Caps | 11% |
| EFA (iShares MSCI EAFE) | International Stocks | 11% |
| SPY (SPDR S&P 500) | US Large Caps | 11% |
| SHV (iShares Short Treasury) | Short-Term Treasury Bills | 5% |
The logic is clear: by allocating equal weight to each capitalization segment (large, mid, small, micro caps), Bengen seeks to capture the size premium documented by Nobel laureates Fama and French — smaller companies structurally outperform larger ones over the long run. In practice, Bengen's original weights are 11% per category (large, mid, small, micro cap), which Tyler at portfoliocharts.com simplified by grouping large+mid on one side and small+micro on the other, due to insufficient historical data on micro caps.
For my backtest, I used the ETFs with the weightings recommended by Bengen, in CHF as the base currency, with annual rebalancing and no transaction costs (as they are marginal).
2001–2026 Backtest in CHF: The Results
Analysis period: August 17, 2001 to February 27, 2026 — nearly 25 years. Benchmark: S&P 500 (SPY).
| Metric | Richer Retirement | S&P 500 |
|---|---|---|
| Total Return | 134.23% | 325.57% |
| CAGR (annualized) | 3.53% | 6.08% |
| Maximum Drawdown | -38.24% | -57.06% |
| Sharpe Ratio | 0.24 | 0.37 |
| Correlation with S&P 500 | 0.90 | — |
These figures are expressed in CHF, which explains the gap with Tyler's USD data. The historical appreciation of the Swiss franc mechanically penalizes any portfolio denominated in foreign assets. Tyler obtains a slightly higher CAGR in dollars, which is consistent.
Beyond the currency effect, the absolute performance remains modest. Let's explore why.
The Small and Micro Cap Paradox: Why ETFs Fall Short
On paper, including small caps, mid caps and micro caps should boost performance, in line with Fama and French's research. In practice, the results are disappointing. The main reason? ETFs are structurally ill-suited to small capitalizations.
Here is what we observe concretely:
First, micro cap ETFs like IWC manage enormous sums of money. When they buy or sell micro cap stocks, they directly move prices due to the limited liquidity of these securities. Their real transaction costs are therefore far higher than the already elevated stated expense ratio (0.60%) suggests.
Second, and more critically, these ETFs are not truly micro cap ETFs. The scale of assets under management forces them to dilute their exposure by purchasing larger companies. IWC holds many small caps and even mid caps. Small cap value ETFs do the same — some even hold significant positions in large caps. The "micro cap" label becomes more marketing than reality.
Third, since the rise of ETFs in the 1990s, the market share of micro caps by stock market capitalization has been cut in half. Passive index funds, by concentrating flows toward large caps, have structurally favored them at the expense of smaller companies.
The numbers speak for themselves. Over the 2004–2024 period, IWC (Russell Micro) posted a CAGR of only 4.76% versus 8.63% for the S&P 500 (SPY). That is the opposite of what Fama and French predict. But it is not Fama and French who are wrong — it is ETFs that fail to capture the size premium.
By contrast, when you select micro caps directly using simple qualitative filters (positive ROE, Piotroski score above 7, positive earnings growth), the results reverse entirely: a CAGR of 13.41% for quality micro caps, and even 16.15% when adding a value criterion. Nearly double the market return.
This paradox largely explains the Richer Retirement Portfolio's underperformance: its small and micro cap components fail to deliver what they are supposed to, constrained by the structural limitations of ETFs.
The Other Problem: High Correlation Between Equity Components
Looking at the correlation matrix of the portfolio's ETFs, another problem immediately stands out:
| IJR | IWC | IWR | SPY | |
|---|---|---|---|---|
| IJR (Small Cap) | — | 0.96 | 0.94 | 0.90 |
| IWC (Micro Cap) | 0.96 | — | 0.91 | 0.85 |
| IWR (Mid Cap) | 0.94 | 0.91 | — | 0.95 |
| SPY (Large Cap) | 0.90 | 0.85 | 0.95 | — |
Correlations of 0.91 to 0.96 between different US capitalization segments are extremely high. In practice, IJR, IWC, IWR and SPY behave almost like a single asset. Diversification by market cap adds virtually nothing in terms of risk reduction — everything rises and falls together.
Where genuine diversification appears is with directly selected micro caps (correlation of 0.66 with SPY), or with truly uncorrelated assets such as gold or bonds. The Richer Retirement Portfolio, by keeping 44% of its allocation in US index equities, misses much of the diversification benefit it aims to achieve.
So Why Does the SWR Exceed 4%?
This is where the real value of this portfolio lies, and where it confirms Bengen's central thesis.
Tyler at portfoliocharts.com calculates a 30-year SWR of 4.8% for the Richer Retirement Portfolio. Bengen himself arrives at 4.7%. Despite a modest CAGR of 3.53% in CHF and a Sharpe ratio of 0.24, the safe withdrawal rate comfortably exceeds 4%.
How to explain this paradox? The answer comes down to one word: drawdown. The Richer Retirement Portfolio caps maximum drawdown at -38.24%, versus -57.06% for the pure S&P 500. For a retiree, that is what truly matters. A 57% drop at the start of retirement, combined with regular withdrawals, can permanently deplete a portfolio — this is what is known as sequence of returns risk. A portfolio that falls less, even if it grows less in absolute terms, supports more stable withdrawals because it better preserves capital during bad periods.
That is precisely what the 40% bond sleeve achieves: it absorbs shocks, at the cost of reduced overall performance.
And this brings me back to a conclusion I have long argued on this blog: the 4% rule creates wealthy heirs. A retiree who strictly follows this rule will statistically leave behind substantial capital at death. Bengen himself acknowledges this — with the SWR now revised upward to 4.7–4.8%, the original rule was already too conservative. The real problem is not running out of money — it is dying with too much left unspent.
This is precisely why more dynamic approaches like VPW (Variable Percentage Withdrawal) deserve attention. Rather than applying a fixed rate calculated once at the start of retirement, VPW recalculates each year the percentage to withdraw based on your age and actual portfolio allocation. The result: you withdraw more when markets perform well and as your time horizon shortens, without ever risking portfolio exhaustion. A far smarter way to make use of a high SWR like the one offered by the Richer Retirement Portfolio.
Is This Portfolio Right for You?
The Richer Retirement Portfolio is designed for a very specific profile: the retiree who prioritizes withdrawal safety over absolute performance. If your goal is to maximize capital over 25 years, this portfolio is not optimal. If your goal is to sleep soundly through 30 years of retirement knowing your withdrawals are covered under every historically recorded scenario, it deserves consideration.
For investors in the accumulation phase, or those who — like me — advocate a quantitative approach to small and micro cap stocks, the allocation clearly underperforms its theoretical potential due to ETF limitations. The Fama and French size premium exists — but to truly benefit from it, you need to select individual securities, not index funds.
Can We Do Better? Comparison with the Permanent Portfolio 2.x
To put the Richer Retirement Portfolio's performance in perspective, it is instructive to compare it with the Permanent Portfolio 2.x over the common available period (since April 2011):
| Metric | Richer Retirement | PP 2.x |
|---|---|---|
| CAGR | 6.5% | 10.8% |
| Sharpe Ratio | 0.63 | 1.15 |
| Maximum Drawdown | -24.4% | -21.6% |
The result is unambiguous: the PP 2.x dominates the Richer Retirement Portfolio on every metric simultaneously — higher return, better Sharpe ratio, and lower drawdown. This is not a classic risk/return trade-off where you gain on one side what you lose on the other. This is what is known as Pareto dominance. Note however that this comparison covers a different period from the article's main backtest (since 2011 vs. 2001).
Conclusion: A Welcome Evolution, But an Incomplete One
The Richer Retirement Portfolio represents a genuine step forward from the original 4% rule. By diversifying the equity sleeve across capitalization sizes and adding an international component, Bengen demonstrates that simple adjustments can meaningfully improve the SWR. His intellectual approach — questioning his own assumptions thirty years on — is exemplary and rare in the world of finance.
Yet the portfolio's potential remains constrained by the structural limitations of ETFs on small and micro capitalizations. To fully unlock the size premium documented by Fama and French, direct stock selection is essential. That is a constraint inherent to the ETF format, regardless of how the allocation is structured.
Finally, let us take away the core message of Bengen's work: retirement is not an exercise in maximum austerity. With smart allocation and dynamic management, it is entirely possible to spend more in retirement while staying within safe limits. That is a lesson many investors would do well to internalize.
Bibliography
- Bengen, W. (2025). A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More.
- Tyler, portfoliocharts.com. Richer Retirement Portfolio (2026)
- Tyler, portfoliocharts.com. Sail to a Good Life With the Richer Retirement Portfolio (2026)
- Fama, E. & French, K. (1992). The Cross-Section of Expected Stock Returns. Journal of Finance.
Frequently Asked Questions About the Richer Retirement Portfolio
What is the Richer Retirement Portfolio?
It is an investment portfolio designed by William Bengen, the creator of the 4% rule. It is composed of 40% intermediate-term bonds, 55% stocks spread across US large caps, mid caps, small caps, micro caps and international equities, plus 5% short-term treasury bills. The goal is to improve the safe withdrawal rate in retirement beyond the traditional 4%.
What is the performance of the Richer Retirement Portfolio?
Over the 2001–2026 period, the portfolio shows a CAGR of 3.53% in CHF (approximately 5–6% in USD according to portfoliocharts.com), with a maximum drawdown of -38.24%. Its absolute performance is modest, but its risk/withdrawal profile is optimized for the retirement phase.
What is the Safe Withdrawal Rate (SWR) of the Richer Retirement Portfolio?
Bengen calculates a 30-year SWR of 4.7%. Tyler at portfoliocharts.com obtains 4.8% with slightly different data. Both figures comfortably exceed the original 4% rule, confirming that diversification by market capitalization improves the robustness of retirement withdrawals.
Why do small and micro caps underperform in this portfolio?
Small cap ETFs have significant structural limitations: high transaction costs due to illiquidity, dilution of exposure toward larger companies, and a systemic bias introduced by passive management since the 1990s. To genuinely capture the Fama and French size premium, direct stock selection is necessary.
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