4% Rule Bond Sensitivity: Duration, Credit Quality & Allocation | AlgorithmicFIRE Why Your Bond Choice Can Break the 4% Rule<br>Bengen specified 5-year U.S. Treasuries for a reason. This analysis shows what happens historically when investors substitute other bond types — and how much it matters which bonds you hold.<br>AlgorithmicFIRE &bull; 2026-07-22<br>Share

In our prior post, we replicated Bill Bengen's classic 4% rule. Bengen was specific about the bond component: intermediate-term U.S. Treasuries with roughly a 5-year maturity. In practice, however, many investors following the 4% rule hold something different — bond index funds with longer effective durations, corporate bond exchange-traded funds (ETFs), target-date funds, or high-yield bond sleeves — often without considering how that choice changes the underlying risk profile.<br>During the replication work for that post, we found that Safe Withdrawal Rate (SWR) outcomes are remarkably sensitive to which bonds you hold. The difference between 5-year Treasuries and 20-year Treasuries, or between Treasuries and BAA corporates, is not a rounding error — it has historically been the difference between a retirement that survives comfortably and one that collapses in 15 years.<br>All simulations sweep monthly cohorts from January 1930 through the present at a 4.0% SWR , capped at a 40-year horizon to prevent timeline truncation bias. Bengen's original analysis used a 30-year horizon; we extend to 40 years to stress-test longer retirements, which matters particularly for early retirees.<br>1. A Better Definition of Retirement Failure<br>Bengen's original 4% rule framework relies on two core assumptions:<br>Solvency Criterion ($0 Balance) : A portfolio "passes" as long as account value stays strictly above $0 through the end of the timeline.<br>30-Year Horizon : Bengen validated his 4% rule across a 30-year retirement window. We extend this to 40 years throughout this post, as longer horizons are critical for early retirees (FIRE).<br>Why a "Wealth Reaches $0" Definition is Inadequate<br>The standard zero-balance definition is inadequate for a behavioral analysis. In practice, a retiree who has lost 40% of their real purchasing power in the first few years of retirement is not going to continue following the plan. The psychological and behavioral reality is that most people would capitulate, sell, cut spending, or seek work long before their account reaches zero. The $0 failure threshold measures mathematical solvency, not behavioral viability.<br>To capture this, we use a Behavioral Capital Floor . A cohort is marked as a behavioral failure the moment its real purchasing power breaches a time-scaled floor:<br>$$\text{Floor}(t) = \text{Initial Principal} \times \max\left(0.05,\ 0.60 \times \frac{\text{Years Remaining}}{\text{Total Horizon}}\right)$$<br>At the start of a 40-year retirement, a cohort fails if real wealth ever drops below 60% of initial principal . The floor decays linearly to 5% by year 40, relaxing the constraint as the horizon shortens — reflecting that a small balance late in retirement is less alarming than the same balance in year two.<br>The chart below shows what this means for the classic Bengen scenario: a passive 50/50 portfolio of S&P 500 and 5-Year U.S. Treasuries at 4.0% SWR.

The contrast between the two panels makes the point clearly:<br>1960s cohorts : Under Bengen's original 30-year criterion, nearly all 1960s cohorts passed — consistent with his published findings, and confirming our replication is accurate. Extending the horizon to 40 years under the same $0 solvency definition, only 53% of cohorts completed the full window. Under our Capital Floor, that falls further to 36% passed — and the median portfolio survival collapsed to 15.46 years . Each step reveals failure that the prior step concealed.<br>1970s cohorts : Bengen's metric shows 100% pass — not a single portfolio went to zero. Yet the Capital Floor reveals that 25% of these cohorts breached the behavioral threshold , with the interquartile range (IQR) of survival spanning roughly 33 to 40 years. Mathematically solvent; behaviorally vulnerable.<br>1930s : Both methods show a pass rate near 90%, and no bar is visible in either panel because the small number of failures occur very late in the simulation — cohorts that failed did so around years 38–39, well beyond Bengen's original 30-year window. Every single 1930s cohort would have passed under Bengen's original criterion.<br>1940s, 1950s, 1980s : 100% pass under both definitions.<br>Every simulation in the remainder of this post uses a 40 year horizon and the Behavioral Capital Floor as the failure criterion.

2. Defining the Portfolios & Simulation Methodology<br>To evaluate the impact of bond maturity, credit quality, and active management, we compare two primary portfolio architectures built from the S&P 500, various bond indices, and 3-Month Treasury Bills (the cash exit destination):<br>Passive Stock-Bond Mix (Buy & Hold) : The classic static asset allocation benchmark....