The author and creator of ‘the 4% rule’ discusses the pros and cons of various withdrawal strategies and key risk factors facing retirees today.
Episode Highlights
Why the 4% Rule Needed a Rethink
Inflation as the Biggest Retirement Risk
Different Approaches to Finding Your Withdrawal Rate
Factoring in Longevity, Taxes, and Legacy
Managing Your Asset Allocations, and Outsourcing the Rebalancing Process
The 4% Rule Is Not for Everyone
45 minutespodcast
teaser:
Bengen has added new classes of investments.
small cap stocks boosted withdrawal from 4.0% rule to 4.5%
Then 4 new asset classes -micro cap stocks, mid-cap stocks, international stocks & Treasury bills that allows for 4.7% withdrawal.
Bengen states key factors in setting your retirement rate are stock market valuation[high now] & estimate of inflation for the next 10 years[his assumption is moderate]. His research suggests currently if you don’t wish to leave any inheritance spending down to zero the withdrawal rate is 5.8% from tax advantaged accounts.
He claims the MIT endowment fund uses a 5.1% withdrawal rate.
“assumption” is the problem. Just too many variables out of one’s control. One’s longevity. Political events such as closure of the Strait of Hormuz that could have at least a potential economic effect.
A withdrawal rate is similar to investing for retirement. One places their bets and hopes for a good result.
Yes, and when your investments perform well you build a surplus that can cover the unexpected. Living on the edge just barely surviving on your 4% year after year is not a comfortable retirement in my view,
The 4% rule is what survived the high inflation of the 1970’s and early 1980’s, and there really isn’t a way to predict ahead of time if your particular 30 to 40 year retirement drawdown period will be one of the bad ones.
That’s why you should retire with a 4% withdrawal from something close to a 60% stock, 40% fixed income portfolio. And then if you happen to see your portfolio balance double or triple in the next 10 years, you can start taking 4% from your new higher portfolio balance, or if you don’t have any current need for increased spending, you can cap the fixed income portion at 10 year’s worth of current annual portfolio withdrawals and let the stock allocation increase with time.
That’s how I closed out my 30-year 1994-2024 payout period with a 97% stock allocation, a paid for home purchased with cash, and a withdrawal rate that had declined to a fraction of 1%.
If your current withdrawal rate is funding everything you are interested in doing, there is no reason to do the work to spend more. And no matter what happens in the future, there’s a likelihood that you’ll be better able to deal with it, with more money rather than less. There’s no shame in leaving a bundle to your heirs or charitable beneficiaries after you expire as long as you’ve thoroughly enjoyed the ride along the way.
Yes, when I retired in 1994, universities and large charitable endowments targeted a 5% of assets withdrawal rate, but the dollar amount of the withdrawal went up and down with the portfolio value.
Obviously, a retiree needs an annual withdrawal that rises reliably with inflation over time, so that’s going to be less than 5%. I chose 4% as a wild guess since it was a bit less than the current interest and dividend income thrown off by my retirement portfolio in 1994. I didn’t come across Bengen’s SWR study until about a year after I retired. It was a revelation.
I quickly went to the library and got the Ibbotson stock and bond returns database that Bengen used as his data source, and created an Excel spreadsheet using his method. What caught my eye was the large divergence in the terminal value of the portfolio after 30 years. There was a very good chance that the “4% rule” would leave you fairly wealthy rather than penniless after 30 years.
Yep. Back in the 1990’s there was a very famous neurologist and best-selling financial author, William Bernstein, who’s expertise led him to believe that wide diversification across several asset classes was a good idea. Of course, the last 30 years has revealed that strategy has under performed. (e.g., a 60% S&P500, 40% fixed income portfolio was 6X it’s starting balance after 30 years of withdrawals while the Bernstein preferred allocation left you with merely 4X)
Bengen has admited that he abandoned the “4% rule” after the 2008 market meltdown in favor of a third party “market timing” service that advises him on asset allocation in response to macroeconomic trends and “market whispers”. I hope he didn’t hire John Hussman.
From the Morningstar podcast transcript.
{{ I’m reviewing that and saying it may be possible to use a higher asset allocation if, one, you don’t have a 90% decline. I don’t know how you can be sure of that, and the other is perhaps if you use risk management procedures to reduce your equity allocation according to the determinations of a third, objective third party, that might help you escape the worst of a very big stock market decline and preserve your portfolio.}}
I was pretty disappointed in that. If a third party market timing service actually worked like that, you wouldn’t need the 4% rule because you’d be fabulously wealthy.
Everybody sleeps on the 4% rule and it’s partner the low cost index fund because they are boring and simple. Bengen is screwing around with market timing schemes trying to get an extra 0.7% WR. But his market timing might mean a lower WR too.
As you point out, all he has to do is wait past the first few critical years. If the market is up, which it is in most scenarios he can safely increase his WR. No market timing needed. If it isn’t, you don’t have to lower your WR.