Once upon a time, in southern California in 1994, there lived a man named William Bengen.
He read many claims, widespread at the time, that said that since the markets return at least 7-9 percent compounding rates on average, retirees could withdraw and spend 7 percent of their portfolio.
William had a hunch that this was misguided. He decided to prove it.
He looked at 30-year timespans in U.S. history, starting from 1926. The first timespan ranged from 1926 to 1955. The second timespan ranged from 1927 to 1956. And so forth.
He assumed that the retiree held 50 percent stocks, in the form of an S&P 500 Index, and 50 percent bonds, in the form of intermediate-term government bonds.
Then he asked two questions: