Afford Anything - How I Discovered The 4 Percent Retirement Rule, with Bill Bengen

Episode Date: April 26, 2022

#377: Today’s episode is sheer retirement nerd bliss. We talk to the creator of the 4 percent retirement safe withdrawal rule, Bill Bengen. If you’re new to retirement planning, you might not yet grasp the gravity of this. Let’s cut to the chase: the 4 percent rule is one of the most revolutionary, groundbreaking insights in the field of retirement research in the past 30 years. To understand why, let’s climb in our time machines and return to 1994. Back then, many financial advisors were telling their clients that they could safely withdraw 7 percent of their retirement portfolio each year. After all, the simplistic logic went, the stock market has historically yielded between 7 to 9 percent returns, so that type of withdrawal rate shouldn’t dwindle the principle … right? ⠀ Bill Bengen, an MIT graduate and former rocket scientist, decided to build a better model. He looked at the performance of investment portfolios across 30-year time horizons, beginning in 1926. Under the assumption that the portfolio is invested 50 percent in an S&P 500 Index and 50 percent in intermediate-term bonds, in a tax deferred account, he found that retirees could only withdraw 4.2 percent of their portfolio in the first year of retirement, and that amount adjusted for inflation each subsequent year. He called this the “safe withdrawal rate” that gave people a reasonable chance of not outliving their money, based on historic performance. He published the results in the Journal of Financial Planning and caused a stir. This was revolutionary. It upended the assumptions that dominated the field at the time. And it remains a cornerstone of retirement planning to this day. We talk to Bill Bengen about his discovery – and his latest research – in today’s episode. For more information, visit the show notes at https://affordanything.com/episode377 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to any limited resource you need to manage, like your time, your focus, your energy, your attention. Saying yes to something implicitly means, turning away other opportunities. And that opens up two questions. First, what matters most? Second, how do you make decisions that align with that which matters most? How do you prioritize your priorities?

Living the answers to those two questions is a lifetime practice. And this podcast exists to explore the ways in which you can do that. My name is Paula Pan. I am the host of the Afford Anything podcast. And once upon a time, in Southern California in 1994, there lived a man named William Bangan. His friends called him Bill. Bill was born in Brooklyn.

He studied aeronautics at MIT. He wrote a big paper on advanced model rocketry, gained a lot of acclaim. He then made a career pivot. He became an executive at a soft drink company. And finally, 17 years later, having made a name for himself as an MIT-educated rocket scientist, and having made a name for himself as a high-level executive, he thought he was ready to retire. So he attempted to retire.

to sunny Southern California, and he got bored. He decided to become a financial advisor. He got a master's in financial planning, and he opened his own firm. And at that point, he started noticing what he thought was perhaps an error in judgment, one that dominated the field at the time. You see, back in 1994, many financial planners were claiming that since the stock market historically returns between 7 to 9% compounding rates on average, on a long-term aggregate average, there were many financial planners who were claiming that retirees could withdraw

and spend as much as 7% of their portfolio in retirement. And Bill had a hunch that this may be misguided, but he wanted to prove it. So he began looking at 30-year time spans in U.S. history, starting from 1926. For example, the first time span ranged from 1926 to 1955, the second time span ranged from 1927 to 1956, and so forth. He assumed that a retiree held 50% stocks in the form of an S&P 500 index and 50% bonds in the form of intermediate term government bonds, and he assumed that this money was held in a tax-deferred account. Based on these assumptions, he then asked two questions. First, what was the worst-case scenario? In this case, the answer would be retiring in

1966. The 16-year time span from 1966 to 1982 was particularly rough. Historically, that would have been the worst year to retire. Then the second question became, how much could an investor withdraw from their portfolio if they had endured that worst-case scenario? How, how much could they withdraw and still have a high degree of confidence that they would not outlive their money? That answer was 4.2% in the first year and 4.2% adjusted for inflation every subsequent year. And it was from that that the 4% safe withdrawal rule was born. The 4% rule became a groundbreaking insight in the world of retirement planning. It upended the dominant paradigm

and fundamentally changed the way that people think about how much they need to save for retirement and how much they can spend once they've retired. Under the 4% rule, to use some simple examples, if you have a $1 million retirement portfolio, you could withdraw about 4% of that or $40,000, in year one of retirement, and that same $40,000 adjusted for inflation every subsequent year. If you have a $1.5 million portfolio, you can withdraw $60,000 in year one.

If you have a $2 million portfolio, you can withdraw $80,000 in year one, and so forth. So 4% became a very simple shorthand for estimating how much you need to retire and how much you can withdraw from that portfolio during your retirement. And of course, since then, Bill Bengen, as well as other researchers, have done a lot of follow-up research where they've altered some of the variables to see what would happen. So, for example, if instead of assuming a 30-year retirement, you assume a 40 or 50 or 60 all the way out to infinity-year retirement,

how does that change the equation? or if the money is in a taxable account rather than a tax deferred account, how does that change the result? And we're going to talk about all of that in this upcoming interview. And so it is a huge honor to feature Bill Bangan as the esteemed guest on the Afford Anything podcast today. Before we get into this interview with him, I have two announcements. Number one, we have a course on rental property investing called your first rental property, we have decided to only open our doors for this course once this year. So in the year 2022, we're only admitting one cohort of students. This is a big departure from what we've done for the last three years. The last three years,

we've had a spring semester and a fall semester. This year, we're having one and only one cohort of students. So if you want to learn about rental property investing, this is your own chance this year. We will be opening our doors in June of 2022. And if you want to learn more about it, if you want all of the information, go to afford anything.com slash VIP list. That's afford anything.com slash VIP list. So that's announcement number one. Announcement number two, we've put together a free guide on inflation and recession. I know that's a topic that concerns many of you. And so we've specifically put together a five-day email series all about inflation and recession and about how those tie to the world of real estate. If you want to get

this five-day series for free, please go to afford-anything.com slash inflation. All right, with those two announcements out of the way, here is our interview with esteemed retirement researcher Bill Bagan. Hi, Bill. Hi, Paula. How are you? Doing well, thank you. I am so excited to talk to you. You are renowned for being the creator of the 4% rule. You came up with this idea even before the Trinity study. Walk us through that. How did you come up with the 4% rule? Well, it was kind of a forced necessity. I was a relatively new planner in the early 90s. My clients were coming to me and beginning to ask me about retirement. They were baby boomers, you know, in their mid to late 40s as I was. And they started

I started asking me questions like, how much do I need to save for retirement? When I get to retirement, what kind of a budget can I have? How much can I take out? And I just passed the CFP exams, and I didn't remember anything about those things on the CFP exams. So I went back to check my CFP textbooks, nothing. And there was really not much internet at that time in the early 90s. So researching things like this is a lot tougher. So I assumed then that there was nothing available.

I couldn't find anything in print. So I got out my trusty computer. and my book of rate of return data historically and set to work trying to answer the questions myself. How is it that through all of the CFP training, a question that's as basic as how much do I need to retire, didn't get asked or answered? Well, I think, you know, and this is talking 30 years ago, really we were on the cusp of people living much longer.

Prior to that, people might have lived 10 years in retirement, didn't really care very much what they took out because they're going to go through it in 10 years. But as we got into the 80, 90s, people's living longer and longer. It became necessary to ask if I need 30 years to live off on money, how can I take out safely? So it was really just starting to become an issue. And so when you began that research, how did you first approach it? I mean, was your initial approach to look at historic returns? Or was that an iteration of some first attempt to add a different approach? Yeah, basically, I wanted to see what had been possible historically before I tried anything fancier, like forecast. So I used actual data for returns,

for stocks and bonds, and for inflation, for a couple of different acid classes, starting with just a few to begin to see what kind of results I get. And over the years, I've added more acid classes and made the analysis more sophisticated. And so when you first looked at the historic data, were the patterns initially obvious, or did it take some time to sort through the noise? Well, I remember the first time I drew a chart, which essentially graphed the withdrawal rate, the safe withdrawal rate, which means if I was looking at the worst case in history, which was the late 60s for a person to retire, and it was measured against the allocation of stocks, and it was the weirdest thing because it was like a humpback whale,

where if you had a low allocation of stocks, you have a very low withdrawal rate. If you had a high allocation of stocks, you also had a very lower draw rate. And in between was kind of a golden plateau, which spanned, you know, 20 or 30 points of stock allocation, which gave you just about the same withdrawal rate anywhere in that range, somewhere, you know, between 40 and 70 percent stocks. Now, that blew me away because I didn't know what to expect. And this did not look like any shark I would have imagined. And why was that? Why was it that if you were over-exposed to stocks, it would have a similar effect to being under-exposed?

Well, when you have a very high percentage of stocks and a bare market occurs early in retirement, your portfolio is really devastated. At the other end, on a low percentage of stocks, of course, your investments don't have enough oomph to give you that higher withdrawal rate. Somewhere in between is a magic blend that gets you just where you want to be. So you're referring to sequence of returns risk when it comes to early withdrawal? That's right. And that's what I focused on early in retirement. It was only later when I took a closer look at the worst case scenario. Why was it a worst case? Why was the late 60s so bad to retire? We know we had two big bear markets back to back. And that was part of it early in retirement. But also inflation in the 70s forced retirees to increase their redrawls. And that was locked in for the rest of retirement. They couldn't do anything about it. So they were hitting both sides. They're hit on the returns, which were low, and then they were hit on expenses, which were fixed and high and still growing. When you started the research that led to the development of the 4% withdrawal rate, did you begin with the initial assumption that a person's withdrawal would be pegged to an inflationary increase, but steady throughout their retirement? And if so, why?

Well, in my initial research, I want to keep the assumptions as few and simple as possible because I wanted to do a situation that I could understand and get some, you know, revealing graphs quickly and easily. So, yeah, I assume that the first year, let's say, we take out 4%. You have a million dollar portfolio, that's $40,000. And then every year after that, you throw away the 4% figure and just give yourself a dollar increase equal to inflation in the prior year. So essentially, the person is maintaining their lifestyle over time,

because they're keeping pace with inflation. And other than simplicity of research, was there any other reason why that was the initial assumption when you began the research that led to the development of the 4% withdrawal rate? Yeah, no, I think it was basically simplicity. You can make so many different assumptions here. I mean, even the term 4% rule,

when we use that as really a mental shorthand for a scenario that involves a lot of different assumptions, which usually aren't mentioned. But I wanted to keep the number of assumptions I wanted to keep, you know, a fixed 30 years of retirement. I was working with strictly a retirement account, a tax-deferred account. I was allowing the balance to go to zero at the end of retirement. And just those very simple, straightforward things because getting the data work together and assembled was complex enough without looking all the permutations. Right, right.

And was this with a 50-50 stock bond allocation assumption? My very early research when it was just about 4%, 4.1% was I varied the allocation, you know, between 10% bonds and 90% stocks. And the sweet spot was anywhere between 40 and 70% stocks. As I started adding acid classes later, that plateau narrowed down. So it's probably somewhere around 50, 55% is what I would recommend today to folks who have a diversified portfolio. How long did you look at the data before you came up with the 4% rule? Like how much time did it take between when you were absorbing the research that was in front of you to when you were able to synthesize it? Well, it took me some weeks to assemble all the data, get an answer in the spreadsheet, set up all the formulas.

But when I did that first chart, that's when it really, it just blew me away because now I have a picture in front of me. what all these numbers mean. I still remember that moment vividly to this day. It stunned me. I think I sat looking at that chart for an hour without moving because I said, my goodness, this is what all this means. Wow. Tell me more about that moment. Sure. When you saw that chart, how did you know? Did it feel right? You know, I looked at it and I said, I wonder if that's right. So I went back and I checked all the numbers. I checked all the formulas. I checked all the relationships I created and everything checked out.

And I came to the realization that I was looking at was real. This is really what had happened historically. And I'd never seen anything like it before. So after a while, I had to accept it because, you know, if the facts are what they are, even if we're not prepared for what they are. And what did that chart look like visually? Yeah, it kind of looked like a, flattened pyramid, you know, with a plateau on top, a kind of a safe zone. That was really

surprised me that it was such a wide range that between 40 and 70 percent stocks, it did make a difference. You got 4.1 percent out of the portfolio, which I thought was really odd because, you know, that's a pretty wide range of stock allocation. But that's what it came out to be. After you synthesized this data, you created the chart. What did you do next? Who was the first person you told or the first people that you told? I had a friend, a fellow financial advisor who I'd met some years before at a nap from meeting. My name is Jim Bray. He's no longer with us, unfortunately.

I lost him a few years ago. We had discussed a lot of things, and I called him up in excitement. I said, look what I found, Jim. Jim was fascinated, and for many years after that, he was the first person I would call to tell my results because he was very thoughtful, intelligent person. And he often helped me sometimes, you know, correct the errors of approach. as I had, but he was as I was about the result. You know, it was unexpected from his perspective as well. And then what happened next? Did you publish it? Did you present it? How did you get this idea out into the

world? Yeah. I started writing an article for the Journal of Financial Planning based on that. And, you know, I did a little additional research looking at some other charts and put that together. And it came out in 94, which is, gosh, that seems so long ago. I can't believe I've been doing this for 28 years. And it got a very interesting reaction. A lot of people called me and congratulated me, and some people were not so nice. They said nasty things to me. And they didn't believe that 4% was the right number.

Did they think it should be higher or lower? Was there any kind of trend? There were two camps. There were folks who have been telling their clients for years. They could take out 7 or 8%. Don't worry. Just keep a lot of stock. in your portfolio. And there are other folks who said, well, you know, you're retired now. You

really should be much more conservative and have a lot of bonds. Don't have so much stocks. They're very volatile. Of course, my research indicated neither of camp was correct. You had to be somewhere in the middle. I imagine, given the cacophony of opinions out there, that there was also competing research, were there any particular papers that were published around the same time that had results that opposed yours? No. I only was aware of one person who published a paper in 1993 in the Journal of Financial Planning. He was starting to look at the issue, not the same way I was looking at it.

You know, he was looking kind of in intervals. But I could see people were starting to look at this issue, you know, and getting close. About three, four years later, the Trinity study was released. And that pretty much confirmed what I had discovered, which was. was good to me because my greatest fear, you know, that I had punched in a wrong number somewhere and all this was garbage and all the attention I'd gotten from people would suddenly dissolve and I'd be a pariah and not invented to cocktail parties anymore. But fortunately, I had done my research correctly and it had stood the test of time. Were you involved with

the Trinity study? No, I had no involvement in law. It wasn't aware that it was going to be released. I was glad to see it come out. You know, my philosophy is the most. more people you have in a profession doing research in a field, the better off you're going to be because they can verify each other results or point out errors. So the important thing is that the profession get it right and that we're all kind of participants in that. So did you know that it was going to be published before it was published? Wow. So you first encountered it just as everyone else did? Just like everyone else. That's right. Were there any nuances about the 4% rule that came out through the Trinity study that did not come out through your original research? In other words,

are there any layers to the 4% rule that you yourself understood in greater depth or detail once the Trinity study came out? Honestly, I can't remember. Yeah, I was a little bit surprised that the issue of the study and they didn't reference earlier research such as mine. I remember reading it. I remember having a sense of satisfaction that the numbers were about the same. But I can't recall anything that was glaringly different from what I had discovered. Of course, by that time, you know, I was further down the line with my research. I was looking a lot more variables and aspects of the problem, which I would then later publish. Tell me about some of those, some of those other variables,

some of the other aspects. Well, I had only looked at tax deferred accounts in my initial research. So since that time, I've looked at taxable accounts. I've looked at time horizons, much different than 30 years, I've looked, you know, from 10 years and on practically to infinity, it turns out as you take longer and longer during time, if you get 60, 70, 80, 90 years, your withdrawal rate reaches kind of like what's called an asymptote mathematically where it just kind of flattens out and you get to a certain level where no matter how long you live, this will be a safe withdrawal rate. It's a bit lower. It's about half percent lower, you know, than what's called a safe withdrawal rate, but let's say, you know, you want to use 4.5% for the historical safe withdrawal rate

for a 30-year person, if someone to live 100 years, it'd be about 4%, which is pretty much what the fire people are using, which, you know, to me makes a lot of sense. So you think it's appropriate for somebody who is an early, an aspiring early retiree, someone who might want to retire at the age of, say, 35, and live ideally to 100. you think a 4% withdrawal rate would be reasonable for that person? Yeah, once again, another variable is whether it's a taxable or tax deferred account. That would apply to a tax deferred account. Taxable accounts probably about 10% less than that.

So that's another thing you have to look into. We're talking what's happened historically. I don't predict the future. I basically report what's happened in the past. It's really important to understand that. Because the environment we're in today has components which have never occurred historically. combination of very high stock market valuations, very high bond market valuations, and high inflation has never existed. So I can't really say with absolute assurance that 4%, 4.5%,

whatever rule you want to use is going to hold up in these circumstances. And unfortunately, we won't know for a long time. So I would urge people to be a little cautious and conservative, you know, in their selection of withdrawal rates right now. What do you mean by a little cautious and conservative. Do you think something around three and a half percent would be reasonable? I think that's too draconian. I think four percent from a tax deferred account would take into a lot of terrible things into account. I mean, that would be worse than the 1970s, which was pretty terrible for investors. But you never know. You never know what's going to happen in the markets and with inflation. So I can't say that with 100 percent insurance. Your original research was based

around, if my understanding is correct, domestic equities and domestic bonds, how would further asset allocation, such as into international equities and bonds, or something that didn't exist back in the 90s, cryptocurrency allocation, some of these other alternative investment methods, would these impact safe withdrawal rates? Yeah. In 2006, I did another round of research where I incorporated small-cap stocks as a third acid class in addition to my original intermediate term U.S. government bonds and large-cap U.S. stocks. That raised the withdrawal rate from 4.1 to 4.5 percent. And then in the last year and a half, I added four more acid classes to that,

including treasury bills, U.S. mid-cap stocks, U.S. micro-cap stocks, and international stocks. And it only increased the withdrawal rate from 4.5. 4.7%. So I think we're starting to reach diminishing returns where perhaps, I don't know, honestly, I don't have a database for cryptocurrency. That's pretty new going back, so it's hard to figure it in. But there are a couple other classes could be used emerging markets, gold, real estate. I think even if you throw them in the mix, it's going to be tough to get beyond 5%. And I don't even know if we'll quite get there. We can make it close.

So what I'm hearing, and tell me if I'm understanding this correctly, is that with sophisticated asset allocation models, there's a likelihood that a person might be able to get up to a 4.7, 4.8, maybe 5% safe withdrawal rate at the top end. And that also at the bottom end, as a person's lifespan approaches infinity, the safe withdrawal rate asymptotically approaches around 3.5% for a text deferred account. For a text deferred account. So what I'm probably if you're going to use 4.7% as the new finding, then I would say probably 4.2% would be the, let's say the what I call a Methuselah client, somebody who lives essentially forever, would be somewhere in that range, low fours. Low fours. All right. So the range of

somewhere between 3.5 to 4.7, 4.8 with a best practice of maybe the low four, would be a generalized starting point. Probably from a tax-deferred account, it may not be a bad policy to follow in this environment because we don't know how severe this environment will be. And you don't want to run out of money. That's the number one rule. Don't write out of money.

Number two rule is don't let your retirement nest egg get crushed. On the topic of letting the retirement nest egg get crushed and on the topic of how we're in a very unique situation right now, what are some of the biggest risks that you see for today's retirees moving forward? Well, we could have a very large bare market with sticking high-level inflation, something like we had in the 70s. I'm hoping we don't see that, but that would be very difficult for retirees, extremely difficult for them to navigate.

So that's why I'm advocating caution right now, until we get a better handle on what's going to happen. You know, we've had a lot of experimentation with monetary policy from the central banks over the last 20 years. It really hasn't been reflected in the historical record yet. It will be 20 years from now, and then we'll know exactly how devastating the effects of that was for retirees. But I don't know now where that'll go. You mentioned also that we have historically very high stock valuations and very high bond prices.

What should a person do, given the fact that all assets everywhere are expensive? Well, you know, I can't advise people what to do because, you know, I'm a retired financial advisor now. I can tell you what I do. Sure. Which is about all that I can accurately represent. I use a service, which determines the level of risk in the market and adjust the stock allocation accordingly. And I'm even more conservative than that. Right now, my allocation of stocks, which would normally be 55%, is around 15%.

and maybe 5% in commodities and gold and real estate. And my bond allocation is also corresponding low. It's around 15 to 20%. So I've got a lot of cash. And it sounds stupid to have that much cash, which is yielding zero. But so far this year, a return of zero would have been pretty good, I think, for most people, all things considered, because everything's been going down. And it may continue for a while.

I don't know. I'm not a seer. I can't forecast something. But with your cash allocation, isn't the return negative seven given the inflation rate? Yes, it's a real dilemma for investors. But I think what you have to try and do is earn the safely the highest total return you can. Inflation is what it is. I mean, if I earn zero and if I've been fully invested in stocks, I would have been minus six or minus seven now, I'm a lot better off. The matter what the inflation rate is, I've preserved my portfolio. So it's a very uncomfortable time to invest. And you are 75 years old right now, if I may ask? Not quite. 74 and a half.

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companies by Fortune magazine. That's what being a fifth third better is all about. It's about not being just one thing, but many things for our customers. Big bank muscle, fintech hustle. That's your commercial payments of fifth third. better. If you were starting today, if you were 24 and a half, what would your approach be? What would you be thinking through if the, regardless of your timeline to retirement, at 24 and a half, you might not know if your retirement goal is going to be age 34 or 44 or 54 or 84 or 84.

So not knowing exactly when you want to retire, but knowing that you're going to be age 34 or 44 or 84. But knowing that you at least want some degree of financial security and stability and options, what would you do from that point forward? Well, I would advise my younger self if I have to run into myself on the street. I would save as much as I possibly could out of my paycheck because returns are uncertain. And the larger the nest egg you have in retirement, the easier is going to be. And by the, you know, a 24-year-old, who knows, they may have a life expect. see of 110, 120, you know, medical science over the next 20 years might discover some

incredible things. And they may need being in retirement, so 60, 70, 80 years. So we're looking at that, like you said, that lower that Methuselah client kind of situation, very long-lived client. They can't use that 4.7 percent rule. I got to use like a low fours number out of a tax-deferred account. You know, that means you need a pretty big nest egg if you want to have a decent lifestyle in retirement. So save, save, save. You've mentioned tax-deferred accounts multiple times. Many people now, of course, have significant amounts of money in tax-exempt accounts, Roth accounts. How does that change the picture?

The analysis is pretty much the same. I grouped them all under umbrella term, tax advantage accounts. The analysis is the same. None of the capital gains were being taxed or the income during retirement growth, so it doesn't change. It's only when you get to the taxable accounts. that things change dramatically. And can you talk about that? How do things change dramatically with taxable accounts? What assumptions do we need to make?

Yeah, well, I always assume that the portfolio will pay any taxes, investment taxes, generated from capital gains and income while it's active. So for a tax-affirred portfolio, of course, you don't have any. For a taxable account, you are paying taxes out of account, and it diminishes the size of the account over time so that you end up with a lower draw rate, of course, about 10 to 15 percent, depending upon the tax rate for the portfolio, then it would have been if it would have been a tax advantage to count. And so that's 10 to 15 percent less than the 4 percent number?

That's right. That's just a bullpark figure. It really depends upon the tax rate. It'd be like 90 percent of 4 percent is what you would end up the pocketing. Uh-huh. That's a fair approximation. What we've been talking about right now is predicated on the assumption that you are an individual planning for your own life and your own retirement.

How does the conversation change for couples who are planning for a retirement in which the spending needs will diverge based on the fact that they may have highly divergent lifespans? That's honestly a complex issue I haven't looked at. It's a very interesting question. I'm assuming some of my compatriots in the NNA and research have probably looked at it. I'm sure how I'd go about that. You know, there's so much complexity in this analysis to begin with.

For example, I assume always I'm a investor as a buy and hold investor because that's the only way I can see to analyze it in some kind of meaningful way. But obviously, people have all kinds of difference. Some people, you know, try to time the market. Some use market risk adjustments. What should their withdrawal rate be? I don't know. It's really. I just haven't looked at it.

But I'm going to add it to my list, though. It's interesting question, Paul. Are you still doing research on the note of you adding it to your list? Yeah, I am. I plan to update my 2006 book because it's outdated now. I've done so much research since that time, discovered so many new things. I'd like to get it in book form.

And that'll probably be my final contribution to the profession when I get that, our layout. I've developed a complete program, a systematic way to determine what your draw should be and how you should manage in retirement and perhaps how you should adjust in the retirement. It's important to recognize that it's just when you come out with a withdrawal rate at the beginning of retirement, it may not be into the process, just like with any other plan. If you live long enough, you'll find yourself making adjustments to adapt to changing circumstances. And that's the same thing with a withdrawal plan. You may have to make changes over time.

Can you tell us more not just about what you're currently researching, but how it was that you were led to this? You've been researching retirement for longer than some of the people listening to this podcast have been alive. Sadly true. Every researcher follows their curiosity. How has that path of curiosity morphed and iterated for you over such a long time span of successfully researching retirement? I was frustrated for many years because people are focusing on the safe withdrawal rate, okay, which is actually, based on the worst case that investors, retirees had to face in their late 60s.

It's where you got that four and a half or 4.7% of rule from. But I knew that historically, some retirees have been able to withdraw much higher rates up to 13%. And I could never determine a rational method by which one could determine what are the right set of circumstances under which you can take higher than that safe withdrawal rate. because they clearly have existed in the past. And then about a year and a half ago, I made a discovery. I realized that it was important not only to focus on returns early retirement, but inflation.

And if you look at market valuation at the time of retirement, stock market, and couple that with the inflation regime you're in, those two factors together allow you to very reliably pick a redraw rate from history that should work over your 30-year period. And it could well be much higher than the 4.7. For example, you remember the terrific bear market we had in 2008 to 2009, when the market dropped almost 60%. I determined that the retiree, who retired at the end of March in 2009, really near the market bottom, could safely take out 6.5% instead of the 4.7. Now, that's a big difference.

That's like 30% more spending for a whole lifetime. So the person who had blindly followed a 4.7% or 4.5% rule, you know, would have short of themselves. By now they would have had so much in their bank account, they're saying, oh, my goodness, why didn't I spend this to have more fun the last 15 years? So when I was finally able to determine that, that kind of like completed my research in terms of providing a complete systematic approach to managing and defining withdrawals. And it was very gratifying after all those years to finally come up with because it was purely by amount of chance. I was just playing around with things. And I had this aha moment.

And I drew another chart. I said, oh, my goodness, this is it. And once again, I sat there for an hour and a half and looked at this chart I created and said, yeah, this really works. So that's the way discoveries are. Wow. And so how did you discover that? What was the process by which you were able to come up with those numbers?

Well, I knew that inflation was definitely a factor known from the beginning because that created the safe withdrawal rate. I just couldn't see how to integrate it into the analysis. And I knew also, you know, Michael Kitsy's another advisor had discovered that market valuations had a very close correlation to withdrawal rates historically. And then I just said, gosh, let's just divide all these retirees, all the historical data into six categories, each one with a different inflation. and let's see what it does. And I created the chart, and it was astounding, you know, how well-correlated that chart was. Because if you just use stock market valuations alone, it's not enough. You get a huge spread and potential withdrawal rates, like 50%.

But adding in the inflation picture to the market valuations gives you, like, over 90% assurance that you have a good withdrawal rate that'll last year all through retirement, at least based on history. And that was a major break. through. And that really, that'll be the theme of my book. To a certain extent, you know, I know you've heard about some folks who use guardrails and an attempt to get higher withdrawal rates, people for a long time have been looking to make adjustments based on them. Gee, I'll take out less when the stock market drops. I'll take it more when it goes up. My latest discovery kind of obvious the necessity for all that because now we have a high degree of confidence that the withdrawal rate

we pick at the beginning is carefully related to market factors that truly determine your draw rate over long periods of time, and you won't need all those other. He still probably should, you know, we're reviewing it every five years and making adjustments if they're required, but they shouldn't be big adjustments. So for the average person who's listening to this, how would they put that research into action? Is there an online calculator or formula or a spreadsheet that they can use? No, because it's complex. A lot of it is based on charts and not formulas. For example, I've developed what I call templates where if you know the market valuation

today and you know the inflation rate today, it's probably occurred sometime in history. And we know there's a withdrawal rate associated with that. So I can produce a chart. Let's say somebody retiring today, maybe he matches circumstances that occurred in July of 1966, create the chart for the July 1966 retiree and who use that as a template in each year compare the progress of his portfolio against this investor from, you know, for 50 years ago. So it's complex. I wish I'm going to put all that in my book as much as I can to help people, you know, understand and possibly utilize it. But this kind of research ultimately involves

a fair amount of complexity. So it's getting harder and harder to explain simple like the 4% rule. You say that. Everybody says, that's great. But I'll say, wait a minute. There's this. Are you surprised by the amount of attention that the 4% rule has gathered? Do you think that it's appealing because it's such a simple heuristic? Yeah. I really had done the research for my own clients. Initially, I hadn't thought about, you know, using it and giving a broader exposure, and then it just became obvious that I should.

People ask me to. And, of course, when you say 4% rule, that's really a mental shorthand for a lot of stuff behind it. But, yeah, I'm surprised that 28 years later that people are still interested in the topic and I'm still discovering new stuff, which is pretty exciting for me. Do you think that it gets misinterpreted frequently? Yeah, and in a number of different ways. Some people assume it's 4% of your portfolio starting value every year instead of, you know, giving an inflate just every year. Some folks have recently come out with much lower safe withdrawal rates, you know, in the Tuesday. and threes, and I had the opportunity to look at one of those research reports recently,

and the reason they came out with something the low threes is that they're assuming very low rates of return for stocks and bonds for a 50-year period. And that's never happened in history. Not to say it couldn't happen. I'm not a forecaster once again. But, you know, when you assume very, very low withdrawal rate of, I'm sorry, rates of return for a very long period of time, sure, you're going to end up with a low withdrawal. Is it realistic? I can't say. I'll leave it up to the individual to decide that.

The 4% rule is sometimes referred to as the Bingen rule. Do you like that? How does that make you feel? I'm a little embarrassed. You know, once again, when I do this researcher, I'm not doing it for reasons of ego. I'm doing because I feel I have something of value to give to the profession, a profession which over many years gave me an awful lot. I don't need. gratification, ego gratification, don't seek it. Never asked anyone to call it to bank and rule. If they want to do it, that's fine, but not necessary. I just feel like I'm one of a long line of person that's been doing research, and there will be many after me, and we're all part of a parade that's designed to help the profession get it right. That's what counts. You mentioned that the profession has given a lot to you. What has the profession given you? What have you learned through this field?

Oh, financial planning was immensely gratifying me because I felt every day when I went to work, I could make a difference in people's lives directly, very significant. Because essentially I was learning a lot about a lot of complex areas that the average individual just doesn't have time to explore it and understand. And this was important to them, was their life, you know, what they hoped to accomplish in their life. It was a thrill, it was a great privilege to be able to be part of that profession. and offer people advice and hopefully help enrich their lives. And I've had people, you know, clients, after I retired, call me and tell me, thank you so much for doing this for me because, you know, it helped me do something that I didn't think I'd be able to. And that's so enormously gratifying.

I can't even express it in words. Tell me about your own retirement. What happens when the retirement researcher retires? How did you know it was time? Well, I guess you can call retirement. I've been awfully busy. I'm not following the traditional role where I'm paying bridge and tennis and golf every day. But I retired and I used it to 4.5% rule.

And over time, because the stock market's done so well, of course, my withdrawal rate is probably down to 3.5% now if you look at it. And I'm sure that's happened with a lot of other people. But then again, we may have a big bear market coming. So that may change at any time. But I had a lot of confidence that my research that I had a good parameter to use that I did. and it's work. Well, one more satisfied client, me. How old were you when you retired? I was 66.

And how did you know that it was time? You know, I think a year before that, I was still maintained to people that I was going to do financial planning and die with my boots on, so to speak. I was not. And then something changed. I got a grandson. And I was spending, you know, like a lot of solo planners spending a lot of time, 50, 60, hours a week in my office, I began to get the feeling that I wanted to have time to do other things. I wanted to be a good grandfather. I wanted to try my hand in writing a novel. I want to do other

things with my wife. And one day I woke up and I said, okay, this is it. You know, I put 25 years in. It's time to go. So I contacted a third-party firm and put my firm up for sale. And, you know, in six months, I was out. You mentioned that once you update your book, that will probably be your last research-related contribution to the field of financial planning. What else do you look forward to doing? Well, I'm always involved in one project or another. Right now in the community I live, which is an active adult community that's been around for about 30 years, there was a mistake made earlier to divide it into two communities, each with its own HOA, Homeowner Association.

and that's turned out to have disastrous consequences. So I'm leading the movement in the community to merge those two into one. And it's a race against time. I have a low tolerance for bad situations. When I see something, I want to change it if I can't. So we've started and we're building an organization and so far we're coming along. It's going to be a long-term thing. It's going to be five, six, seven years before we get this done.

It's very important to people to get done. So you're focused on local community involvement? For now, yes, that's right. There's a whole bunch of other things. I'm trying to learn my guitar better. I'm trying to become a better golfer. And I'm involved with bridge and astronomy and tennis. I just started taking some pickleball lessons.

So there's always something new and exciting to do in life. It's a wonderful experience. I don't understand it all completely. But I do know it's meant to be seized and gotten the most out of. Excellent. Well, we're coming to the end of our time. Are there any questions that I haven't asked or any messages that you'd like to emphasize? No, you've asked an awful lot of very thoughtful questions. I appreciate that. It certainly made me think hard about the answers. But once again, I just tell people, don't let your nest egg be crushed retirement because we're not sure in the next bull market how quickly it will recover. and if inflation continues to be sticky, you know, you really got to be careful.

Well, thank you so much for spending this time with us. Where can people find you if they'd like to know more about you and your work? They can buy my book, which, you know, it's out of print now, conserving client portfolios during retirement, but there are used copies available, and that gives a summary of my research up to 16 years ago. And they can look for articles that have appeared into journal financial planning and financial advisor magazine over the last six or seven years to get an update. But that's when I get the book updated because I need to get all that stuff in one place,

you know, in some sort of a rational format instead of helter-skelter all over the literary world. Excellent. Well, thank you so much. My pleasure. Thank you, Paul. This Giving Tuesday, Cam H is counting on your support. Together, we can forge a better path for mental health by creating a future where Canadians can get the help they need when they need it, no matter who or where they are. From November 25th to December 2nd, your donation will be doubled. That means every dollar goes twice as far to help build a future where no one's seeking

help is left behind. Donate today at camh.ca slash giving Tuesday. Thank you, Bill. What are some of the key takeaways that we got from this conversation? Here are three. Number one, sometimes when you see the right answer, You just know. You don't doubt that the answer is correct because you spent a long time looking for it.

And when you finally find it, you have a very deep sense that, yes, this is right. That's how Bill Bengen described the moment when he sat back and saw the research for the first time. Well, it took me some weeks to assemble all the data, get an answer in the spreadsheet, set up all the formulas. But when I did that first chart, that's when it really, it just blew me away because now I have a picture in front of me showing what all these numbers mean. I still remember that moment vividly to this day. It stunned me. I think I sat looking at that chart for an hour without moving because I said, my goodness, this is what all this means. Sometimes there are moments in life where you just know. You stumble upon an answer and the moment you

see that answer, the moment you come in contact with that answer for the first time, you immediately and deeply know it to be right. I felt that way 12 years ago when the term afford anything popped into my head for the first time. And I remember that moment clearly. I will never forget where I was at that moment, but the phrase afford anything entered my mind and instantly, instantly, I knew that that was the name that I had been searching for, the name that I was going to give to the message and the philosophy that I was going to spend the rest of my life, sharing with the world. And you may have had that experience at different times in your life.

Maybe when you first arrived in the city that you knew you wanted to live in, maybe when you first picked up a textbook in the field that you wanted to study. maybe when you first picked your puppy out of a shelter, there might have been times that you felt that. And if you haven't, that's okay too. The key takeaway here is simply that those moments, if we are lucky enough to experience them, those moments are anchor points in which we know that what we found is right.

So whether or not you've ever experienced that, be open to it. And if you do experience it, trust it. That's key takeaway number one. Key takeaway number two. And here we get directly to the overt topic of this show, personal finance. Key takeaway number two is that 4.2% is considered to be a safe withdrawal rate for the money that's in your tax-deferred retirement accounts. In fact, Bill says if you're planning only a 30-year retirement, you may be able to push that up as high as 4.7 or more. depending on your asset allocation, etc.

But as your retirement approaches infinity, the safe withdrawal rate asymptotically approaches 4.2% for money that's in a tax deferred account. And about 10% less than that, meaning 10% of 4% less than that, for money that's in a taxable account, and that's based on historic performance. I've looked at time horizons,

much different than 30 years. I've looked, you know, from 10 years and on practically to infinity, it turns out as you take longer and longer during time, if you get 60, 70, 80, 90 years, your withdrawal rate reaches kind of like what's called an asymptote mathematically where it just kind of flattens out and you get to a certain level where no matter how long you live, this will be a safe withdrawal rate. It's a bit lower. It's about half percent lower, you know, than what's called a safe withdrawal rate. But let's say, you know, you want to use 4.5% for the historical safe withdrawal rate for a 30-year person, if someone to live 100 years, it'd be about 4%, which is pretty much what the fire people are using,

which, you know, to me, makes a lot of sense. Bill also indicates that there is research that shows that you could go up to 4.7%, but, again, this is based on historic performance, and we don't necessarily know that the future will reflect the past. And so given the current market conditions, given that all assets, equities, bonds, real estate, every asset is high,

plus inflation is high, there is a level of uncertainty in the market. And that's something to factor in as well when you're determining your safe withdrawal rate. If you're going to use 4.7% as the new finding,

then I would say probably 4.2% would be the, let's say the, what I call a Methuselah client, somebody who lives essentially forever, would be somewhere in that range, low fours. Low fours. All right. So the range of somewhere between 3.5 to 4.7, 4.8 with a best practice of maybe the low fours would be a generalized starting point.

Probably from a tax-deferred account, it may not be a bad policy to follow in this environment because we don't know how severe this environment will be. As a reminder, if you want to learn more about it. inflation in the year 2022 and the risk of recession in 2022. We've created a free five-day email series that deep dives into this topic, inflation and recession, and how both of those relate to investing, specifically how they relate to real estate investing. Free five-day series. To get it, go to afford-anything.com slash inflation. That's afford anything.com slash inflation. So that is key takeaway number two. Finally, key takeaway number three,

remember that 4.2% is a safe withdrawal rate, not the optimal one, meaning that you may be able to spend more. There is a more complex calculation that considers both market valuations and inflation, and that more complex calculation can create a different withdrawal rate that still gives you a high degree of confidence of not running out of your money during your lifetime based on historic performance. This all comes from very recent research that Bill Bagan has performed. I was frustrated for many years because people are focusing on the safe withdrawal rate, which is actually based on the worst case that investors, retirees had to face in their late 60s. It's where you got that four and a half or 4.7% of rule from. But I knew that historically,

some retirees have been able to withdraw much higher rates up to 13%. And I could never determine a rational method by which one could determine what are the right set of circumstances under which you can take higher than that safe withdrawal rate. Because they clearly have existed in the past. And then about a year and a half ago, I made a discovery. I realized that it was important not only to focus on returns early retirement, but inflation. And if you look at market valuation at the time of retirement, stock market, and couple that with the inflation regime you're in, those two factors together allow you to very reliably pick a withdrawal rate from history that should work over the 30-year period. And it could well be much higher than the 4.7. For example, you remember the terrific bear market we had in 2008 through 2009 where the market dropped almost 60%.

I determined that the retiree who retired at the end of March in 2009, really near the market bottom, could safely take out 6.5%. Instead of the 4.7, now, that's a big difference. That's like 30% more spending for a whole lifetime. So the person who had blindly followed a 4.7% or 4.5% rule would have shorted themselves. By now, they would have had so much in their bank account, they're saying, oh, my goodness, why? Why didn't I spend this to have more fun in the last 15 years? So when I was finally able to determine that, that kind of like completed my research in terms of providing a complete systematic approach to managing and defining withdrawals. And it was very gratifying after all those years to finally come up with because it was purely by amount of chance.

I was just playing around with things. And I had this aha moment. And I drew another chart. I said, oh, my goodness, this is it. And once again, I sat there for an hour and a half and looked at this chart I created and said, yeah, this really works. So that's the way discoveries are. Now, there isn't a formula for this, which means there aren't online calculators for this. But there are charts and tables that you can reference, which will soon be published when he updates his book.

So at the moment, for the latest in research, you can look at academic journals, you can look at the journal. You can look at the Journal of Financial Planning. You can look at articles published by other financial advisors like Michael Kitsis or retirement researcher Wade Fowl, both of whom have also been previous guests on this podcast. You can search our podcast archives for links to their episodes, their websites, their books, their research. But there are new discoveries being made in the world of retirement planning, the field of retirement planning, constantly. And so wide lens, at the 30,000 foot view, the big takeaway is don't become overly reliant on a simple heuristic that is simple and designed to be safe, but not necessarily optimal. The 4% rule caught mass market popularity in part because it is such a simple mental shortcut. It's kind of analogous to the popularity of the 1% rule in rental property investing.

It's a simple mental shortcut. It's easy back of the envelope, back of the napkin math, and that has a particular appeal to people. But the fact that something is easy to calculate on the back of a napkin does not make it the final word. It makes it purely a starting point. and it is a starting point that itself is far more nuanced than many people initially believe. As Bill Benkin described, one thing that people often miss about the 4% rule is that it's meant to be increased with inflation each year. Many people don't know that. They believe that this heuristics states that you withdraw a flat 4% every year, when in fact that's never been the case.

And beyond that, people also miss the new. nuance that a safe withdrawal rate is designed for the worst-case scenario. But if you're trying to find a withdrawal rate for something other than the worst-case scenario, well, then that's a fundamentally different question with a different answer. So wide lens, big picture, the takeaway here is to not be overly reliant on these simple heuristics because they provide an easily accessible starting point, but remember, it is only a starting point. And simple or safe is not the same as optimal. Those are three key takeaways from this conversation with Bill Benkin, the creator of the 4% Safe Withdrawal rule.

Thank you so much for tuning in. My name is Paula Pan. This is the Afford Anything podcast. Don't forget to download our guide to inflation and recession in the year 2022. You can get it by going to afford anything.com slash inflation. That's afford anything.com slash inflation. It's a free five-day email. series. Don't forget also that we are launching our course, Your First Rental Property. We're offering this only once this year. So if you want to enroll in this course, this is your one and only time this year when you'll be able to do so. We're opening our doors in June. And to learn more, you can go to Afford Anything.com slash VIP list. That's affordanything.com

slash VIP list. Thanks so much for tuning in. My name is Paula Pant. This is the Afford Anything podcast. Make sure you're following us in whatever app you're using to listen to this show so you don't miss any of our amazing upcoming episodes. Please, while you're in that app, leave us a review. And please share this episode with a friend or a family member. Thanks again for being part of this community. And I will catch you in the next episode.