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Bill Bengen

Retirement Planning > Spending in Retirement

Father of 4% Rule Urges Caution, Cash as Market Risk Rises

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Bill Bengen, the inventor of the so-called 4% retirement portfolio withdrawal rule, has a crucial message for financial advisors:

“Manage the risk portion of a retirement nest egg actively. Unless you’re willing to vary — reduce — your clients’ allocations to reduce risk, it could be damaging,” the former 25-year advisor argues in an interview with ThinkAdvisor.

But have the pandemic, falling markets and rising inflation torn up the 4% rule? Hardly, he says.

“We’re in a period of rising interest rates, and probably both stocks and bonds will do poorly,” he says. 

This time, the Federal Reserve “may not have the luxury” to use monetary policy to affect “a quick cure,” Bengen cautions.

In a research paper published in 1994, he recommended a 4% withdrawal rate in tax-deferred accounts for the first year of a 30-year retirement, making adjustments in subsequent years according to inflation rates.

But about two years ago, he increased his suggested rate to 4.7% based on new research he’d conducted.

Recently, however, citing “high inflation [as] a huge threat to retirees,” Bengen revised the rate once again and recommended a rate lower than 4.7%.

“If people want to take a few tenths off and take it down to 4.5% or even 4.4%, I wouldn’t argue,” he says in the interview.

Bengen is suggesting a retirement portfolio asset allocation of “55% of your normal allocation to stocks” and “cutting your bond allocation at least in half.”

He advises: “Wait for better values in both stocks and bonds, and then put the cash to work.”

For about 25 years, he helmed Bengen Financial Services in Southern California, then sold the practice to Dean Rowland Russell in 2013, and retired. He has never stopped researching the issue of retirement portfolio withdrawal rates, though.

Before becoming a financial advisor, he was president and chief operating officer of his family’s soft-drink-bottling business.

ThinkAdvisor recently interviewed Bengen, who was speaking by phone from Saddlebrooke, Arizona, where he lives.

About revising the 4.7% withdrawal rate, he notes: “I felt it was probably best for people to err on the side of conservatism just in case we get a new worst-case [market] scenario” more distressing than what occurred from 1968 through much of the 1970s.

“I’ve seen plenty of days now when both stocks and bonds have gone down together,” he says. “It’s kind of frightening.”

Here are excerpts from our interview:

THINKADVISOR: Is there anything that alarms you about the way retirement planning is done today?

BILL BENGEN: My biggest concern are buy-and-hold advisors who don’t modify their allocation in response to market risk.

What could be the fallout?

We’re in a period of very high risk for retirement investors. Unless you’re willing to vary — reduce — your clients’ allocations to reduce risk, it could be damaging.

We’re in a circumstance where the Fed has to fight inflation. We’ve had a series of big declines in the last 15 or 20 years, and the market has come back pretty quickly, primarily because the Fed used monetary policy, like quantitative easing and a zero-interest-rate program.

Would they do that again?

They may not have the luxury to. 

Historically, markets have taken many years to come back, like [after] the Great Depression; and during the 1960s and ‘70s, the markets did nothing at all. Maybe we’re headed for another one [of those].

That’s why I say protect your retirement nest egg because if it gets damaged, there may not be a quick cure. 

Manage the risk portion actively. Retirees should be exceptionally careful in this environment.

What prompted you to recently revise your “4% rule” to a lower amount of withdrawal during the first year of retirement?

I wasn’t the one that [called it] the “4% rule.” That’s shorthand that developed over time in the conversation about my research.

I raised the rate to 4.7% a year or two ago based on my latest research at that time. Since then, circumstances in the market have become unique.

My research has been based on studying rates of return and inflation. I couldn’t find anything that matched the situation we had coming into this year, with valuations at all-time highs and inflation threatening to pick up substantially. 

So I’ve suggested that [retirees] may want to be more conservative than my research had indicated was necessary.

But there are different withdrawal rates for different situations, and financial advisors need to take that into account when planning for their clients.

To what retirement investing situation does the so-called 4% rule apply?

It’s based on a tax-deferred portfolio, like an IRA, not a taxable account. And it’s based on a 30-year retirement — not 40 or 20 years. If you have those numbers, you need a different rate.

What’s the specific rate you’ve recently recommended?

I felt it probably best for people to err on the side of conservatism just in case we get a new worst-case scenario.

The historical worst case [started] in 1968 [and lasted for a number of subsequent years]. There was a bear market and high inflation.

Now, if people want to take a few tenths off 4.7% and take it down to 4.5% or even 4.4%, I wouldn’t argue. But they need to keep a close eye on how inflation goes.

I’m not reducing the rate to anywhere near some forecasts, like 3% or the high 2%’s. It would take a real catastrophe to get to something that low. But I think lowering it a little is prudent right now.

Wade Pfau, professor of retirement income at The American College of Financial Services, told me in an April 2020 interview that an investor “taking a modest amount of risk” should be withdrawing only 2.4%. Your thoughts?

I honestly don’t know how that could be possible unless things get much worse. I respect Wade, but we have a parting of visions [here].

I haven’t seen a combination of market conditions that would require such a low withdrawal rate. 

If we had 15 or 20 years of inflation, maybe that would justify it.

Still, high inflation is a big problem now. Just how big a problem is it, do you think?

If the Fed can’t get inflation under control in reasonable order, we may face a situation in the markets that may be more severe, which might eventually lead to a lower withdrawal rate than the 1968 worst-case scenario I had discovered. 

Why did you increase your recommended rate from 4% to 4.7% a few years ago?

When I wrote my book [“Conserving Client Portfolios During Retirement”] in 2006, I added asset classes to my research that raised it to 4.5%. Then I added more asset classes a couple of years ago and made it 4.7%. 

I felt pretty comfortable with that until we started entering this period of high inflation. It’s a huge threat to retirees.

What are the implications?

Inflation forces you to increase your withdrawals, which are kind of locked in. Once you get a period of inflation, you’re not likely to get a period of deflation to offset it.

So you’re going to be stuck with high withdrawals for the rest of retirement.

Where do higher interest rates come in?

I don’t normally look at interest rates in my research other than how bond returns are affected.

We’re in a period of rising interest rates, and probably both stocks and bonds will do poorly. This doesn’t happen that often. 

I’ve seen plenty of days in the market now where both stocks and bonds have gone down together. It’s kind of frightening.

Do you take ever-rising high health care costs into consideration?

I don’t look at the profile of individual expenses because they can vary so much.

My study is: How much can your portfolio withstand before it starts to buckle?

My research is [analogically speaking]: “How much milk can you get out of a cow [while] keeping the cow alive?” 

I don’t focus too much on what you do with the milk after the cow gives it.

So think of your portfolio as a cow: You want this cow to last for 30 years, and you want to know how much milk it can give without running out.

What asset allocation do you recommend for the type of portfolio we’re discussing?

We’ve had a bad start to the year. So far, it’s the worst-ever start for a 60%/40% portfolio. I think it’s down something like 10%. It’s really rare to see a 60%/40% portfolio get hit that bad. 

But it could get a lot worse.

What’s a prudent asset allocation for retirees, then?

I recommend that people find some risk management tools that are reliable, maybe a service such as the one I subscribe to, to protect their nest egg.

What do you use?

InvesTech Research. They adjust equity allocations based upon their perception of risk in the market. They have their own proprietary set of indicators. 

What’s InvesTech saying now?

They’re recommending that you should be at about 55% of your normal allocation of stocks. So if you normally allocate a 60%/40% portfolio, you should reduce stocks to 33%.

I’m personally lower than that because I’m more conservative. 

Some would call InvesTech’s approach market timing. Thoughts?

This isn’t market timing but risk management. Market timing is when you try to sell everything at the top and buy everything at the bottom. No one in creation can do that reliably.

InvesTech’s work is a series of incremental changes to asset allocation during the market cycles. They’re very alert to the market changes and what opportunities there are for investors. 

There’ll be a time to load up on stocks. But I don’t think now is the right time.

What about an allocation to bonds?

I would cut your bond allocation at least in half.

You’ll [likely] have a very large amount of cash that isn’t earning much. But as interest rates continue to rise, bonds will move forward too.

Having that cash is the right strategy now. Wait for better values in both stocks and bonds, and then put the cash to work.

What about buying CDs?

CD rates are becoming more and more interesting as Treasury rates go up as an alternative to cash.

You might be able to get, say, 2% on a two-year CD. So you may want to start building a CD ladder with some of your cash. At least you won’t be earning zero.

Do you think buying an annuity at this time is advisable for asset protection?

Annuities have their place for certain clients with certain requirements. If they’re really afraid of running out of money, a decent annuity could make sense, absolutely.

In today’s environment, should people delay retirement by working longer?

I’m not a financial advisor anymore. I have my little bailiwick: retirement [portfolio] withdrawal.

What brought about your creating the “4% rule” in the first place?

In the early ‘90s, I was a new advisor in my 40s with clients about the same age who were about 20 years from retirement.

They were starting to ask questions about how much they should save. The biggest question of all was: “How much can I take out when I’m retired so I don’t run out of money and still have a decent lifestyle?”

I couldn’t find answers anywhere in all the books and materials. So I started plugging in numbers and used databases. 

That’s where it all began. 

What’s your take on cryptocurrency as part of a retirement portfolio?

It’s OK to keep a very small portion — maybe 1% or less — of your assets in crypto, like a Bitcoin fund.

Frankly, I don’t understand all the risks that go with digital currencies, but [crypto] makes sense because [for example] it’s not subject to [fiat currency] abuses that [have occurred].

Do you invest in crypto?

I had a percentage in Bitcoin but sold it last month because it’s been too closely correlated with growth stocks, and I wanted to reduce the percentage of growth-stock influence in my portfolio.

Probably I’ll be back into crypto at some point.

You became a financial advisor in 1989. It wasn’t your first career. Why did you choose financial services as your second?

I was originally trained as an aerospace engineer at MIT and hopeful they would have a program where you could go to Mars, Venus, Mercury and around Jupiter. 

But of course, that never happened. I was so disillusioned that I didn’t [want to] get a job as an aerospace engineer [after all].

Instead, I went into my family’s soft-drink [bottling] business. That was a long way from Pluto!

What brought you to financial advisory?

When we sold the business, I had some money and was either going to pay someone to manage it or manage it myself.

I decided that if I managed it, I could make that the cornerstone of a financial planning business. I really enjoyed investing. 

Who are the market experts that you most respect and follow the most?

Michael Kitces, Jonathan Guyton, Wade Pfau, David Blanchett, Warren Buffett and a variety of [other] experts that I’ve tracked over time, like Stanley Druckenmiller and Paul Tudor Jones.

Why should financial advisors follow your recommendation about the withdrawal rate from clients’ retirement portfolios?

It’s based on more than 90 years of historical data. In 90 years, we’ve encountered a very wide spectrum of financial events — stock market crashes, wars, depressions, recessions, panics, financial crises.

Everything is possible. So I think that’s a good guide.

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