Quantitative Easing

Bill Bengen revises 4% rule, says reduce holdings of stocks and bonds

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

“Actively manage the risk part of a retirement nest egg. Unless you’re willing to change — reduce — your clients’ allocations to reduce risk, it could be detrimental,” the 25-year-old former adviser claims in an interview with ThinkAdvisor.

But have the pandemic, falling markets and rising inflation torn the 4% rule to pieces? Barely, he said.

“We’re in a period of rising interest rates, and stocks and bonds are likely to fare poorly,” he says.

This time, the Federal Reserve “may not have the luxury” of using monetary policy to provide “a quick fix,” Bengen warns.

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

But about two years ago, it increased its suggested rate to 4.7% based on new research it had conducted.

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

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

Bengen suggests a retirement portfolio asset allocation of “55% of your normal stock allocation” and “reduce your bond allocation by at least half”.

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

Prior to becoming a financial advisor, he was president and chief operating officer of the family’s soft drink bottling business.

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

Of the 4.7% withdrawal rate revision, he notes, “I thought it was probably best for people to err on the side of conservatism just in case we got a new worst case. [market] scenario” more distressing than what happened from 1968 through most of the 1970s.

“I’ve seen a lot of days now where stocks and bonds have gone down together,” he says. “It’s a little scary.”

Here are excerpts from our interview:

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

BENGEN TICKET: My biggest concern is with buy-and-hold advisors not changing their allocation in response to market risk.

What could be the repercussions?

We are going through a period of very high risk for retirement investors. Unless you are willing to change – reduce – your clients’ allocations to reduce risk, this could be detrimental.

We are in a situation where the Fed must fight against inflation. We’ve had a series of big declines over the last 15 or 20 years, and the market has come back pretty quickly, mainly because the Fed has used monetary policy, like quantitative easing and a zero interest rate program .

Would they still do that?

They may not have the luxury to do so.

Historically, markets have taken many years to come back, as [after] The great Depression; and during the 1960s and 1970s, the markets did nothing at all. Maybe we’re headed to another [of those].

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

Actively manage the risk part. Retirees should be exceptionally careful in this environment.

What prompted you to recently revise your “4% rule” to reduce the amount of withdrawals in the first year of retirement?

I was not the one who [called it] the “4% rule”. It’s a shortcut that developed over time in the conversation about my research.

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

My research was based on the study of rates of return and inflation. I couldn’t find anything that matched the situation we found ourselves in this year, with valuations at historic highs and inflation threatening to pick up significantly.

So I suggested that [retirees] might want to be more conservative than my research indicated.

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

To which retirement investment situation does the so-called 4% rule apply?

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

What is the specific rate that you recently recommended?

I thought it was probably best for people to err on the side of conservatism just in case we had 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 of 4.7% and bring it down to 4.5% or even 4.4%, I wouldn’t argue. But they need to watch inflation developments closely.

I don’t reduce the rate to anything near certain forecasts, like 3% or the top 2%. It would take a real disaster to get to something so low. But I think it’s prudent to lower it a bit at this time.

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

Honestly, I don’t know how that could be possible unless things got worse. I respect Wade, but we have a separation of visions [here].

I have not seen a combination of market conditions that would require such a low withdrawal rate.

If we had 15 or 20 years of inflation, that might justify that.

Yet high inflation is a big problem now. How much of a problem do you think?

If the Fed fails to bring inflation under control in a reasonable order, we could face a situation in the markets that could be more serious, which could eventually lead to a withdrawal rate lower than the worst case scenario of 1968 that 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 brought it up to 4.5%. Then I added more asset classes a few years ago and hit 4.7%.

I felt quite comfortable with that until we started to enter this period of high inflation. This is a huge threat to retirees.

What are the implications?

Inflation forces you to increase your withdrawals, which are somehow blocked. Once you have a period of inflation, you probably won’t have a period of deflation to offset it.

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

Where do the higher interest rates come from?

I don’t normally look at interest rates in my research except how bond yields are affected.

We are in a period of rising interest rates, and stocks and bonds are likely to fare poorly. It doesn’t happen that often.

I have seen many days in the market now where stocks and bonds have gone down together. It’s a little scary.