4% Rule Creator Bill Bengen Reveals His NEW 5% Retirement Strategy

Summary

BiggerPockets Money Podcast Summary: "4% Rule Creator Bill Bengen Reveals His NEW 5% Retirement Strategy"

Release Date: June 6, 2025

In this enlightening episode of the BiggerPockets Money Podcast, hosts Mindy Jensen and Scott Trench engage in a deep dive with Bill Bengen, the esteemed creator of the original 4% retirement withdrawal rule. The conversation explores Bengen's updated research, introducing a new 5% rule aimed at enhancing retirement strategies. Below is a detailed summary capturing the episode's key discussions, insights, and conclusions.

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1. Introduction to Bill Bengen and the Original 4% Rule [00:00 - 03:31]

Mindy Jensen opens the episode by introducing Bill Bengen, highlighting his pivotal role in developing the 4% rule—a cornerstone in retirement planning. Bengen reminisces about his 1994 study published in the Journal of Financial Planning, where he sought to determine the safest withdrawal rate for retirees to ensure their savings would last through 30 years of retirement, even amidst adverse market conditions.

Bill Bengen [02:20]: “The original 4% rule, which I've upgraded now to 4.7%, is really the worst case in history. My database goes back 100 years.”

Bengen used a simple portfolio of large U.S. stocks and five-year U.S. government bonds, finding that a 4.15% withdrawal rate was sustainable for most retirees, with only one out of 400 retirees facing the lower threshold.

2. Evolution to the New 5% Rule [04:13 - 07:05]

Building upon his initial research, Bengen introduces his updated 5% rule. This revision incorporates a more diversified portfolio, expanding from two to seven asset classes, including international stocks and micro-cap stocks. The enhanced diversification not only mitigates risk but also allows for a modest increase in the withdrawal rate.

Bill Bengen [04:13]: “I've increased the number of investments from 2 to 7. All these investments increase the diversification of the portfolio and increase the returns.”

3. Portfolio Allocation and Diversification [03:31 - 08:48]

The discussion delves into the specifics of the updated portfolio allocation. Bengen recommends a more diversified setup with approximately 55% in stocks, 40% in bonds, and 5% in treasury bills or cash equivalents. This shift aims to reduce portfolio volatility while maintaining the sustainability of retirement funds.

Bill Bengen [05:24]: “The new allocation for the more diversified portfolio actually lets you use a lower allocation of stocks like 55% and that creates a less volatile portfolio.”

Bengen emphasizes the importance of diversification as a "free lunch" for investors, enhancing returns without proportionately increasing risk.

4. Impact of Market Valuations and Economic Environment [17:37 - 43:54]

Bengen addresses the influence of current market valuations, particularly the Shiller CAPE ratio, on future stock market returns. With the CAPE ratio hovering around 36-37—significantly above the historical average of ~17—Bengen anticipates lower future returns. He discusses the implications of governmental deficit spending, labeling the current economic environment as "unnatural and unstable," which adds uncertainty to long-term investment strategies.

Bill Bengen [40:21]: “The U.S. Stock market from that metric is about double its normal valuation than it is from a lot of others... but it's not a forecast because I don't forecast.”

5. Withdrawal Strategies and Psychological Aspects [14:37 - 18:30]

A key segment focuses on the psychological challenges retirees face when adhering to withdrawal strategies. Bengen advocates for a "total return approach," where withdrawals are funded by both income and capital appreciation. He stresses the necessity of overcoming hesitation to sell assets, emphasizing trust in historical market resilience.

Bill Bengen [15:27]: “You have to trust history, trust what's happened... It gets by them. It goes on and builds new wealth.”

6. Alternative Investments: Real Estate and Bitcoin [21:30 - 24:29]

Scott shares his perspective as a real estate investor, viewing real estate as an inflation-adjusted store of value. While Bengen acknowledges the potential benefits of real estate in a diversified portfolio, he notes the lack of comprehensive historical data compared to stocks and bonds. They briefly touch upon Bitcoin, with Bengen allocating a modest 1% to it, treating it as part of a diversified strategy despite varying opinions in the investment community.

Bill Bengen [23:57]: “Bitcoin makes sense as part of a diversified portfolio... I've got a small portion of my like 1% of my portfolio in bitcoin.”

7. Managing Debt: Mortgages in Retirement [34:11 - 37:25]

The conversation shifts to the impact of carrying a mortgage into retirement. Using Scott's example of a $320,000 mortgage at 4.5% interest, they discuss how an outstanding mortgage can undermine the sustainability of withdrawal strategies. Bengen concurs that eliminating such fixed obligations before retirement can enhance financial stability and reduce portfolio risk.

Bill Bengen [37:10]: “Debt always introduces an element of risk in the portfolio... especially retirees.”

8. Personalizing the Withdrawal Rate [50:15 - 52:19]

Mindy and Scott emphasize the importance of tailoring the withdrawal rate to individual comfort levels and financial situations. While Bengen's research supports a 4.7%-5% rate, personal circumstances, risk tolerance, and financial goals may necessitate adjustments to ensure retirees feel secure and confident in their strategies.

Mindy Jensen [49:00]: “If you don't feel comfortable with spending the money that you're spending, you're not going to sleep well at night.”

9. Rebalancing Strategies [19:49 - 20:47]

Bengen recommends rebalancing the portfolio every six months to a year to maintain the desired asset allocation and manage risk effectively. He notes that the frequency of rebalancing may depend on market conditions and individual retirement timelines.

Bill Bengen [19:49]: “In my book, I have a whole chapter devoted to that particular topic... rebalancing every six months to a year.”

10. Upcoming Book and Final Thoughts [45:21 - 52:48]

Bill Bengen introduces his forthcoming book, "A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More," slated for an August release. Both hosts encourage listeners to pre-order the book to support its availability and success.

Scott Trench [34:11]: “If you've ever planned on retiring using the 4% rule... get a copy of the book.”

Mindy and Scott conclude the episode by expressing their gratitude to Bengen, highlighting how his research has profoundly influenced the retirement planning community and their own personal strategies.

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Key Takeaways:

• Updated Withdrawal Rate: Bengen's new research supports a slightly higher withdrawal rate of 4.7%-5%, thanks to enhanced portfolio diversification.

• Diversification is Crucial: Expanding the number of asset classes in a retirement portfolio can improve returns and reduce volatility.

• Market Valuations Matter: High valuation metrics like the Shiller CAPE ratio may indicate lower future stock market returns, influencing withdrawal strategies.

• Psychological Readiness: Overcoming the hesitation to sell assets is vital for maintaining sustainable withdrawals during retirement.

• Alternative Investments: Incorporating real estate and a small allocation to Bitcoin can diversify and potentially enhance portfolio performance.

• Debt Management: Eliminating fixed obligations such as mortgages before retirement can significantly reduce financial risk and portfolio strain.

• Personalization: Tailoring the withdrawal rate and portfolio allocation to individual circumstances ensures greater financial comfort and security.

• Rebalancing: Regular rebalancing of the portfolio helps maintain the desired asset allocation and manage investment risk effectively.

• Upcoming Resources: Bengen's forthcoming book promises to provide further insights and strategies to optimize retirement planning.

This comprehensive summary encapsulates the essence of the episode, providing valuable insights for those seeking to enhance their retirement strategies based on Bill Bengen's updated research.

Transcript

[Mindy Jensen]

You have followed the 4% rule for years. You've saved diligently and you've dreamed about that early retirement. But what if everything you knew about the fire movement just changed? Today we're joined by Bill Bengan, the Bill Bengen, the original 4% rule study author. And we are going to be talking about the 5% rule. So what does this mean for your retirement date, your withdrawal strategy, or or your entire financial future? That's what we'll be discussing today. Hello, hello, hello, and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen and with me, as always, is my 4% rule enthusiast co host, Scott Trench.

[Scott Trench]

Thanks, Mindy. Great to be here. And I couldn't be more excited to withdraw. Some really intense knowledge from a man who met the legend himself, Bill Bangin. Biggerpocket says the goal of creating 1 million millionaires. You're in the right place if you want to get your financial house in order, because we trul believe financial freedom is attainable for everyone no matter when or where you're starting. And it might be a little sooner than you think. We are so excited to be once again joined by Bill Bangin today to talk about the 5% rule and his new book that will be released in August, a Richer retirement supercharging the 4% rule to spend more and Enjoy more. Bill, welcome back to the BiggerPockets Money podcast.

[Bill Bengen]

Pleasure to be back here again. Thanks for having me.

[Mindy Jensen]

I'm so excited to talk to you. Bill, huge fan, huge fan of your work, love your original study and cannot wait to read this new book as a refresher for our audience who may not know. When did you create the 4% rule and why?

[Bill Bengen]

I wrote an article for the Journal of Financial Planning back in October of 1994, which was the first work I'd done on this subject. And my goal in writing that was to find out very simply, looking back at history, which and which was the unlucky retiree who was forced to retire with the smallest withdrawal amount? Somebody who ran into a buzzfall, bad market conditions and high inflation. It turned out that was the October 1968 retiree who. You know, the 70s was a terrible period for investing and it's reflected in the withdrawal rate. Tom, I wrote the article. I only used two investments. I use large company US stocks, I use five year US government bonds, and those two yielded a withdrawal rate of 4.15%. For this individual, that's the most they could have taken out to have their money last for 30 years withdrawing from a tax deferred account. I actually didn't call it a rule in that paper. And I was kind of surprised when after it started circulating, I saw newspaper articles about the 4% rule or the Bengan rule. I said, wait, wait, what is this? But eventually I decided I wasn't going to fight city hall, so I've adopted that. But it's really important that people understand that the original 4% rule, which I've upgraded now to 4.7%, is really the worst case in history. My database goes back 100 years. I studied 400 retirees in a period of time and only one of them was stuck with that awful low rate of 4.7%. All the rest could take out higher, many much higher. So when you use that rule, make sure that you know what you're doing. It's ultra conservative and you probably can do better off with a higher withdrawal rate today.

[Scott Trench]

Bill, remind us what the allocation between stocks and bonds are for this rule.

[Bill Bengen]

Fixed allocation during retirement of about 60% overall stocks about 35%. Well, actually in the book I use 55% stocks, 30, 40% bonds and 5% treasury bills or cash or money market funds. They're all, you know, roughly the same thing.

[Unknown]

Got it.

[Scott Trench]

Okay, so, so this does, this does assume that that allocation here and then remind us what the big, you know, we had 4.1%. Could you just give us another layer of depth on what, what your updated research has uncovered that has moved that to an updated 5% or 4, 4.7%, excuse me, rule.

[Bill Bengen]

Yeah, nothing's changed in the outside world. It's all on the bill Bangin world, so to speak. I've made my research more sophisticated. I've increased the number of investments from 2 to 7. I've included international stocks, I've included treasury bills. I've included some other classes of US Stocks like micro cap stocks, small cap stocks. All these investments increase the diversification of the portfolio and increase the returns. That's one of the free lunches investors have by using diversification, very, very important. And they bumped up the withdrawal rate. But it appears to me that the last round of increases I got was really small. I added four investments and got only a 2210 of 1% bump in the withdrawal rate. So we're probably approaching a natural limit of sorts, beyond which adding additional classes like gold or, or real estate or emerging markets commodities probably won't weave the needle much.

[Scott Trench]

Got it. What is that new allocation? So we have 55% stocks, 40% bonds, 5% treasury bills for the old 4, 4.1 or 4% rule and for the new one, what does that allocation look like?

[Bill Bengen]

Actually the original? Maybe I misspoke. The original allocation was pro, probably closer to 60 to 65% stocks. The new allocation for the more diversified portfolio actually lets you use a lower allocation of stocks like 55% and that creates a less volatile portfolio, which is an additional benefit.

[Scott Trench]

Interesting. Walk us through. Maybe some other observations on this. One would conjecture, does this reduce the volatility? Reduces the volatility of the portfolio. It probably also narrows the range of outcomes in terms of terminal wealth at the end of 30 years, one would suppose with less of an allocation to stocks as well in that front. Do you find anything interesting like that as you updated this rule? If you use the 4.7% or 5%.

[Bill Bengen]

Rule, there weren't too many changes from the not least not dramatic changes. But I came to the same conclusion that if you go below the ideal allocation, the ideal allocation is somewhere between 45 and 70 some percent stocks. If you stay in that range, you end up with about the Same withdrawal rate, 4.7%, it doesn't matter. Which is, I think quite interesting. But if you get brave and you use a higher allocation of stocks, let's say 80%, you actually penalize yourself, you reduce the withdrawal rate because when you run into a bad bear market, it really chews up the portfolio with a high percentage of stocks. On the other end, if you use a very low percentage of stocks and a high percentage of bonds, the portfolio just doesn't have enough oomph to generate the returns necessary to get a decentral rate. So that also. So you kind of think of a chart, it looks like a mesa, where it falls off sharply on both sides and you have a nice flat spot in the middle, which is anywhere in that middle spot, you're okay.

[Scott Trench]

And for that stock portfolio, walk us through what the allocation to US versus international stocks would look like in the updated role.

[Bill Bengen]

Sure. The most recent portfolio I've used has five classes of stocks, four from the United States, which includes large company, mid company, micro company, small company stocks, and also an allocation to international stocks. And each of those five asset classes for the 4.7% rule are allocated equally. So if we have 55% overall and five stock classes, each one has about 11% and then the bonds get 40% and cash gets 5%.

[Scott Trench]

Awesome. So super simple there. And this is all detailed in the book, of course, for folks who want to really get into the theory and understand that those allocations in their and really internalize the why behind this. Is that right?

[Bill Bengen]

That's right. And could I add one more point I wanted to make this is another free lunch I've identified. There are four free lunches I've identified my research in the book, and one of them is if you the highest returning asset classes are US small cap stocks and US micro cap stocks. They're around 12% versus let's say 10% for the other ones. If you slightly tilt your portfolio toward those asset classes, I'm not saying major shifts, maybe go from 11% to 13% and reduce the other stock allocations asset classes accordingly. That will give you a worthwhile bump in your withdrawal rate. It'll knock you from 4.7 to almost 5%. So there's another free lunch. You can add a higher withdrawal rate without taking any additional risk, which is what I'm always looking for.

[Mindy Jensen]

We have to take a quick ad break, but while we're away, we'd like to ask you to head on over to YouTube to subscribe to our channel. That's YouTube.com biggerpocketsmoney Frustrated with savings accounts.

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[Scott Trench]

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[Unknown]

On Our Way.

[Mindy Jensen]

This episode is brought to you by Amazon Prime. From streaming to shopping, prime helps you get more out of your passions.

[Bill Bengen]

So whether you're a fan of true.

[Mindy Jensen]

Crime or prefer a nail biting novel from time to time, with services like Prime Video, Amazon Music, and fast free delivery, prime makes it easy to get more out of whatever you're into or getting into. Visit Amazon.comprime to learn more. Welcome back to the show. Okay Bill, your original research was for traditional aged retirees and had a 30 year retirement timeline. Does your advice change for people who are retiring earlier and have a longer timeline?

[Bill Bengen]

Yes, the timeline, the elective planning horizon is very, very important. The longer the planning horizon, the lower the withdrawal rate up to a certain point. As it turns out, if you get out to very, very long time horizons, like 50 years or 60 years, let's say you're going to retire at age 18 or something like that, you have an early billionaire, it actually hits a floor and it doesn't go below that. So 4.7% is for the 30 year, for very, very long rises, let's say 60, 70 years, it drops down to about 4.1% and doesn't go below that.

[Scott Trench]

Awesome. So the 4% rule is a great floor with this portfolio. Right? This assumes that you have this allocation that you've discussed here for early retirees. The people in the FIRE community who are most likely listening to this podcast. That's awesome. And that's been, I think a major point of debate in the community is how does that work on a perpetual basis. But yeah, the math between 30 year time horizons and infinity is not that different. So I'm not surprised that it still still works within 6, 10 of a percentage point on your withdrawal rate. Walk us through one. One of the items I think that might be on someone's mind is okay, this, that's is awesome, right? I can, I can retire earlier than I thought. But when you think about the like, let's. And again, the audience listening to this will be somebody who is trying to retire early, like in their 30s, 40s, 50s, and they have a little bit longer time horizon. There's a temptation to be very aggressive with your portfolio while you're building towards this number. Right. Let's say I need two and a half, retire at this number and withdraw 4.7 or 5% here. And I want to be all in stocks for as much of that accumulation period as I possibly can because that tends to perform better than bonds on, on average while I'm building towards this number. How do you think about that flip? When is it time to begin the shift towards this allocation that can actually sustain retirement in there? And, and do you think there should be. Should I start from the beginning? Should I flip it a couple of years in advance? Should it be at the last moment? How do you think about that for folks planning on this?

[Bill Bengen]

I like the idea of being heavy in stocks during the accumulation phase when you're trying to build your wealth because you want to build it as fast and as large as possible. I think when you get within five years of retirement, it's time to reassess where you are. You want to take a look at the market, you want to take a look at valuations. What are the likelihood in the next few years of having a major bear market that might lop half off your portfolio, which would be very, very painful, and perhaps get more conservative. Start getting more conservative. Starting to approach maybe the ideal 60, 40 or 55, 45 portfolio I've outlined in my book.

[Scott Trench]

Got it. So five years before, start making those moves and gradually move in there by the, by the last few. Few years.

[Bill Bengen]

That's right. I think that's a reasonable time period. You want to get as much as you can in the growth phase, but you've got to leave yourself a margin of error. So when you make the transition, you know, you don't have an accident.

[Scott Trench]

Bill, one of the things that we've found in the, in the community is, you know, if we poll our audience that I think I'm this way too, I'm going to have a lot of trouble actually selling off equity positions, harvesting the principle, spending that on fun and trips here in my 30s or 40s as a, as a early retiree or aspiring early retiree, I'm gonna have a lot of trouble doing that. I want to spend a portion of the cash flow generated by my portfolio, and this is apparently a common theme in financial planning for savers. Really hard to make that. That pivot or switch. Do you have any thoughts into that psychological problem and how to, how to bridge that? If I, If I understand the 4% rule, I agree with your research. The math is there, the research is there. I trust it. I just can't bring myself to actually harvest principal. How would that change things for you as a planner?

[Bill Bengen]

Yeah, that's a fair question, because I use what's called a total return approach, where the withdrawals are funded by all the investment results, including capital appreciation. So there are times when you will be selling off a portion of your stocks and good years. You may not. You may get so much growth in your portfolio, you can live on. Off the cash flow. It's just a little difficult, particularly in this environment, to generate. Let's say we want to start out, we get into a more favorable situation where I determine you can take out 6% or 6.5% in your portfolio instead of the 4.7. It's hard to create a portfolio where you can generate today that kind of income from just dividends and yields and interest Wouldn't you agree?

[Scott Trench]

Absolutely. It's really difficult to do that.

[Bill Bengen]

It seems tough today to do that. So you're going to have to get into to the appreciation. I think what you have to do is trust history, trust what's happened. You know, I've been through this for 30 years that I've seen it's pretty dependable, pretty dependable place. The stock market occasionally has these big declines, but it gets by them. It goes on and builds new wealth. And as long as we can trust that process, I think you're okay. And I hate to see people enjoy life lessons than they could by following a philosophy that may be too conservative.

[Scott Trench]

Got it. So that the answer is get over that. If that's, if that's a, if that's a blocker to you as you get like, like harvesting principle. I saw a great analysis of this the other day. I think it was on Reddit or something like that. But it was like, look, the harvesting, the appreciation, a lot of these companies reinvest their cash flows or are not distributing the dividends because it's tax inefficient on there. That's still going in to the equity value of a stock portfolio into a large degree. In fact, the majority of those cash flows are probably being reinvested in a lot of ways into these companies. And harvesting that is not actually reducing your wealth. It's just harvesting tiny portions of that cash flow in a more tax efficient way was how it was put. And I think that's kind of what you're saying. That's another way of putting, I think some of the things you're saying here.

[Bill Bengen]

I know a lot of the fire folks have been using that number 4%, you know, from a tax deferred account for a very, very long time horizon. But in this environment, for 30 year horizon, I think 5.25 to 5.5% is reasonably a reasonable thing to take out based on inflation and market valuation. So I would think a person, fire person retiring today with let's say a 60 year horizon could probably do more like 4.5 to 4.6% and that's a big increase from 4. That's a significant increase in lifestyle. So I want to make sure they understand that it's much better today than it was in the 70s.

[Scott Trench]

Now does that allocation or those rules ever change with market valuations relative to earnings? For example, in the stock market relative to interest yields on debt? Like if interest yields skyrocketed to 15, 18%, would that change this optimal portfolio that you're discussing here for this person in terms of their withdrawal rate.

[Bill Bengen]

Something like that would definitely have a bad effect on the stock market as it did in the 70s, the higher interest rates. So you might want to make your portfolio a little bit more toward the conservative end instead of having a 60% go down to the 50% or 47% of the stocks. But it's really hard to predict for me what will happen in that kind of environment, other than say it would be ugly for people who are trying to keep up with inflation. Because high interest rates means high inflation, and that means increasing withdrawal very rapidly.

[Scott Trench]

I don't think any of us can predict the future. I was just wondering if, if, if we were in the 70s, for example, or the 80s and interest rates were that high, would the optimal allocation have changed at that point? Would you be saying, hey, you should be heavy in bonds right now because yields are so high on this. Would that have changed this at all?

[Bill Bengen]

Actually, this 60, 40 works well the best for the worst case scenario. And that if you were lucky enough to retire into a raging bull market, let's say you retired in 1982, you could probably put 80, 90% of your money in stocks if you were bold enough to do so, and write it through retirement because you've got a huge tailwind of returns. It sounds a little risky and it probably is, but if you look at the numbers, that's what happened. People who retired into a bull market could use more aggressive allocations, and those who retired into a bear market or less favorable conditions had to be more conservative in their allocation.

[Mindy Jensen]

Bill, how frequently would you rebalance your portfolio or recommend someone to rebalance their portfolio? Let's say they're in this bear market and they wanted to be 60, 40, stocks, bonds, but then the stocks just went crazy. Do you rebal balance frequently or.

[Bill Bengen]

Yeah, I think anywhere between six months to a year. In my book, I have a whole chapter devoted to that particular topic. It's a very interesting topic because overall for retirees, it's not that big a deal. Believe it or not, rebalancing is not. Except in certain cases, it becomes very, very important. You know, if you're, for example, start your retirement in 1982, you don't want to rebalance for a long time because you got this bull market for 20 years in stocks. You just want to let that run. On the other hand, if you retire in 1968, you're just facing two big bear markets back to back, and you want to rebalance every 15 minutes. If you can't it seems like that. So in general, I think as a general rule, since when no one is sure what would where we are six months to a year Frequency I recommend based on the research I've done, Bill.

[Scott Trench]

One of the problems, I think a challenge that a lot of people have, myself included is bonds, the bond allocation because the yields are so low and for someone who's trying to retire early, for example, by definition you just haven't had the decades to build up a big portfolio in a tax advantaged account like a 401k or a Roth. So it's just simple interest for the portion of that yield that's paid out in a lot of cases on that. So if you're in a reasonably high income tax bracket, especially approaching that, that's cutting your yield by 30, 40% depending on where you're at personally or what state you live in. I also think that one of the challenges with bonds for me is they don't preserve the principal value relative to inflation. So it's all on the cash flow component and it's kind of a bet on rates coming down fundamentally, which is a great hedge for the portfolio. You want that in the 1968 portfolio situation right on there. So, or sorry, it's bet, it's a bet against bad market conditions. Excuse me, but real estate, you know, we're a real estate platform here at Bigger Pockets and I'm a real estate investor and when I think of a paid off rental property, forget leverage and all this other kind of stuff, just a paid off rental property, I view it as a inflation adjusted store of value and an inflation adjusted income stream that will wax and wane. It's some work on there. But if for me I've replaced bonds to a large degree in my portfolio with this kind of concept and just plan to pay off the properties and let them, let them rip and ride there. Have you done any exploration of real estate? And if, if, if so or if not, do you have any reaction to that, that philosophy that I have?

[Bill Bengen]

No, you know, certain. It seems to make sense to me. I, I understand I haven't done any definitive research because I can't find databases that have detailed data going back 100 years representing actual returns on that and you come across something like that. I'd love to because I'd like to integrate that into my research. But yeah, bonds are awful until you need them basically, which is basically a bear market. And then you're very, very happy to have them. I know back in 2008 and 2000 and 73, 74 people were very, very happy they had their bonds because the world was collapsing around them and equities, you know. But yeah, when it's not a, when it's a stock bull market, you just go, wow, why do I have these things?

[Scott Trench]

Yeah. And when bond yields are super low, right. Like if we were to go back four or five years ago, would that change your mind as well in terms of the bond allocation? If they were, if they were truly basically 0% interest rate environment in that.

[Bill Bengen]

Situation, that was a really painful period of time. Unprecedented, you know, so it's so recent in fact that I can't even make sense out of it for my examination of historical record because we haven't seen 15, 20 years from that time. What was the impact on withdrawal rates. So I'm hoping I'm living long enough to get answers to the questions, you know.

[Scott Trench]

Awesome. Well, in that case I'll also ask how about bitcoin?

[Bill Bengen]

I think just a personal opinion, Bitcoin makes sense as part of a diversified portfolio. I know some people like Charlie Munger, didn't like them at all. But there are other people whose opinion I respect who think it's a legitimate investment. And I've got a small portion of my like 1% of my portfolio in bitcoin.

[Scott Trench]

Love it. Do you include gold or other, other of those types of things in that cash? Like would you put that in like the 5% cash or money market section of the portfolio or how would you think about sprinkling those in?

[Bill Bengen]

I would just cope with that. And if you think of 60% of portfolios in growth investments, including stocks and real estate and gold, commodities, things that can fluctuate in value very substantially and don't necessarily produce any income. Some do, some don't. Real estate does obviously, but yet gold I think is essential today and will probably will be for a time. I don't know when we're going to get out of this deficit spending syndrome around the world with huge debt. But as long as that remains, I think gold will be very good.

[Scott Trench]

So I guess that's a question that I would love to follow up with. Then here is you outline this portfolio of 55% stocks, 40% bonds, 5% T bills or cash equivalents in there, does your portfolio personally mirror that or do you deviate from that? Because this is a research backed portfolio, it may not be the optimal portfolio. Right?

[Bill Bengen]

Sure. I used to be what you call a passive investor, a buy and hold investor. And then 20 years ago the central bank started playing with monetary supplies and with interest rates and trying to affect equity markets. And we started getting these really large bear markets, you know, 2000, 2008, and gosh knows what the next one will be. And once I retired I decided I didn't want my portfolio to be subject to to the kind of declines people saw in 2008 when they're fully exposed to stock. So I've become an active manager and I rely on a third party service to guide me to adjust my equity allocation to their perception of risk in the stock market. And right now the service I use is recommending roughly keep about 50% of what you normally have in the stock market. So if your normal allocation is 60, they're saying keep 30 and keep the rest of that allocation in cash, treasury bills and so forth. And that's worked pretty well for me. I mean this recent decline didn't bother me at all. I think I got like a 1.5% loss at worst and my portfolio is at all time highs right now even though the market is not. So I think for retirees you got to protect your nest egg. I would not be buy and hold investor retirement. It makes sense in the accumulation phase, but not during the retirement phase. Just my personal opinion.

[Mindy Jensen]

I was going to say does that advice change on based on the age of the retiree? Because a large portion of our listeners are retiring in their 40s and early 50s, would you still consider that to be advice that they should take?

[Bill Bengen]

Once you cross the Rubicon, you become a full fledged retiree? Yes, it does. Because your nest is your nest egg. You're depending upon it to generate a certain level of income, perhaps for many years. You have to protect it. If it drops below a certain threshold, it loses its ability to generate the income you need.

[Mindy Jensen]

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[Unknown]

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[Mindy Jensen]

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[Scott Trench]

I guess the question I think would be on a lot of people's minds, certainly on mine. Here is and look, I agree with you. I read all the research I have all this the optimal portfolio allocations. My portfolio currently today I have made this change in February is about 30% real estate, 30% cash, 30% stocks, 10% bonds. And that's a big change from having it in 75 80% stocks through the end of last year in there with the real estate allocation with the rest with the remaining portion being mostly in real estate. It was very aggressive in my retirement accounts and I made that that change as well. Just something more like what you just described that that seemed like a good move about two months ago and then the market has completely rebounded essentially to where it was in February at the beginning of the year at this point here. But how do you, how do you think about how do you marry the fact that you are the pioneer of this research? You've done all of the work, you have all the historical data sets, you've written the rule, you're cited constantly with these portfolios and yours is different from that than that portfolio that's in your book.

[Bill Bengen]

Well, I explain that in the book I devote a checks into risk management. You know, that's what I do is not what I consider market timing. Stan, a lot of people poo poo the whole thing because that's market timing never works. Well market timing for me is trying to sell everything at the bottom or sell everything at the top and buy at the bottom. No one in God's creation has been successful doing that over multiple market cycles. To me, it makes a lot more sense to use the third party who has the expertise, experience, and track record of preserving capital. That's what the name of the game is in retirement. So my original research was based upon buy and hold. It's the easiest way to analyze because it's very hard to analyze a portfolio if you're not doing buy and hold, because what are the parameters you're using for changing the level of stocks? But just because I did most of my analysis on that does not mean I preclude advising folks to look at alternative ways of managing their portfolio to improve the safety, lower the risks that they face in retirement. And it's really something I take on as a personal campaign. You know, that buy and hold is not the best for retirees.

[Mindy Jensen]

So we've been following your original research and we call it the 4% rule. How should we flip? How should we implement now the 5% rule? Does that mean that we have to save less money or does that mean that we can just spend more?

[Bill Bengen]

I guess both. And in fact, yeah, you need a smaller nest egg than I estimated before and you'll take out at a higher rate so that it's a nice situation. Less stress during accumulation and more fun during retirement.

[Scott Trench]

I got an interesting one that you may not have ever gotten before. Maybe you have on this, but let's use the original 4% rule. We can use the 5% rule as well on this. But, but, but we, let's say we have. I want to, I want to walk through some funky math that I've observed with respect to retirement and mortgages in here, because the mortgage, many people, for example, in our community will have 25 years left on a mortgage, many of them refinanced in 2020, 2021 in the low interest rate environment. And if you have a low interest rate mortgage, let's say, you know, 4.5% on a $320,000 mortgage loan balance, right? Let's say of that remaining, you're paying 1600 bucks a month. 1600 bucks times 12 is 19,200 bucks to fund 19,200 bucks at the 4% rule, you'd need. Let me do this math here. Divided by 0.044 80, you need 480,000. But you have 320,000 left on your mortgage on that front. So I've kind of come to the conclusion that if you're, if you're one of these followers of the 4% rule and your research bill, that you ought to pay off the mortgage in that situation because it will actually accelerate this inflection point that the math shows in your portfolio. And you would change that of course to 4.7 or 5% now with the updated research. But what's your reaction to that phenomena and my observation of it?

[Bill Bengen]

Yeah, it's not part of my research. I want to let you know, my research focus is so narrow. I'm in a little corner of a, a very large room working by myself with a lot of the folks who are looking at other interesting issues like you just raised. But my own instinct is to agree with you that you probably want to get rid of that mortgage if you can, before you get into retirement.

[Scott Trench]

Yeah. And I think it's just the observation of that, the 4% rule, the research is so exhaustive. It just covers all of these scenarios, including the worst cases in history. And the mortgage is just a fixed unrelenting obligation that you have to pay every month. Month. And so that's why even at lower interest rates than the 4% rule, I think that would actually be true at 3% as well. You still actually need a larger asset base than your mortgage balance to.

[Bill Bengen]

Of course, unless we got into a very inflationary environment, you've got a fixed rate mortgage that says 7% and inflation is at 8 or 9. I don't know. Maybe it's better off to stay in a mortgage. I don't know.

[Scott Trench]

I think the paradox is that in most cases it'd be better to keep that mortgage in place for 30 years portfolio, but it wouldn't comply with the 4% rule. You wouldn't be covering your, you wouldn't be sure or as close to shore as the historical data lets us be that you could sustain your payments and your lifestyle the way you want.

[Bill Bengen]

Yeah, debt always introduce element of risk in the portfolio. In those life situations. You have to be aware of that debt. It's not necessarily evil or bad, but it's risky and particularly retirees.

[Mindy Jensen]

So I have opted to keep my mortgage even though I could pay it off because my feeling is I can take that chunk of money and put it into the stock market and make more than I would like. I could pay my mortgage based on like that money. I could pay my mortgage and still have stuff left over.

[Bill Bengen]

Okay, well, let me ask you a question. What would you estimate would be prospective returns for US stocks over the next 10 years. Do you have an idea what that might look in your mind based on current valuations? Because I see estimates anywhere from plus 2 to minus 5% a year compounded annually for 10 years. That usually includes a bear market, which distorts things. I'm not sure over the next 10, 12 years that logic will work out for you. I suspect that the returns you earn on stocks will be a lot less than the interest you're paying on your mortgage in a normal situation. If we had normal stock valuations, yeah, that logic might apply. But we're, we're nosebleed levels right now.

[Mindy Jensen]

We also have been trying to have a recession for the last 10 years and nothing sticks. We had a global pandemic and the market, the stock market was like, oh, we're going to tank. Oh, wait, no we're not. And they're back. What was it like a six month, six month downfall? We just did tariffs and that lasted a month. We're trying so hard to tank the economy and it's just not happening.

[Bill Bengen]

I guess we're just not trying hard enough, huh? No. My view that is that we're in a very unnatural period of time, that the United States government and a lot of other governments are running enormous deficits. As you know from economic theory, when governments run deficits, that money pours into other sectors of the economy and inflates corporate profits and Putin rates, growth rates. But the problem is how long can we continue to do that? I don't think, you know, that much longer. I could be wrong. Maybe we're going to do this for another 30 years. I hate to think where we'd be at the end of 30 years. But we're in a very unnatural and unstable situation with respect for our deficit spending, which is keeping us, I think, out of recession. So that when that eventually comes to an end, well, I'm not sure I want to be looking out over the landscape.

[Scott Trench]

The millennials will bail us out.

[Bill Bengen]

Oh yeah, that's nice. Yeah, they're good folks. We love them.

[Scott Trench]

That's super interesting here. What is the driver, in your view of those forecasts, of 2 to negative 5% total stock market returns over the next 10 years? Is it the threat of recession in government spending? Is it price to earnings ratios? What is it that you think is that is driving?

[Bill Bengen]

It's just a historical relationship between stock market valuation and subsequent returns that's been well established over many years. When you get to very.

[Scott Trench]

Is that stock market valuation in absolute terms or relative to its earnings in.

[Bill Bengen]

A given year It's a PE ratio, let's say Shiller sickly adjusted PE ratio, the cape. That's a number I use frequently in my research. That's now at around 36, 37, 7. Historically its average is around 17. So mark the U. S Stock market from that metric is about double its normal valuation than it is from a lot of others. You know, Warren Buffett's favorite indicator, the market valuation of the G gdp a lot of things are indicating were very overvalued. And when you look through history, when you get to those levels and there aren't been too many times we've gotten this high, the stock market performs very poorly for the subsequent decade or more afterwards. But it's not a forecast because I don't forecast. That's. I'm no good at that.

[Scott Trench]

Yeah, but you do move your personal portfolio in relation to this analysis in there and I do too. And I think that that's the fascinating thing is there's all this research, there's all this stuff that goes on and you are managing your portfolio in relation to some of these items here and these metrics and in response to interest rates and price to earnings ratios as they move over time.

[Bill Bengen]

Take a look at Warren Buffett's Berkshire Hathaway portfolio. He's got $350 billion in cash. That's the largest balance. It's still only about 35% or some 40% maybe of his overall. So he still has a lot in the stock market and he always will. But you know that that is a lot of buying power. You know, that's when the time comes when the market bottoms. That cash is what's going to pull us back up into a new bull market. You want to be. It's important to prepare yourself in a bear market and get to serve. But it's equally important to take advantage of a new bull market and get in back in as soon as you can. That's why I use that service because my timing was rotten. Theirs is much better than mine. And they make you. They take the emotion out of you got to take the emotion. It's so easy to get emotionally well in the stock market.

[Scott Trench]

Are you friends with Robert Shiller and some of these folks that you've mentioned here? Have you met them in your. In your career?

[Bill Bengen]

No, I never have. I wish I had. I really admire him and the work he's done.

[Scott Trench]

I've emailed him a couple of times at his Yale email and he is not. He has not responded to Come on the bigger pockets money Podcast. If anyone listening knows Robert Schiller, he would be a dream guest. Just like Bill here is on, on our show here. Yeah, we'd love to talk to him. I read his book Irrational Exuberant earlier this year.

[Bill Bengen]

He's brilliant. I just find his Schiller cape is very, very useful to me in my work. You know, that was the first. Michael Kitces back in 2008 published an article where he tracked the Shell cape against annual withdrawal rates, safe withdrawal rates, which he computed for every single retiree and showed there was a real strong correlation. The more expensive the the cape got, more expensive stocks are, the lower your draw rate and vice versa. And unfortunately wasn't enough to predict the cape. But I had to add inflation. When I added inflation to that about three years ago, I got this breakthrough moment in my office, the same office I'm sitting here right now, same chair. And when I put inflation, it increased dramatically. The ability to recommend higher withdrawal rates when the time is right. If not now, you can't do 6% now or even the 7% average. It's just so expensive. And that's a reflection of probably we're pretty close to a major bear market.

[Scott Trench]

One of the other observations that I have about the 4% rule, because you can tell I've gone down the rabbit hole with that stuff on the mortgage versus the asset balance and all that kind of stuff, but is that the simplest observation, and it's just not stated enough, is the more you can reduce your fix fixed expenses and eliminate them relative to inflation, the better off, the less you need From a portfolio perspective. Right, that's the paid off mortgage. You know, you can get wild and go into solar panels or these types of things that, that reduce your monthly outlay on there is just so much better of a defense mechanism, I believe in terms of long term financial planning and the ability to retire than even the portfolio allocation. The slight tweaks in the portfolio allocation, obviously the overall balance and getting that macro view reasonably close to what is backed by the research is critical. But that's the most important thing folks can do. And if you can ensure your lifestyle against those inflationary pressures, it just makes this game so much easier in terms of being able to retire in the lifestyle you want.

[Bill Bengen]

That makes a lot of sense to me. I think my philosophy in life is you control the things you can control. There's not much you can do about inflation, there's not much you can do about the stock market, but you control what you spend and you control what you have invested in stocks and, you know, so to a certain extent, your destiny is in your own hands in those regards.

[Mindy Jensen]

All right, Bill, where can people find a richer retirement? Supercharging the 4% rule to spend more and enjoy more.

[Bill Bengen]

Sure, it's not going to be in the bookstores until about August 11, I think is the latest date. But you can go any online bookseller, go to their website and you can pre order a copy on Amazon, Barnes and Noble Books, a million pals, they all were taking pre orders. Now, pre orders are nice because from my perspective, I didn't know this, but I'm learning from my publisher that the more pre orders you get, the larger the orders that the book sellers will place and, you know, the more copies available for sale and likely more sales. So it all kind of like works together.

[Scott Trench]

And I will say this. If, if you've ever planned on retiring using the 4% rule or use that as a goal post for measuring your progress or that inspired you or whatever, this man Bill just made that happen and he's updated that research here. And so one thing you can do to return the favor there is get a copy of the book. Maybe it'll accelerate your retirement even more. Help them get those pre orders in place, get those big orders in the bookstores and, and let's make it a New York Times bestseller if we can out there. All those orders, pre orders count for those first week sales. And that's what you need to get into the bestseller lists. So what he said, go pick up a copy. We are not affiliated with Bill. We are just fans of Bill. We get nothing out of this. But that's. Thank you for all you do for the community here. And we'll be picking up the copies of the books in addition to the very nice PDF that you sent us here.

[Mindy Jensen]

I would love to be affiliated with Bill. I just placed my order. Bill, I'm super excited to get a copy of your book. I really appreciate your time today. Thank you so much.

[Bill Bengen]

It was my pleasure. I really enjoyed it.

[Mindy Jensen]

Okay, Scott, that was Bill Bangot. That was the Bill Benket. And that was so much fun talking to him. He is just so sharp. He could be lying on a beach drinking margaritas, but instead his fun, his idea of fun is doing research and continuing to look into all of these different financial models. And I just, I'm so excited to talk to him. That was such a great show. What did you think?

[Scott Trench]

I, I mean, this guy is the, this guy's the legend. He's the guy who started it. All right. I mean he, he, he wrote the 4% rule research and I told him afterwards he directly changed my life because Mr. Money Mustache wrote an article, you know, in 2012 or whatever that I stumbled across sometime around this then or thereafter discussing the math of early retirement in the 4% rule study that was citing Bill Bengan's research. Right. I mean it's just a direct cascade to what I do and, and, and to anybody who else has been inspired by the 4% rule or early retirement. This is the foundational math that has kind of spurned like, like spurred that on and got us going. And I just, I love talking to Bill because he's, he's got, he's got this great philosophy, this great research set that he went back that, that he, that is back tested. It's his passion in life. And he also invests in different ways relative to that portfolio. This is a right answer, but it wasn't the right answer for him on there. And I think that that's what's fascinating about what we do. Mindy, in this world of planning for financial independence, retire early and figuring out how to, how to get there is, there's no, there's so many different paths to it. There's so many different personal preferences that come along. There's so much research that's back, back tested. Everyone can argue about it until they're blue in the face and you got to just do what's, what's right for you. And I think I'm increasingly coming around to the idea of I can talk to bill bangin 10 times and have that privilege of a lifetime with you here. And I'm still probably going to need to build portfolio. I'm still going to, I've built a portfolio will need to depend on just spending less than the cash flow generated by my portfolio to feel comfortable personally.

[Mindy Jensen]

Well, and I think that's a good point, Scott. I can talk to him and I still need to do this to feel comfortable. And how many times have we said personal finances, personal. If you don't feel comfortable with spending the money that you're spending, you're not going to sleep well at night. You're going to constantly be second guessing yourself. And what that means for you specifically is that you need to build a little bit of a larger portfolio than perhaps I would because I trust Bill implicitly and his 4 now 5% rule. So it's just, it's a personal choice, but it's, and we call it a rule, it's a rule of thumb and the of thumb always gets lopped off, but it's a rule of thumb. Scott is a little bit less excited about the 4% rule and wants to do, you know, 3.25 or 3.75, and I'm super cool with it and I'm going to do 7%. We're in different positions in our life. We're in different, you know, we have a lot of different expenses coming up. I've got college coming up, you've got Pre K through 12 coming up and then college. So, you know, having a different withdrawal strategy is totally fine. What I want people to do is think about what they're doing, not just I read it someplace once, so that's what I'm gonna do. And I think that's. I think that's what you're doing. You've thought about it and you're like, well, to make myself comfortable, it's gotta be this instead.

[Scott Trench]

Mindy, are you going to buy bitcoin now?

[Mindy Jensen]

No.

[Scott Trench]

Me neither.

[Mindy Jensen]

I love that Bill Bengan, the, The professor of finance. The. The. He's not a professor, but Bill Bengan says his portfolio is 1% bitcoin. If you have more than 1% bitcoin, I hope you're way wealthier than Bill.

[Scott Trench]

I was surprised by how much he has allocated to bitcoin. I thought I read that as an endorsement of bitcoin from Bill. So read that. I heard that. Right? We just talked about it. So you can see I'm a visual thinker.

[Mindy Jensen]

But yeah, I heard him say it's an interesting thing. I'm going to test it with 1% of my portfolio. And yeah, 1% is still really, really high. I own 0% of my portfolio in bitcoin.

[Scott Trench]

I have the same allocation as you.

[Mindy Jensen]

Yeah, yeah. And that's okay. That's what I'm comfortable with.

[Scott Trench]

With.

[Mindy Jensen]

And honestly, I haven't done that much research into bitcoin because it's something I heard. I'm like, I don't know that I like that so much. I'm another. I'm doing okay. I mean, I'm not. I'm not hurting because I don't have money in bitcoin.

[Scott Trench]

Well, help us out. If you're listening to this, let us know what you thought of the episode in the show notes here. And if you get an, if you get an idea for where you can get. Where we could get a data set that would help help kind of supplement the research that Bill has done on stocks and bonds that with a real estate portfolio. We'd love to get a link to that at some point. That would be really fun to think through or noodle on or do bang out in an Excel spreadsheet or just send to Bill in case he wants to work on it at some point. That'd be really interesting. We'd love to. Love to see that. That's something that's been bothering me, and I asked the question because of that to Bill today on the podcast. So please send that to Bill. Scottigerpocketsmoney.com or Mindy biggerpocketsmoney.com It's a little bit of an update. We've got BiggerPockets money email addresses in addition. Of course, you can email us at scottigerpockets or mindyggerpockets.com awesome, Scott.

[Mindy Jensen]

Thank you so much for having such a great conversation with me with Bill.

[Scott Trench]

Thank you, Mindy, for inviting Bill on the podcast.

[Mindy Jensen]

Should we get out of here?

[Scott Trench]

Let's do it.

[Mindy Jensen]

Okay. And our listeners go check out his book. It's going to be worth its weight in gold. That's not actually true, but it's. It's gonna be such a great book. I'm so excited for it. All right, that wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench. I am Mindy. Did I just pronounce my name wrong?

[Scott Trench]

You did. Bye, Mandy.

[Mindy Jensen]

That wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trent. I am Mindy Jensen. Saying farewell. Blue Bell.

[Scott Trench]

Yeah. Scott Trent and Mandy Jensen. Yep. There you go. Bye, everyone.