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- [00:04]
Bill Bengen
When did making plans get this complicated? It's time to streamline with WhatsApp, the.
- [00:10]
Matt Zigler
Secure messaging app that brings the whole group together.
- [00:12]
Bill Bengen
Use polls to settle dinner plans, send event invites and pin messages so no one forgets mom 60th and never miss a meme or milestone. All protected with end to end encryption. It's time for WhatsApp message privately with everyone. Learn more@WhatsApp.com this episode is brought to you by Netflix from the creator of Homeland. Claire Danes and Matthew Rhys star in the new Netflix series the Beast in Me as ruthless rivals whose shared darkness.
- [00:41]
Co-host (possibly a guest or secondary host)
Will set them on a collision course with fatal consequences.
- [00:45]
Bill Bengen
The Beast in Me is a riveting psychological cat and mouse story about guilt, justice and doubt.
- [00:50]
Co-host (possibly a guest or secondary host)
You will not want to miss this. The Beast In Me launches November 13th only on Netflix.
- [00:57]
Bill Bengen
My first task was I assigned myself to find the worst case scenario, to find one withdrawal rate that could survive or had survived under all historical conditions. When I first did my research, I saw that there were periods of time where investors could successfully take out 6, 7, 8, even 10%. And I found them fascinating. Anytime a healthy percentage of equities in your portfolio to to get one of those higher withdrawal rates. In my book I talked about 55%, but I recently upped that to 65% because it works better almost across the board for all retirees. Every time I went to a more diversified portfolio, it increased the withdrawal rate. The last time it went from 4.5 to 4.7.
- [01:48]
Matt Zigler
You're watching excess Returns. I I'm your host Matt Zigler, and we've got a legend with us today. I've got Justin Carbono here too. He's a legend, too. A legend in and of himself. But who's this? It's not Matt Damon in the Martian, although this guest did go to MIT. And no, it's not Cool Spot, the iconic 7Up mascot. Although he did some time there too. It's the financial planners rule of thumb, but never ring finger. His latest book is A Richer retirement supercharging the 4% to spend more and enjoy more. Mr. Bill Bengen, welcome to Excess Returns.
- [02:20]
Bill Bengen
Thanks for inviting me. I'm looking forward to this.
- [02:22]
Matt Zigler
Well, your work precedes you. I think that's a good thing. Let's talk about the original 4% rule. I want to talk about where you were, how old you were, why you incepted this thing. Let's give the history of where this thing came from.
- [02:37]
Bill Bengen
Yeah, it takes me way back over 30 years now. That time I was a noodle. New finance newly vented financial advisor, though not a young one. You know, I was still in my early 40s of the my next career and I started getting clients and I started asking me questions about retirement, which was about 20 years off for most of them. And I figured, well, it can't be hard to find out information about that. And I went through all my CFP textbooks and found nothing about withdrawal rates or how much to save. I went to the library, checked publications, talked to fellow advisors. Nobody seemed to really have a handle on the subject. So I said maybe just nobody's really taking a look at it. That has been so important up to this point. So I decided to whip out my trusty loaded spreadsheets and investigate it for myself.
- [03:31]
Matt Zigler
So as a financial planner, how'd you decide which inputs to put in? Those original assumptions, where did those come from?
- [03:39]
Bill Bengen
I just adopted things which I think were reasonable based on what my clients had told me, what they're expecting. A lot of them were saying I planned for at least 30 years, so I use that number. My first task was I assigned myself to find the worst case scenario to find one withdrawal rate that could survive or had survived under all historical conditions. That turned out to be the unlucky person who retired in October of 68. This ran into a buzzsaw of multiple big bear markets followed by high inflation which forced them to increase their withdrawal. Just devastated their portfolio. Something I hope we never see again, at least not during my lifetime.
- [04:24]
Matt Zigler
When it comes to people saying they use the 4% rule now and we'll get on to how you've updated this because you have updated it, what do you think people mean when they say it? What do you think they're missing when they say I'm using the 4, the 4% rule?
- [04:36]
Bill Bengen
Well, I think probably two things. One, I think it means taking 4% out of your portfolio each year. What's not works more like Social Security where you take out 4% the first year and then give yourself a costing of living adjustment each year after that. And the other issue is I think they apply it as a first attempt at what the retirement plan should be. From my perspective, probably one of the last things you should look at because there are much higher rates available today.
- [05:09]
Matt Zigler
When did it start to click with you or was it immediate that those higher rates could be or would be available?
- [05:15]
Bill Bengen
Oh, when I first did my research, I saw that there were periods of time where investors could successfully take out 6, 7, 8, even 10%. And I found them fascinating. I Just for many years I couldn't find a connection, a theoretical connection between the data and where we want to be. So I finally made. About three, four years ago, I made a breakthrough where use inflation and stock market valuation to get access to some of those juicy higher withdrawal rates of the past.
- [05:49]
Matt Zigler
As a planner, did you connect this back to the human side from the get go? Was this an idea of just how to not screw it up or did you have, I mean, spending money is hard, right?
- [06:01]
Bill Bengen
Yeah, people need encouragement to do so. It's pretty clear. I think there are folks who are spending, I hear only their interest in dividends and leave their principal on touch. And I'm sure their heirs are very appreciative of that. But I think if you spend all those years saving money and sacrificing, you should enjoy it.
- [06:21]
Matt Zigler
So let's go back. I want to stick around on the original idea for just a little bit longer. In those periods, 1968 was the failure point. What were some of the other things in the years that you discussed? Actually just lay out the way the original study was conducted. I think this is underappreciated how you studied this.
- [06:38]
Bill Bengen
Well, I look across all historical periods which now going back to 1926, there's almost 100 years of data and there are just certain periods of time which stand out. One was 1968, which was a combination of factors. Another was 1937, it was like a 50% bear market in one year, which is pretty awful. And of course the 192932 situation, which turns out is not the worst case because it was a deflationary period, so investors were actually able to increase their withdrawals. Which part of me offset the used losses. It's hard to imagine a bear market like 1929 32, which last almost three years and declined stocks by 90%. That's something we haven't seen the parallel and I hope we don't anytime soon. 2008, 2009 was bad enough at almost 60%. A lot of people lost what, a third of their portfolio value for that and who knows what the market will bring us in the future.
- [07:43]
Matt Zigler
Can you talk a little bit about the actual 4% itself? What that number represents, what the key assumptions are inside of it, how it can change over time, static, dynamic, all that stuff?
- [07:55]
Bill Bengen
Sure. We start off by assuming that you want a plan for 30 years of withdrawal that you take from a tax advantage account, that you want to have a zero balance in the account at the end, and that your asset allocation is appropriate. I recommend 65% stocks for most people. 20 more years of planning horizon. Those are some important factors. And the 4% rule works. You take 4%. If you have a million dollars, the first year, you, withdrawal would be 40,000. Then you throw the 4% away completely every year. Treat it like Social Security does. Give yourself a cost of living adjustment.
- [08:37]
Matt Zigler
Do you think that it seems like in talking to people, a lot of people forget in the original study that you were supposed to throw the 4% away after the first year. Did you run into that a lot? A lot of people confused by that?
- [08:49]
Bill Bengen
Yeah, yeah, that's something I run into today. You know, there is a legitimate withdrawal scheme where you take 4% of your portfolio every year. But it doesn't work. It doesn't generate as much income as the way I describe it. But value percentages because I want to increase the general applicability of my research. So somebody with a million dollars, somebody with $10,000 could use it, you know, equally. I, I just snatched it going in terms of percentages. You know, I, I didn't have any marketing goals at the time. I was quite frankly just doing that research for my clients, you know, something in house. Eventually I shared it and broke loose.
- [09:34]
Co-host (possibly a guest or secondary host)
One of the things that I think you pointed out in the original research was that, and you kind of hit on this earlier, that starting in 1968, two big bear markets in there, plus that inflationary time, you know, that was actually maybe even worse or more painful for investors than those, let's say if they had invested in 1929 and gone through the Great Depression. So just, I think that's an important like distinction. You can have these huge massive bear markets. But when, if you, if, if that is also coupled with inflation, then I think this is kind of the point you're making. And I want to ask about inflation a little bit more in a minute. But that can be even more, more painful or more devastating.
- [10:17]
Bill Bengen
Yeah, I think of the two inflation flying, the most painful because you're probably stuck with whatever increases you make in your draw rates because of inflation. You're probably not going to encounter any of that. And not in this monetary environment, a deflationary episode that's just going to knock your expenses down 10% a year. Nor we do that and probably enter another depression. No one don't think wants that.
- [10:43]
Co-host (possibly a guest or secondary host)
So when inflation comes, it's kind of sticky. It's here to stay. And before we started this, you were kind of talking about that you're getting these because of your new book. You're Getting these questions from readers. And you know, what I, what I want to focus sort of this next set of questions on is a little bit more around, like the current environment and what we're faced with as investors today. And one of the questions, I guess, that I have is if you look at the overall market valuation, let's say you take something like the CAPE ratio or the Shiller PE ratio, which is elevated given where it's been historically. You know, how do you think about strategies or ways that might take stock valuations into consideration? And also I guess the bond yields, in terms of like, trying to come up with these safe withdrawal rates.
- [11:38]
Bill Bengen
Really examine the effects of bond yields so much because they tend to be fairly stable over time. You know, the volatility is on the equity side of the equation. And determine you need to have a healthy percentage of equities in your portfolio to get one of those higher withdrawal rates. And in my book I talked about 55%, but I recently upped that to 65% because it works better almost across the board for all retirees and really gives them a lift. Like I was estimating, based on market valuations and inflation, using a 55% stock portfolio, it would grow in today's environment, we about five and a half percent. When I go to 65%, that goes up to over 5.8%. So that's a worthwhile increase. And I don't think you're taking much risks. They've got it.
- [12:34]
Co-host (possibly a guest or secondary host)
Yeah. So that's a pretty, like you said, substantial increase from the 4%. So how would, how would you view taking something like the cape? And I think one of the pieces of research you've done is looking at market valuations and then looking at different inflationary regimes and trying to kind of embed those in a framework that would allow someone to estimate what that withdrawal rate is. So how would that framework basically be constructed?
- [13:01]
Bill Bengen
Essentially put inflation first, which is I learned after 25 years of failing to come up with the close zone. Once I put inflation first and put stock market valuation second, everything flowed. Stock market valuation is important because if stocks are very expensive, we'll probably near a major bear market. And major bear markets around retirement are damaging to withdrawal rates. Inflation, of course, causes you to increase your draws, which can be even more devastating because they're locked in for the rest of retirement.
- [13:37]
Co-host (possibly a guest or secondary host)
One of the, I guess, enhancements here that you are suggesting is the incorporation of different types of stocks, so mid cap, small caps, maybe even micro caps, to get that equity return, you know, higher than Maybe what the broader market would give you over time.
- [14:00]
Bill Bengen
Yeah, if you look at my research, I had three different allocations I work with and every time I went to a more diversified portfolio, it increased the withdrawal rate. The last time it went from 4.5 to 4.7.
- [14:13]
Co-host (possibly a guest or secondary host)
One of the things that I was thinking about over the weekend actually, and I don't know, and it was in relation to this conversation we're having today, but it had to do with. Oh, I know what it had to do with. It had to do with. I was thinking of AI and sort of what some of these guys that are, you know, really deep thinkers and that are thinking about AI, but thinking about the developments that artificial intelligence will have not today on health care, but thinking like 10 years from now, like the advancements that are going to be being made in health care are, you know, going to be significant and might have a very big impact on longevity. So for people that are maybe 40 and going to be 50 in 10 years or 60 and 20 years, you know, if you make it that far, hopefully you know, all of us. Well, you have Bill, Matt and I. Do you know that these enhancements with healthcare are just going to be like kind of mind blowing and extending our lives more than we know. And I wonder like how do you think about like that a little bit with sort of this withdrawal rate strategy? Do you, I mean I know you have like a 30 year time horizon on the, on this withdrawal rate rule, but do you think about that at all about how this might, we might be living longer and longer as humans. And so our portfolios are going to need to basically be able to withstand even more time than.
- [15:48]
Bill Bengen
Yeah, even if we're not living longer. There are a certain group of people, the fire folks, financial independence, retire early. We're probably going to have a very long term retirement because they're going to retire so early. So it's a really valid question. And I studied the effect on withdrawal rates of increasing the planning horizon. And as you might expect, as you increase the planning horizon, the overall draw rate comes down a bit, but it reaches a floor. For example, under 4.5% rule came down to watch and the current point, 7% comes down to 4.1% for let's say 50 or 60 years or longer and then it doesn't go down any more. So if you want to have 100 years retirement, you're probably still at 4.1%.
- [16:34]
Co-host (possibly a guest or secondary host)
One of the counterintuitive things is this U shaped equity glide path. So you know, an equity glide Path is effectively like the exposure you have to equities over time. And the U shaped aspect of it is about this idea that you reduce your equity exposure more when you're entering, I guess before you enter and immediately entering retirement. And then you increase it sort of gradually over time. And you know, that seems like maybe counterintuitive to a lot of people because if you're entering retirement and you think, Well, I have 20 to 25 more years to live off this portfolio, I need to have my equity exposure maybe highest then. But can you just explain that idea of sort of the sort of this U shaped equity glide path and why it could be important for retirees?
- [17:31]
Bill Bengen
Originated with two other advisors, Michael Kitces and Wade Val. About 10 years ago they published a paper and they looked at exactly this. You're talking about what happens to withdrawal rates if you increase wetcoin exposure during retirement. And surprising conclusion I reached was it was of significant benefit to do that as opposed to having a fixed allocation. And it seems like you said counterintuitive. Why does that work? Probably, as they speculated, and I have to agree, it's because if you encounter a major bear market or on your retirement and you have lower exposure stocks, you're not going to get hurt as bad. You know, if you have 45% stocks versus 65, and then the bear markets are all temporary, eventually they run the course and they're over. And then you can just piling money basically into a market which is going up. So it's a really favorable dynamic.
- [18:29]
Co-host (possibly a guest or secondary host)
It creates one of the things, you know, when people think about rebalancing their portfolio, a lot of times investors are like, okay, it's January 1st or it's the beginning of the year, it's December 31st. I know I got to rebalance back to some, you know, target allocation. But what does your research suggest investors, specifically retirees do when it comes to rebalancing that's optimal?
- [18:55]
Bill Bengen
My research reveals it's not a huge issue for retirees. You could get away without rebalancing in most cases. But there are a number of cases where rebalancing, let's say once every 12 months, makes a lot of sense. And I think generally that's a fair, mean middle approach because it works well under almost all circumstances. It may not be optimal, but sometimes it's hard to judge what to do to get the optimal. You have to do what you can to maintain it.
- [19:33]
Co-host (possibly a guest or secondary host)
I wanted to ask you about the permanent portfolio. So the permanent portfolio was developed by somebody, his name was Harry Brown and it basically is this idea of allocating to four very different asset classes. So cash or short term bonds, long term bonds, gold and stocks, with the idea that you're never really going to lose that much hopefully because all those asset classes are performing differently in different economic periods. Inflation, deflation, economic expansion, recession. And so you try to get different asset classes that give you diversification across all those different sort of regimes and environments. Do you have any sort of thoughts on a diversified allocation like the permanent portfolio and how that could be useful for investors in retirement?
- [20:25]
Bill Bengen
It might work. I actually have not done a rigorous test of it in my research, so it's hard for me to give you an authoritative answer. But you know, obviously there's diversification there in terms of the economic performance of the assets. The only thing I question, 25% gold. Gold is an asset which has had or historically much lower return to the stocks. Of course, if they held it the last two years, you'd be thrilled because you've done much better than stocks. So to have a permanent allocation gold, I don't know. I'm holding onto my goal for now, but at some time I'm probably sense that we've reached the limit like we did in the 80s and then gold dropped about 16%, the peak there. So you know, that can be painful if you have 25% of your portfolio in it.
- [21:18]
Matt Zigler
Let's talk about sequence of returns risk. I know as a planner this is a big one that I run into all the time. Where you hinted at it earlier, you said 100% stocks right up until five or so years out from retirement. What is it about sequence, returns, risk? How should we think about this?
- [21:39]
Bill Bengen
Well, that's probably mainly retirees because it's been demonstrated that when you get a major bear market or on retirement, your draw rate reduces significantly. So you have to take that into consideration. And you know, I think people have a natural inclination to pull in their ears a little bit when times get tough. And I don't dispute that. I think that makes sense. It's like a safety valve just in case things really go off the rails, you know, you're not going to be destroyed. The stock market has bear markets, but bear markets are a finer length. They, they come and they go and they pass and then you're on for another bull market for five, seven, eight years, whatever. So it's easy to overstate, you know, the importance of bear market strong retirement because eventually the market will recover. And if you believe that that is still true for markets that should bolster your confidence in continuing as withdrawal.
- [22:42]
Matt Zigler
Let's talk a little bit about cash reserves and sort of a bucket strategy as you've called it. How do you think about that especially with regards to weathering bear markets?
- [22:52]
Bill Bengen
Sure. Oh, I think in effect my research incorporates a bucket strategy because it has a 5% cash component and it doesn't separate the stocks and bar and some people add another like a intermediate term category. I don't know if that's necessary or not. I haven't read literature that convinces me that that is a viable approach. I think just a simple two bucket approach work pretty well.
- [23:19]
Matt Zigler
We've seen some great work especially from Wade Fowl on different types of withdrawal strategies. Some of the dynamic withdrawal strategies compared to the fixed inflation adjusted withdrawals. Any thoughts on those? Do you think there's. There's room for all of these things or.
- [23:35]
Bill Bengen
Yeah, I'm a great admirer of Wade. I think he does some fantastic work and I read everything he writes and I think there's a lot to be said for those dynamic strategies although I haven't really been able to test one. I hope to do that over the next year to see if some gains can be had from addressing your we have withdrawals and market conditions during retirement.
- [24:00]
Matt Zigler
What do you think about the idea at the beginning of retirement of front loading spending taking more early?
- [24:08]
Bill Bengen
I think that's a viable approach I analyzed in my book I'm an efficient with a lot of the attitudes of retirees they want to spend more when they're younger and maybe less later. For those who use that it's a viable approach. It's just that you have to be prepared for the magnitude of the clip the decline let's say in the 10th year if you had a decline expenses in the 10th year because it could be pretty substantial depending upon how aggressive one was initially ordinary and if you can handle 25, 30, 35% decline in expenses and you know what's coming it should be okay.
- [24:49]
Matt Zigler
In the new book you've updated the number now to 4.7. I just want to hit it again. Is that strictly because of incorporating the inflation and then stock market valuations or did anything else play in there?
- [25:03]
Bill Bengen
It's largely because of the change that made in the portfolio. I went from the prior portfolio at 3s class I went to 7 on this asset class class and those extra portfolio elements acted as diversifiers that helped increase the withdrawal rate for you yourself.
- [25:24]
Matt Zigler
Was it it's 2013 when you started with the four and a half withdrawal rate for you years ago, not long. Congratulations, you've adjusted it at the time. What. Where are you to the degree you're comfortable disclosing. Where are you at now? How have you updated it? Why?
- [25:41]
Bill Bengen
You know, I have a plan which I created in 2013 that back then, you know, I did not access higher draw rates. So I started with a four and a half percent rate, which was the worst case scenario and said, let's see how things go. Of course, the stock market has done so well the intervening dozen years. I find myself really accumulating more cash than is necessary to support more draws. So I've actually increased my withdrawal rate total 5% recently and might do it again. Have to be careful doing that though, because you don't want to let one or two good years in the stock market convince you that it's all green lights. Because when that bear market comes, it can turn on you pretty nastily.
- [26:25]
Matt Zigler
How many years do you feel like you should have before you start considering a permanent increase in the distribution rate with comfort?
- [26:34]
Bill Bengen
Oh, you know, it's. That's a tough portion to answer. I think you have to look at what the causes are. If it's low inflation and it looks like low inflation going to continue, that's a green light to increase withdrawals. If it's because an exceptionally long bear market exceeded everyone's expectations, you probably justified after a couple years increasing withdrawals. That happened to folks in the 1980s who retired. Just now, the start of that used bear market that ran through 2000 and the valuations on stocks jumped a huge amount which gave them a tailwind and they, they were able to make significant increases in their distributions and say retirement went on.
- [27:21]
Matt Zigler
I remember working with a client years and years ago who had done just that and retired in the early 80s with mostly a tax free bond allocation and a little stock allocation. And they're looking back over, you know, 30 odd years of it and going, now we have more stocks than the bonds.
- [27:39]
Bill Bengen
Yeah.
- [27:40]
Matt Zigler
But as the last, you know, 15% or 15% coupons, you know, finally went away.
- [27:46]
Bill Bengen
Yeah, well, yeah, it's just, it's funny, it's easy to feel that way because I remember the early 80s and difficult time for people. Inflation was still a big problem. The Fed was fighting it. People weren't sure how successful they'd be, but people like Warren Buffett were saying, hey, I felt like a kid in a candy store. I see all these companies gone for six or seven times earnings. I don't even know where to start buying. So you Know, I think he's a good person to watch, quite frankly, in terms of approach to equity allocation, probably not.
- [28:19]
Matt Zigler
Probably not a bad person to watch. You wrote in 2020 that retirees can't afford to do buy and hold anymore due to central bank distortions that made huge market swings. What changed your thinking back in 2020? Where'd that quote come from?
- [28:35]
Bill Bengen
Well, I just noticed since the turn of the century we've had more large bear markets than you would normally expect in a 20 to 25 year period. And we all know governments around the world have been spending large amounts of money and their central banks have been reacting by printing money, which is a risk of inflation. So those combination of factors argue for a different approach in my opinion. We can't expect a relatively stable returns that we used to have until this market clears itself to we drop maybe half from where we are now and restart the whole system. The problem is government and central banks are kind of resistant to hit the reset button on that because of the wealth effect. So I don't know if it'll happen. You know, it may be a forced occurrence as a result of default or something, but I wouldn't guess so.
- [29:34]
Co-host (possibly a guest or secondary host)
In your book A Richer Retirement, you have a number of charts and tables and you know, it's very data driven, which Matt and I can appreciate. But I'm curious, are there, is there like one or two charts that really stand out to you that are like this is like kind of the most important thing that you know, you really want. Like if you were to highlight like the top two or three charts or data sets in the book, like what would you, where do you think you would go with that?
- [30:12]
Bill Bengen
Well, one of the charts would be safe withdrawal rate versus asset allocation, which shows clearly that you need to have a certain millim which goes to equities. And my preference right now is for at least 65% equities. You get up much higher than that, then you really start running into problems with bear markets. They can devastate you. But that's where I would be now.
- [30:38]
Co-host (possibly a guest or secondary host)
Any other charts, anything else just stand out to you as something that.
- [30:42]
Bill Bengen
Yeah, good question. A couple of unexpected charts. I think the rising equity glide path chart is interesting to show how that has superior results to. Although I did that comparison for 55% equities for fixed versus a increasing glide path. When you go to 65% equities, equity increasing glide path is still slightly superior, but there's not as much an advantage as it had at 55% equities. So I think we're probably reaching kind of a zone when you get 65, 70% with a rising equity glide path is not much better than a fixed allocation.
- [31:29]
Co-host (possibly a guest or secondary host)
One of the things that the book also sort of highlights is you actually are giving people like tools in the sense that they can kind of do this planning themselves. And one of the things that I was just hoping you could talk to is talk about this, talk about the, like the, the selected value of the eight elements, if that, if I'm capturing that correctly and sort of what, you know, an individual would basically fill out like the important things. And we've talked about a lot of them, but it's like you have this step by step form that someone can use to kind of work through. And maybe it's just this is, this is the strategy, this is the playbook, this is what I'm going to fill out. And so walk us through, you know, starting with the withdrawal scheme and then working down through those elements. If you remember those eight selected elements.
- [32:19]
Bill Bengen
Yeah, withdrawal team is important. That's why I put it first. It's probably the most important thing.
- [32:25]
Co-host (possibly a guest or secondary host)
And so the withdrawal, the withdrawal scheme is like, just talk to that like fixed percentage, fixed annuity, front loaded cola.
- [32:32]
Bill Bengen
Those are the things that you have ways. In fact, I had a reader suggest something to me to, I hadn't even thought of. He says, what if I was to take a fixed 2% COLA each year and not just a COLA based strictly on inflation. And I said that's really an intriguing idea. So I'll probably run that scenario and put it up my website for folks to take a look at. But beyond that, you want to take a look at whether you're withdrawing from a taxable or tax deferred account. Significant difference between the two depending upon the tax rate. You also want to take a look at your asset allocation and also whether or not you want to leave a zero balance, what's called a legacy in tam, with that horizon, whatever you're using. And there are a few other factors. Those are what I call the big five. There are three others which include the timing of the draw. Take them early, later in the middle, where they rebalance once a year as.
- [33:31]
Co-host (possibly a guest or secondary host)
We get sort of toward the end here, just a few more like. And these are kind of what would you do if. So I guess if you were personally retiring today at age 65 with a million dollar portfolio and your Social Security was enough to cover your basic needs, like what withdrawal rate would you use and how would you kind of allocate the portfolio between stocks and bonds.
- [33:59]
Bill Bengen
Well, you're saying effective, the portfolio is almost superfluous. It's not required to cover any of their expenses at all or just a portion of their expenses.
- [34:09]
Co-host (possibly a guest or secondary host)
Yeah, this would, Well, I guess the social, let's say Social Security covers the basic needs. So basic stuff. But maybe the portfolio. Yeah, you need to kind of live off it, you know, do you need to be probably using some of it at least to cover other discretionary things like trips and gifts and stuff like that?
- [34:27]
Bill Bengen
Well, you know, what I do would calculate an expense budget. And against that, look at various withdrawal rates and see how to generate a withdrawal plan that matches what my expense is going to be. If that's the case, you know, you should be okay even if you take out 3%. I don't think you should take any more risk in your portfolio than you absolutely need to. I mean, if you want, you might end up with 40% equities and 35 or something. You know, because the portfolio is so big, then it covers so many other expenses easily. But if you do that, you also lose the opportunity to build wealth, careers. So that's a trade off that you have to remember.
- [35:12]
Co-host (possibly a guest or secondary host)
How do you, how do required minimum distributions play into this? Because, you know, obviously those RMDs have a specific schedule that need to be followed. And like some people, you know, they don't even need to live off the RMDs. They can kind of put that back into the market like in a taxable account if they don't need it. So I'm just curious, can you just talk to sort of how you think about those in this sort of context?
- [35:42]
Bill Bengen
The RMDs is basically just an artifact of the tax system. You know, from my perspective, it doesn't directly feed into withdrawal strategy. It just happens that the amount, percentage of withdrawal in the early years is pretty close to the four, four and a half percent, you know, associated with my rule. But it's, it doesn't generate. If you take a look at the withdrawal rates over time, it goes up very slowly and probably not keep up with a COLA strategy, which I would recommend. There are times in your retirement where it's okay to be withdrawing 6% or 7 or 8% in later years, but you won't get those kind of rates out of the RMD necessarily.
- [36:27]
Co-host (possibly a guest or secondary host)
We have two closing questions, but before we go there just sort of two questions for you personally. So do you ever have to pinch yourself that like, you know, you were interested in this, you were looking for the answer on Withdrawal rates and retirement. You did the research and you put this research out to the world, and now you are like kind of the. I mean, I can't tell you how many times, like on this podcast we've talked about the 4% withdrawal rate, which now we have to update, I think, to the 4.7% withdrawal rate or, you know, whatever it might be. But, you know, do you ever. Are you ever just like, like, wow. Like, I'm amazed that, like, the world embraced this to the extent that it did.
- [37:13]
Bill Bengen
I am, yeah. I feel a little bit like a character Monk in a TV show with Tony, who had this gift for detective work. And whenever people question, Bong said, yes, it's a gift and a curse, goes, well, there is sense of responsibility, of place on my shoulders to get my stuff right, you know, because a lot of people will be reading it and acting often.
- [37:36]
Co-host (possibly a guest or secondary host)
Right. No, I appreciate that. And the other thing that I just thought was kind of inspiring, I guess, was in reading, you know, about. On your website, which is bengenfs.com B E N G E N F S.com and we'll mention that again at the beginning when we do. When we do this, Bill.
- [38:00]
Bill Bengen
But.
- [38:02]
Co-host (possibly a guest or secondary host)
You know, you're. There's like a little bio about you and your history and what you were involved in early in your career and then your shift to financial planning. But I kind of felt like this last little snippet here, I'll read it if I've learned anything. On this journey, you need family, friends, and a passionate interest in something you fully, to fully enjoy life. Cultivate all three, and they will not fail you. So just, I don't know, I just thought this journey, you know, the family, the friends and sort of having a passionate interest, which you clearly have in this research, are, you know, very important to you. And so just, you know, if there's anything you want to say to that, like, I'd be. I'd be interested in it because I think a lot of people could probably learn from sort of that philosophy.
- [38:48]
Bill Bengen
Yeah, it's a philosophy of life evolved over time. And if I was to write that paragraph today, I would probably add health. And so one of four factors are importance here. If you don't have your health, you really have a problem as you age and all the other things you will not be able to enjoy as much as you normally would. But, you know, it's a matter of setting priorities. What's important in life. There are so many phenomena tugging at us for attention. We need to narrow our focus on the things that are really important that will help us create the kind of life we want to live. And that statement was my attempt to summarize what I felt was important.
- [39:33]
Matt Zigler
All right, Bill, based on all of this experience, both in markets and research and helping regular clients, what's one lesson, if you could, that you'd teach the average investor?
- [39:46]
Bill Bengen
Well, I would say that if you're in retirement and you're tracking your plan and you run into a bear market, you're going to find that your withdrawal rate could temporarily increase up to 7, 8, 9, 10%. 10%, which could be very worrisome. But they should keep in mind that bear markets come and go and that if you leave it alone, unless it's a really extremely deep bear market, that you'll probably be okay. And then you'll find a good recovery on the other side. Will bring your plan back into alignment. Target.
- [40:18]
Matt Zigler
Here's the things coming back in alignment once in a while. You've got a new book. Why don't you tell us what it's called? Tell us where to find it.
- [40:25]
Bill Bengen
Sure. It's a rich retirement supercharging the 4% rule to spend more and enjoy more. You can obtain it on any online bookseller. They all offer, and I hope people do and enjoy it. You know, I wrote it not largely to inform people, but I also wanted to entertain people to a certain extent. So I tried to use humor in the book. Some people liked it, some people didn't. But it's. I tried not to make it a dry exposition that would bore you to cheers.
- [40:59]
Matt Zigler
I. I'd say you succeeded there. It's important and just I know from my own professional practice as a planner and from many of the planners that watch this show. And I'll talk to you about this, the household name that you've become in doing this work with a little bit of a sense of humor in there. It's wonderfully humanizing. It's wonderful because it reminds us just how personal personal finance is, really is.
- [41:25]
Bill Bengen
No one size fits all.
- [41:27]
Matt Zigler
And that's a feature, not a bug.
- [41:30]
Bill Bengen
That's right. That's true.
- [41:32]
Matt Zigler
Bill, we want to thank you so much for coming on Excess Returns.
- [41:36]
Bill Bengen
It's my pleasure. Thanks for inviting me.
- [41:38]
Co-host (possibly a guest or secondary host)
Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess returns network@excessreturnspod.com if you have any feedback or questions, you can contact us@excessreturnspodmail.com no information on this podcast.
- [41:58]
Matt Zigler
Should be construed as investment advice.
- [42:01]
Co-host (possibly a guest or secondary host)
Securities discussed in the podcast may be.
- [42:03]
Matt Zigler
Holdings of the firms of the hosts or their clients.