Ep # 99 - The 4% Rule Revisited: How to Craft a Safe Retirement Withdrawal Rate
Many people who don’t know much about retirement planning still know about the 4% rule. People often assume 4% is the only safe withdrawal rate, asset allocation doesn't matter in retirement, and setting a fixed withdrawal rate is the best strategy. But is it true?
In this episode, Joe speaks with Bill Bengen, a seasoned financial advisor who is widely recognized for his pivotal role in introducing the 4% rule for retirement planning. With a rich background spanning over three decades, Bengen's profound research has significantly influenced the approach to safe withdrawal rates and asset allocation strategies in retirement planning. His expertise extends beyond conventional wisdom, delving into the intricate details of portfolio management and the significance of maintaining a balanced investment approach.
What You’ll Learn in Today’s Episode
· Master the 4% rule to secure a stress-free retirement.
· Safeguard your retirement income by adjusting for inflation.
· Discover effective asset allocation strategies for a worry-free retirement.
· Learn the crucial role of portfolio rebalancing in retirement planning.
· Uncover the key to determining safe withdrawal rates for your retirement.
Ideas Worth Sharing
· “I think it's because we live in a very complex world, for the most part, and it's very difficult for all of us to deal with all the changes that occur in our lives. And to have something simple like the golden rule or the 4% rule, to have something, you know, that you can just hang your head on, it's very appealing to people, even though I think it's very misleading.” - Bill Bengen
· “I really recommend that retirees get professional help from people who manage portfolio risk to help them make adjustments to the portfolio so they're not devastated.”- Bill Bengen
· “I think the retiree has to take an active role in making sure their nest egg is protected and get professional help, not market timing, which is calling tops and bottoms.” - Bill Bengen
Resources in this episode
Joe Curry
Bear Markets, Inflation, and Your Nest Egg: Key Risks for Retirement Investing Success
In this episode, we speak with Bill Bengen, a seasoned financial advisor widely recognized for his pivotal role in introducing the 4% rule for retirement planning. With a rich background spanning over three decades, Bengen's profound research has significantly influenced the approach to safe withdrawal rates and asset allocation strategies in retirement planning. His expertise extends beyond conventional wisdom, delving into the intricate details of portfolio management and the significance of maintaining a balanced investment approach. Bengen's wealth of knowledge continues to be a beacon for individuals on the brink of retirement and financial advisors seeking to refine their clients' retirement planning strategies.
In 1994, Bill, a young financial advisor, published a paper that would shape the retirement planning landscape. While he didn't coin the term "4% rule," his extensive research led to its emergence. His initial safe withdrawal rate of 4.15% for tax-deferred accounts garnered widespread attention, sparking a simplified version of 4%. However, as Joe and Bill discuss, there are many considerations beyond a singular number when planning your retirement. Bill and Joe highlight the importance of planning horizon, asset allocation, rebalancing, and market valuations. Joe and Bill guide individuals and financial advisors to navigate the complexities of retirement planning with a keen understanding of the evolving financial landscape. Bill’s journey from the inception of the 4% rule to the continuous evolution of retirement planning strategies showcases his commitment to delivering improved retirement outcomes for individuals and financial professionals alike.
In this episode, you will be able to:
· Master the 4% rule to secure a worry-free retirement income.
· Safeguard your retirement nest egg against the erosive effects of inflation.
· Discover the optimal asset mix to enhance your retirement portfolio's resilience.
· Learn the power of regular portfolio rebalancing for sustained retirement wealth.
· Uncover the secrets to determining safe withdrawal rates for a secure retirement.
Introduction and the 4% rule
Understanding the 4% rule is crucial in retirement planning as it provides a guideline for retirees on how much they can safely withdraw annually from their savings. By initially withdrawing 4% and adjusting for inflation in subsequent years, retirees aim to make their money last for 30 years. This rule offers a structured approach to managing retirement income and helps individuals plan for financial security in their later years. Bill sheds light on the origin and evolution of the 4% rule, emphasizing the importance of considering various factors beyond this rule in retirement planning. Bengen's insights delve deeper into the complexities of withdrawal strategies and the impact of market conditions on determining safe withdrawal rates.
Factors to Consider for Retirement Planning
Retirement planning involves a multitude of considerations beyond simple withdrawal rates. Factors such as planning horizon, account type, legacy planning, asset allocation, and projected investment returns are crucial in determining the appropriate withdrawal rate for retirees. By evaluating these factors, individuals can better prepare for the uncertainties of retirement and ensure their financial sustainability in the long term. Bengen's research outlines nine important considerations in retirement planning, highlighting the significance of factors like rebalancing frequency, market valuation, and inflation. His in-depth analysis underscores the need for a holistic approach to retirement planning that considers the dynamic nature of financial markets and individual risk tolerance levels. By addressing these various factors, retirees can develop robust retirement strategies that align with their financial goals and aspirations.
The resources mentioned in this episode are:
· Bill Bengen's email for general retirement planning questions: bill@bengenfs.com
· Keep an eye out for Bill Bengen's upcoming book on retirement withdrawal planning, expected to be released before the end of the year.
Timestamped summary of this episode:
00:00:01 - Introduction and the 4% rule
Bill Bengen discusses the origins of the 4% rule, which he didn't actually invent, but researched. He explains the concept of taking out 4.15% annually from retirement savings and adjusting for inflation.
00:03:50 - Factors to Consider for Retirement Planning
Bill emphasizes the need to consider various factors such as withdrawals, planning horizon, asset allocation, legacy goals, and market valuation. He also highlights the impact of inflation on retirement savings.
00:09:42 - Importance of Asset Allocation
Bill delves into the significance of asset allocation in retirement planning. He discusses the evolution of his research, from initially testing two asset classes to utilizing seven asset classes for a well-diversified portfolio.
00:11:28 - Indexed Investing and Safe Withdrawal Rate
Bill advocates for an evidence-based investment approach, favoring index funds over trying to beat the market. He also addresses the challenge of determining a safe withdrawal rate in today's high market valuations and inflationary environment.
00:14:30 - The Impact of Inflation and Market on Retirees
Bill Bengen discusses the devastating impact of double-digit inflation and bear markets on retirees in the 1970s. He mentions that the current 5% withdrawal strategy may work well, but the long-term effects are still uncertain.
00:16:33 - Valuation Methods and Withdrawal Strategies
Bengen explains the use of the Shiller cyclically adjusted P E ratio for stock market valuation. He also discusses different withdrawal strategies, such as the front-loaded system and constant percentage of portfolio value, and their potential impact on retirement income.
00:19:00 - Safe Withdrawal Rate and Portfolio Adjustment
Bengen emphasizes the need for thorough retirement planning, considering factors like market valuation and inflation. He also points out that historical withdrawal rates have varied from 7% to 16%, highlighting the importance of adjusting withdrawal strategies based on market conditions.
00:22:25 - Value of Professional Financial Advice
Bengen expresses support for professional financial advisors, emphasizing the complexity of retirement planning. He believes that advisors can provide valuable guidance based on historical context and personal circumstances.
00:23:03 - The Glide Path Approach and Monitoring Retirement Plans
Bengen introduces the concept of the glide path approach to investing, highlighting its potential to increase withdrawal rates. He also shares case studies on monitoring retirement plans and the importance of addressing discrepancies caused by market volatility and inflation.
00:29:12 - The Pitfalls of Buy and Hold Strategy
Bill warns against the buy and hold strategy for retirement investors, emphasizing the need to protect one's nest egg and seek professional help in managing portfolio risk.
00:30:48 - Gradual Portfolio Adjustments
Bill discusses the importance of making subtle and gradual adjustments to the portfolio over time to reduce risk and extend retirement, highlighting the role of professional services in identifying and managing market risks.
00:32:29 - Bill's Current Projects
Bill shares that he is working on a new book based on his 30 years of research, focusing on retirement withdrawal plans and factors influencing withdrawal rates. He aims to provide valuable insights to the average individual seeking to learn more about the retirement planning process.
00:33:19 - Book Publication Timeline
Bill expresses his hope to release the book before the end of the year, acknowledging the challenges of finding a publisher. He emphasizes that the book is intended for the general audience and aims to provide a structured and insightful approach to retirement planning.
00:33:28 - Conclusion and Gratitude
Joseph expresses his gratitude for the insightful conversation with Bill and looks forward to reading his upcoming book. Bill reciprocates the sentiment and appreciates the opportunity to share his expertise on retirement planning.