**Cut Your Retirement Spending Now, Says Creator of the 4% Rule** **The combination of high inflation and high market valuations could require revisions to the retirement rule of thumb** **By Anne Tergesen, The Wall Street Journal, Apr. 19, 2022**
**...** **The combination of 8.5% inflation with high stock and bond market valuations makes it difficult to forecast whether the standard playbook will work for recent retirees, said retired financial planner Bill Bengen, who first devised the 4% rule in 1994.**
**He now recommends retirees take a less aggressive approach to drawing down their nest eggs, at least until we determine whether the current surge in prices that has been particularly stressful to those on fixed incomes is a long-term trend or a short-term blip....**
**Aside from cutting spending, retirees can try to protect their nest eggs by reducing their exposure to stocks and bonds, he said. While Mr. Bengen said he would normally invest about 55% of his savings in stocks and 45% in bonds, his concerns about both markets have left him with closer to 20% in stocks and 10% in bonds, with the rest in cash....** [end quote]
I agree with Mr. Bengen. It’s nice to hear a conservative investing voice in the normally rah-rah WSJ. Those who are risk-averse (like DH and me) will find comfort in this safe approach.
My only point of disagreement is that I think a ladder of short-term bonds held to maturity is cash-like while adding a little extra interest during the next year or two while the Fed is raising interest rates. Not bond funds, and not long-term bonds. I-Bonds are safe and will keep up with inflation while most other bonds still have strongly negative real yields.
I just read that WSJ article on Bengen. (For the first time in about 15 years, I bought a WSJ subscription. WSJ offered me WSJ, Barron’s and MarketWatch as a package for $72/yr. Goes up to $600/yr on renewal. I’ll make sure I cancel before then.)
Mr. Bengen’s latest revision doesn’t necessarily mean going below 4%, he said. That is because the 4% rule hasn’t really been the 4% rule for some time. His original research was based on a portfolio with 55% in U.S. large-cap stocks and 45% in intermediate-term Treasury bonds.
Since 2006, he has revised that portfolio to add international stocks and midsize, small-cap and microcap U.S. stocks as well as Treasury bills. That raised returns and supported a safe withdrawal rate he increased to 4.7%.
Given the challenges of making forecasts right now, Mr. Bengen suggests cutting spending, if possible. New retirees with highly diversified portfolios that would normally support a 4.7% withdrawal rate might want to start around 4.4%, he said.
So he’s advocating 4.4%, not something less than 4%.
He also mentions that it’s hard to time the market and “I’m uncomfortable holding that much in cash,”
I note that the S&P 500 has gained 63% in the past 24 months. I’m crying about the 5% I have in cash and short-term bonds.
I do agree on cutting spending. I was going to buy a new car last year, but no way I’d pay more than MSRP for it. Instead, I put a new set of tires on my 2005 Nissan Altima.
his concerns about both markets have left him with closer to 20% in stocks and 10% in bonds, with the rest in cash… [end quote]
So this guy is going to get killed on 70% of his holdings. Losing ~10% a year on 2/3 of his port means he has to make triple double on the 30% he has “working.” (And he’s not going to.)
his concerns about both markets have left him with closer to 20% in stocks and 10% in bonds, with the rest in cash… [end quote]
So this guy is going to get killed on 70% of his holdings. Losing ~10% a year on 2/3 of his port means he has to make triple double on the 30% he has “working.” (And he’s not going to.)
I know math is hard, but jeez, the Journal?
Bengen’s also an MIT grad. I’d be evaluating him for early signs of dementia.
It’s a lot harder to cancel the WSJ than you may realize. If you find a way to do it online, please let me know. The only way is to phone a toll-free number with a live rep who will spend all day trying to talk you out of canceling. With sufficient arguing, you can get them to extend your special offer price.
It’s a lot harder to cancel the WSJ than you may realize. If you find a way to do it online, please let me know. The only way is to phone a toll-free number with a live rep who will spend all day trying to talk you out of canceling. With sufficient arguing, you can get them to extend your special offer price.
Same thing with the NY Times and Washington Post. I can deal with it.
Thank you for recommending this post to our Best of feature. You will be able to recommend 3 more posts today. (explain this)
Cash flow is king. LBYM and avoid debt.
I was trying to hoard my few remaining recs for today, but your succinct and factual restatement of the basics of Macro Economic Trends and Risks’ pulled one of the last recs out of my quiver.
PS
Note to those who don’t know; unless TPTB change things around here you get to give up to 30 recs a day.
Unused recs expire at 10PM MST and you are issued 30 new recs to confer upon posts you like.
Indeed but those are defensive moves. Attack is the best defense. Invest in such a way that your port covers your expenses without having to draw down at all. The 0% rule!
Attack is the best defense. Invest in such a way that your port covers your expenses without having to draw down at all. … So dividend paying stocks?
Anything else?
Rentals. If you have the personality where you can let a manager do the work for you, it’s about as hard as owning stock. You get to buy on margin if you use a mortgage, but it’s less risky than buying stock on margin since you can lock in your payment with a fixed rate mortgage, and you benefit on appreciation of the total value of the house, not just your initial investment. Cash flow can be very good on real estate that you pay cash for, but total return on equity invested is not high enough for me to justify putting that much cash in. I prefer to have tenants pay my mortgage. It’s not uniformly a rational market, and it’s possible to find properties that are under valued. Just had a woman offer me her house at it’s assessed value, which is about $90K below where it would sell today. I offered her the name of a Realtor, who after commission would net her more money than selling by owner. I am not capable of hands off ownership, and getting out of the business.
Major negative is that real estate is much less liquid and more expensive to sell, takes more time and effort. You also have to liquidate a property all at once, incurring higher capital gains tax on more money than you need at that time. Concentration in one area gives benefits, given you only have to identify and hire one support staff if you decide to go that route, but exposes one’s investments to increased frequency and strength of natural disasters. Mortgage payments don’t stop if the property is demolished and can’t house tenants. It’s a great way to build generational wealth, but neither of our kids have shown any desire to follow in my footsteps, so we have started liquidating.
I know real estate is not something often considered here, but it can be a good option for the right person. Another opportunity we had was angel funding for start ups. Was an almost too good to be true opportunity, but we know the person doing the start up which piqued our interest. In the end our lack of knowledge on how angel investing worked and the poor timing of starting a business in the middle of Covid prompted us not to invest, but it’s an area I am curious about learning more of. I suspect I will kick myself down the road for not doing so.
A cousin in LA who, after being fired by Continental when it went broke, has lived off rentals ever since. While working for Continental he bought four unit housings that needed restoration which he did himself with one helper. By the time Continental went broke he had become independent. I have no idea about his financing but rental sure worked for him.
Rentals. If you have the personality where you can let a manager do the work for you, it’s about as hard as owning stock. You get to buy on margin if you use a mortgage, but it’s less risky than buying stock on margin since you can lock in your payment with a fixed rate mortgage, and you benefit on appreciation of the total value of the house, not just your initial investment.
My back of the envelope for retirement planning is to assume that the rental must throw out net profit (including contingency) equal to the downpayment x 4%. For example, if you put $200,000 down, the annual net profit should be $8,000 minimum to replace the SWR from that $200K. As you go above 4% net profit, real estate becomes more and more attractive vs. a standard portfolio.
One thing that should be discussed is taxes. Because investment real estate tends to be owned by wealthier people, it gets very favorable tax treatment. This makes it easy to show little or no profit for tax purposes, when in fact the property flowing cash.
For example, if you put $200,000 down, the annual net profit should be $8,000 minimum to replace the SWR from that $200K
That’s interesting because in most cases you’re getting not just cash flow but also capital appreciation. It appears that you’re looking for a dividend equal to a 4% equivalent (your 4% annual net), but also a nice boost at the end when you sell the property.
And, as you note, there are tax implications about real estate which allow you to show a profit but not actually declare it so.
That’s interesting because in most cases you’re getting not just cash flow but also capital appreciation. It appears that you’re looking for a dividend equal to a 4% equivalent (your 4% annual net), but also a nice boost at the end when you sell the property.
I don’t count appreciation for retirement planning purposes. My reasoning, possibly fallacious, is that for retirement planning I’ll need $X.XX dollars each month but appreciation is realized at some future date and an amount to be determined later. So I don’t get to count that for retirement planning. Appreciation is a real thing and I include for other purposes, just not that one.
One thing that should be discussed is taxes. Because investment real estate tends to be owned by wealthier people, it gets very favorable tax treatment.
Third download from top is the ten year profit projection spreadsheet that I run for every property I consider buying. Sadly, these no longer seem to be 100% editable, as I am more risk adverse and have customized my own spreadsheets. Tax impact is included to some extent in this spreadsheet.
