Eye Opening Interview with Bill Bengen, 4% Rule "Creator"

[bizman]

I found this interview with Bengen on the WSJ.com eye-opening to almost shocking.  

Contains this passage:

"Aside from cutting spending, retirees can try to protect their nest eggs by reducing their exposure to stocks and bonds, he said. While Mr. Bengen said he would normally invest about 55% of his savings in stocks and 45% in bonds, his concerns about both markets have left him with closer to 20% in stocks and 10% in bonds, with the rest in cash.

'I’m uncomfortable holding that much in cash,' he said. But with the Federal Reserve announcing its intention to aggressively raise interest rates, 'it’s not a great time to invest in financial assets,' said Mr. Bengen, who said he plans to buy stocks if the market drops significantly and stocks become cheap."

Cut Your Retirement Spending Now, Says Creator of the 4% Rule
www.wsj.com/articles/cut-your-retirement-spending-now-says-creator-of-the-4-rule-11650327097?mod=markets_lead_pos10

I have to say that with everyone holding so much cash and rather bearish, it makes me a bit itchy to put some to use.  But where exactly?

Edited to add:

I don't know how to type a URL and have it go directly to the correct place apparently.  Sorry for any trouble finding the article.

[Deleted]

I find your summary shocking myself. Retirees come in all ages - haven't read article - paywall. I am amazed at the going to cash move by so many. I can't do it. I have my allocation plan and am sticking to it. Including international. The next few years I see as a test of efficacy for my plan. How does it do in a "real" market. I have some time to adjust if needed. For Bengen to advocate this is bizarre. Thought he had bad years factored in. He must find this period truly exceptional - which it is - a true sea change. One I would argue we clearly saw coming as of late 2020. As far as what to buy? I would look at value funds - true value funds - large and mid cap. I would buy some international. If gold/oil/nat gas tanks for one of the myriad of reasons it does some times, I would - and will be - a buyer. I would buy some well priced growth - I have been adding to my Google stake (my focus on cloud) when it drops below 2550 (but my base is much lower so don't know I would start a position - higher rates = higher multiple contraction - higher volatility = opportunity). I have a shopping list too - EMR, DEO and TGT are high on it - but too pricey. They always come around. Might add to PFE and VZ if either gets around 48. One place I nearly agree with the summary - 10% in bonds - towards the later part of the year once we get clarity if we have a Fed funds rate going above 2% or not. You've been to this rodeo before. No one knows when this ends or how.

I imagine Mustang will comment on Bengen.

[steelpony10]

bizman ,

        The way around bad markets is a third dedicated investment area. I used growth stocks, bonds and a 50% income area which worked from 1982-2017 for our parents. I was tipped off by one of my veteran mentors during stagflation. Of course back then they mostly used utility stocks.

          Long term the 3 growth stocks, AAPL, INTC and MSFT saved the day but steady dependable income at least slows the bleeding during market lulls. They carried about 10% cash for 35 years. Following the same basic pattern it continues to work fine for us. We currently carry about 7% cash. Funny the author market times and disregards compounding the greatest wealth builder over time just like many posters creating tremendous long term invisible losses much greater then recurring temporary pull backs.

[bizman]

Apr 20, 2022 9:39:45 GMT @slooow said:

I find your summary shocking myself. Retirees come in all ages - haven't read article - paywall. I am amazed at the going to cash move by so many. I can't do it. I have my allocation plan and am sticking to it. Including international. The next few years I see as a test of efficacy for my plan. How does it do in a "real" market. I have some time to adjust if needed. For Bengen to advocate this is bizarre. Thought he had bad years factored in. He must find this period truly exceptional - which it is - a true sea change. One I would argue we clearly saw coming as of late 2020. As far as what to buy? I would look at value funds - true value funds - large and mid cap. I would buy some international. If gold/oil/nat gas tanks for one of the myriad of reasons it does some times, I would - and will be - a buyer. I would buy some well priced growth - I have been adding to my Google stake (my focus on cloud) when it drops below 2550 (but my base is much lower so don't know I would start a position - higher rates = higher multiple contraction - higher volatility = opportunity). I have a shopping list too - EMR, DEO and TGT are high on it - but too pricey. They always come around. Might add to PFE and VZ if either gets around 48. One place I nearly agree with the summary - 10% in bonds - towards the later part of the year once we get clarity if we have a Fed funds rate going above 2% or not. You've been to this rodeo before. No one knows when this ends or how.

I imagine Mustang will comment on Bengen.

Hi Sara,  

First of all, I think I've found a workaround by just typing the article's title Cut Your Retirement Spending Now, Says Creator of the 4% Rule into Google.  I think it might work through them even if you don't subscribe?

The other thing is, I wouldn't call my post a summary of the article.  Because of copyright laws and I assume forum rules, I didn't think I could or should copy the whole thing, hence the attempted link.  In the article, there was a lot of talk of cutting spending, and the comments about Bengen's portfolio moves were at the end of the article.  He wasn't really directly calling for everyone to follow his lead.

As I mentioned above, the fact so many have big cash positions and are bearish does make me a bit itchy to put some money to work just from a contrarian perspective.  Interesting times indeed.

[saratoga]

I have about 20% of my portfolio in TIAA Real Estate and TIAA Traditional and not much 'cash' left after paying taxes.  The rest of my portfolio consists (mostly) of equity funds and prwcx.  I have a pension and drawing near maximum SS.

[Mustang]

The Paypal is blocking me from the article. But would be interesting to see why he has gone to cash. In his original paper he used two asset classes: U.S. large cap stocks and intermediate-term U.S. government bonds and had a maximum safe withdrawal rate of something like 4.15% (rounded to 4%). He later increased it to 4.5% by adding small caps. But, he was not taking 4.5% from his own portfolio. He used 3.5% because he didn't need the money.

Back in January 2022 Bengen said the 4% Rule should now be the 4.7% Rule. To get to 4.7% he added more asset classes: U.S. small caps, U.S. microcaps, U.S. midcaps, international stocks and U.S. Treasury bills. He said his new asset allocation is 11% in each stock class plus 40% in intermediate-term Treasuries plus another 5% in 3-month U.S. Treasury bills. www.investors.com/etfs-and-funds/retirement/retirement-savings-4-percent-rule-401k-ira/

As I said it would be interesting to read why he has run to cash. Perhap it provides enough income. Perhaps his view of the future has turned south. Retiredat48 pointed out in another thread that looking at historic data (Bengen's research) is backward looking. He makes a good argument about how things are different this time. big-bang-investors.proboards.com/thread/1400/allocation-balanced-funds-separate-stock?page=1&scrollTo=18735

But I'm not just reading about research based on historical data. There have been a lot of research lately using Monte Carlo simulations. A lot of it published in Morningstar. In general Monte Carlo simulations are random computer generated retirements (typically 10,000 or more). The flaw is that the researcher's inputs can lead to very different results and some of the simulated retirements can be at the extreme edge such as an entire decade of losses. I have read that many analysts believe that a 70% probability of success is acceptable. But as Kitces puts it. That does not mean a 30% chance of failure. It means there is a 30% chance that adjustments will be needed.

John Rekenthaler wrote (The “Math for Retirement Income Keeps Getting Worse: Revisiting the 4% Withdrawal Rule,” Morningstar, October 8, 2020) that in 2013 he thought everything was OK. He now thinks we are in changing times. He compared a 2013 retirement to a 2020 retirement. He said in 2013 the yield on treasury bonds was 3.6% and inflation was 2.3%. That made the real return 1.3%. In 2020 he said that yield was 1.4% and inflation was 1.7%. That made the real return negative. He showed that a portfolio of 100% treasury bonds might run out after 24 years.

That was not a surprise. Modern Portfolio Theory shows that 100% bonds has an unacceptable level of return/risk and all of the studies (Bengen, Trinity, Pfua) show that 100% bond portfolios have had unacceptably low historical success rates. Pfua’s update showed a 44% success rate.

As for stocks, Rekenthaler said in 2013 the price/earnings ratio of the S&P 500 was 17. In 2020 it was 27. According to the Shiller CAPE (Cyclically Adjusted Price Earnings) ratio he was using that meant the market is overvalued, that prices are too high and a correction is coming. Using Buffet’s forecasting formula he tested the 4% Rule using a portfolio of 50% S&P 500 stocks and 50% treasury bonds and it lasted the entire 30-year payout period. In spite of the eye catching headline, he proved it was successful.

Another Morningstar analyst (Amy Arnott, “Will the Real Retirement Income Number Please Stand Up,” Morningstar, March 3, 2021) using Monte Carlo simulations and a different set of assumptions found that the 4% Rule had an 86% probability of success. Not bad considering many think 70% is acceptable but she seemed to be shooting for a 90%.

Two other Morningstar analysts, Chistrine Benz and John Rickenthaler (“What’s a Safe Retirement Spending Rate for the Decades Ahead”, November 11, 2021), were also shooting for 90%. They included their assumptions in the report: equity returns 6-11%, fixed income returns 2.0-3.5%, inflation 2.1% and a 30-year payout period. Here is a comparison to Pfau’s historical data findings reported earlier. The top number is for a portfolio that is 75% stock, the bottom 50% stock. I thought it was interesting that for the Monte Carlo simulations that for every payout period the portfolio with the most bonds had a higher initial withdrawal rate.

                                     Initial Withdrawal Rate
Payout Period           Monte Carlo            History
15-years                     6.0%/6.4%             6%/6%
20-years                     4.7%/4.9%             5%/5%
30-years                     3.2%/3.3%             4%/4%
40-years                     2.7%/2.8%             4%/3%

The authors said the initial withdrawal rate for a 30-year payout could be increased from 3.3% to 3.9% by reducing the probability of success to 80%. They also said lower than inflation annual increases would increase the safe withdrawal rate.

I am sure changing the input for inflation to 8% would drastically change the output but no one expect 8% over the entire 30-year payout. Most of the things I've read expect inflation to be back down in a couple of years when the supply chain problems get worked out.

I agree that this situation is different but I have other sources of income and can ride out a down turn. Unless I get different information I'm pretty much staying course.

[galeno]

We start our year every April 15 with 5% cash. Our term = 30 yr.

Our port yields ~ 2%. We use a 4% AWR. So every year or TWO on April 15 we sell some combination of equities or bonds to get back to 50/45/5.

Right now we're at 53/42/5. If equities get to > 55% on Apr 15 we'll sell stocks and buy bonds. If they get to < 45% we'll sell bonds and buy stocks.

[Chahta]

I posted this on another topic as a contrarian view (holding bond funds vs. selling). I picked it up over at MFO from a contrarian there. There are plenty of other folks that are not buying in to selling to cash. Bond OEFs are like CEFs but paying lower yield as steelpony10 does. Having said that I am somewhere in the middle. Some bond funds I won't sell and some cash for bonds later. Of all the advice given by financial advisors to keep clients from panic selling, this seems to be one of those times. But a healthy cash position is not a bad idea here for gaining some leverage down the road. Just an opinion.

The primary focus of this forum and others is capital growth not how can my portfolio provide an income stream for me in retirement.

[chang]

Apr 20, 2022 12:48:29 GMT Chahta said:

Of all the advice given by financial advisors to keep clients from panic selling, this seems to be one of those times.

The strange this is, panic selling has actually been the right thing to do, on the various occasions during the last year or so when I did. We're in uncharted territory here.

(My definition of "panic selling": looking at the chart of one of my holdings, which I haven't checked in a long time, and assumed to be a safe, "sleep easy" asset; and seeing a sharp plunge and/or increased concavity [rate of descent], and yelling "what the f*** is going on?" and entering a sell order without any further analysis or thinking.)

[bizman]

Replying to Mustang ,

You obviously know a lot more about Bengen than I do. And I wish everyone could see the whole article because there is a lot of nuance and detail that is hard for me to summarize without quoting practically the whole thing.

The gist, as I can distill it, is that 8.5% inflation, if it sticks around for a long time increases the risks a great deal. As you mention, the article goes into him having modified the 4% rule to 4.7% in the past:

"Mr. Bengen’s latest revision doesn’t necessarily mean going below 4%, he said. That is because the 4% rule hasn’t really been the 4% rule for some time. His original research was based on a portfolio with 55% in U.S. large-cap stocks and 45% in intermediate-term Treasury bonds. Since 2006, he has revised that portfolio to add international stocks and midsize, small-cap and microcap U.S. stocks as well as Treasury bills. That raised returns and supported a safe withdrawal rate he increased to 4.7%. Given the challenges of making forecasts right now, Mr. Bengen suggests cutting spending, if possible. New retirees with highly diversified portfolios that would normally support a 4.7% withdrawal rate might want to start around 4.4%, he said."

He goes on to mention that high valuations (he cites 36 times CAPE, about double the historic average) usually requires a bear market to restore valuations and so we could be looking at a long period of subnormal returns. He also cites a chance of a long period of high inflation such as the period from 1965 to 1981 as a big risk. Again he recommends cutting spending above all.

It didn't really seem to me that he was table pounding and saying everyone should do what he is doing. But I was very surprised at his asset allocation. I didn't post the article to advocate his actions, just to enable discussion on something I found very surprising. Sort of like if you found out that Jack Bogle was really heavily invested in hedge funds or something.

I guess it just goes to show that even experts are purely rational only up to a point. It's one thing to say what the average person should do, but even the "best of us" may actually do something idiosyncratic and different with our own money.

What do I know, but I think your final summation makes a lot of sense:

"I am sure changing the input for inflation to 8% would drastically change the output but no one expect 8% over the entire 30-year payout. Most of the things I've read expect inflation to be back down in a couple of years when the supply chain problems get worked out.

I agree that this situation is different but I have other sources of income and can ride out a down turn. Unless I get different information I'm pretty much staying course."

[Deleted]

Article on cited article -

www.newsmax.com/finance/investinganalysis/retirement-savings-4percentdrawdown-rule-inflation-outliving-savings/2022/04/20/id/1066422/

So - I don't know. I 100% agree about bonds. He's 9 years into retirement and protecting the nest egg in an unpredictable rising rate environment. If I were 9 years into retirement I might do the same.

[Chahta]

Where is Bengen on holding a couple of years worth of cash to tide you over? Why is that concept so ignored? If a retiree needs to cut spending what kind of retirement is that? Seems like a part time job would be better.

As an aside interesting that Newsmax has a financial dept.