BiggerPockets Money Podcast - 153: Bill Bengen (The Inventor of the 4% Rule) Talks Retirement, Past Crashes, and How You Can Withdraw Even More!

Episode Date: November 30, 2020

He really is the man who needs no introduction (but here’s one anyways). Bill Bengen, the inventor of the 4% rule (and personal finance hero of Mindy & Scott) stops by the Money Podcast to talk about how he calculated his famed 4%, how he managed his client’s portfolios, and how the 4% has aged throughout the past three decades. In his Original Article from the Journal Of Financial Planning, October 1994, Bengen outlined a groundbreaking calculation: a 4% withdrawal rate from your retirement accounts is all you need to comfortably retire (if enough is saved up). Bengen was hit with praise and criticism, but is still applauded to this day for having such a simple yet crucial metric for knowing how & when you can retire. Using over 200+ retirement account portfolios spanning decades of time as research, Bengen still says with confidence, the 4% rule is a winner! He has the proof and we couldn’t agree more. Whether you’re a few years or a few decades away from retirement, this episode features life-changing advice from one of the leaders in financial research. This is an episode you won’t want to miss! In This Episode We Cover What the 4% rule is How Bengen came up with the 4% rule and why it stands the test of time How inflation becomes the “thief in the night” for many investors The best (and worst) times to invest How to stay the course during financial downturn Which asset classes boost great returns and withdrawal rates Steering clear of “1 more year syndrome” The importance of rebalancing your portfolio How to not accumulate too much wealth for retirement Why everyone needs to learn how to be a saver, so they can enjoy life! And So Much More! Links from the Show BiggerPockets Money Facebook Group BiggerPockets Forum Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to the Bigger Pockets Money podcast show number 153, where we interview the father, the inventor of the 4% rule, Bill Bagan, and talk about safe withdrawal rates from the man, the myth, the legend himself. As you lengthen the time horizon, you start out at 4.5% for 30 years, and you go to 40, 50, and finally, what I call the Methusel client, who's going to live forever, still is 4%. It approaches a minimum of 4%. doesn't go below that. And that is a worst case scenario. That's if you're retiring into a time where there's high inflation and terrible bull markets. Four percent, I think you can do better than that if you're careful about managing your investments and choosing a good time to retire in terms of market valuations and inflation. I don't see why 5% is not feasible or even higher. Hello, hello, hello. My name is Mindy Jensen. And with me, as always, is my 4% Rule Evangelist co-host, Scott Trench.

Oh, what a, what a safe intro for this particular show, Mindy. Can't go wrong with that. Can't go wrong with that. Nope. Scott and I are here to make financial independence less scary, less just for somebody else. And show you that by following the proven steps, you can put yourself on the road to early financial freedom and get money out of the way so you can leave your best life. That's right.

Whether you want to retire early and travel the world at the 4% rule, go on to make big-time investments in assets like real estate or start your own business. will help you build a position capable of launching yourself towards those dreams. Scott Scott, Scott, we have Bill Bangan on the show today. He invented the 4% rule, which is kind of the cornerstone of the entire Phi movement. And once I knew he was coming on the show, I asked our Facebook group what questions they had about the 4% rule. So a lot of the questions that we asked today come directly from you, the listener. Bill easily answers your questions like the absolute rock star that he is. That's right. We had a really fun.

episode here with Bill. He knows this stuff. He invented it. He pioneered it. He's evolved it. It's like, here's the math. Here's what it is. Here's my lane that I'm an expert in. And let's go to town and and, you know, beat up all the naysayers. So, you know, this is where, you know, me and Mindy, if someone says the 4% rule, it's being questioned, no, it's not. We're pretty comfortable with the 4% rule here. We've done the math. We've talked to the originators now of the rule, both Bill Bangin and then I wouldn't say Michael Kitsis is an originator of the rule, but he's arguably taken some of that work from Bill and evolved it and gotten into even more detail than the original research. So between the two of them, Bill Bagan and Michael Kitson,

I think you can learn a tremendous amount about an easy button way to manage your portfolio and think about the world of retirements, right? There's all these layers you can bring in besides stocks and bonds. Oh, you have an easy button. You got it just for me, when I used it the next time. I have an easy button, Scott. Oh my God. That was easy.

She got an easy button because I use it all the time. Okay. Okay. Okay. Okay. I see how it is. Look, if you're going with the easy button retirement portfolio of just stocks and bonds,

this is the expert. This is the guy who knows how to do it. This is the guy who invented and did the original research to figure out exactly. what you need to retire. He's also totally up front in this episode today that, hey, if you're layering in things like real estate or small businesses, those can easily impact your retirement dates, but those are going to be things that you're going to have to understand and know about

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indispensable for me over over 10 years. Kickstart your well-being journey with your first audiobook free when you sign up for a free 30-day trial at audible.com slash BP Money. William Bankin, inventor of the 4% rule, welcome to the Bigger Pockets Money podcast. I am jumping out of my skin to have you here today with us. Great to be here. In 1994, you published an article called Determining Withdrawal Rates using historical data.

And this, despite the slightly dry headline, was the most fascinating article I've read in my whole life. Okay. It must have been fascinating some people who I got pretty close to some death threats from some people who were very unhappy with the conclusions I reached in that article. They wrote me very nasty letters. Well, that's unfair. First of all, didn't you use math to come up with your conclusions?

Apparently, that's not sufficient for some people. Math does not lie. Two plus two is always four. Well, those people were wrong. So the initial article is just absolutely fascinating. I read it a few years ago and then I reread it again today in preparation of this conversation. And it occurred to me as I was reading, every person that I have ever talked to who has argued with me about the validity of the 4% rule has never read that article. Ah. Every argument that I have heard from somebody saying, you know, oh, well, the 4% rule doesn't account for this, or you can't do that, or it's not going to last, or blah, blah, blah, blah, blah. I'm like, oh, you should read the article because every point that you just made is answered. Bill knew that you were going to ask that question way back in 1994. He predicted this, and he has an answer for it.

If you're listening to this episode and you haven't read the article, I strongly suggest you read it. If you Google William Bangan 4% rule, you will find a link to the article. original article on Google somewhere. Bill, in your article, you kind of have a framework for addressing the problem, which that people have around, how much do I need to retire, right? Which is the central question here. And your framework, I believe, has four components to that. One is the size of the pile of money that you've got, right? The second is the amount of, the amount you're going to withdraw. Well, I guess there's five components. The amount you're going to withdrawal from that pile on a regular basis, and then how inflation, stock market returns,

and bond returns impact how big that pile needs to be in order to sustain your desired withdrawal rate. Is that right? Can you walk us through why you kind of thought about that with that framework, or if I'm maybe misinterpreting and you have a different lens? No, that was the initial framework. And actually, there are a lot more factors than those four. For example, if you feel that you want to leave money to your errors after you pass away, You have to specify that, and that, of course, would reduce your withdrawal rate. And that's important consideration. How often you're going to rebalance your portfolio?

That doesn't seem like it's a very important issue, but that can significantly increase your withdrawal rates, believe it or not, if you, instead of follow the conventional wisdom of once a year rebalance, you know, maybe every three years, every five years, let your profits run, so to speak. So at that time, back in 94, which seems like an awfully long time ago, I was looking at, I was trying to identify what I thought were the most important factors that people would need to look to to solve this particular puzzle. And those are those, as you mentioned, the four most important that leapt out to me. I added more later on.

And then I came up with that number of four and a half percent, which I can remember the moment I was sitting at my computer and I entered it and all of a sudden all the portfolios survived 30 years. And it was a shocking experience. I said, I'm here. I've got a number. I know what it is. it's 4.5% and it's a lot lower than I thought it would be because conventional wisdom at that time was much higher or much lower depending upon how you invest it. But that's what I came up was. And I was a pretty exciting moment in my life. So I think it's fascinating. And the reason why it's

so important to have found that number is because when you can identify that, you can look, the goal is if you go too low on your safe withdrawal rate, you're building up a stockpile that's too big. and will delay your retirement by a large amount of time. If you go too small, you're at risk running out, right? And so that's why that's at the highest level, if you're listening, the staggering importance of you discovering this number here, this 4%, 4.5% number, would you say 4.25? At the time was around 4.15.

I rounded off to 4.2 because I didn't want to give the impression was a very precise calculation. You know, these things are subject to change. But you're right. And that that's a worst case scenario. And when I, you know, in the later years, I continue to research, I found that there were individuals who retired who could have withdrawn as much as 13 percent, believe it or not, in very fortunate circumstances.

And the average long term was 7 percent. So what caused it to go from 7 percent, the long term, over just down to 4.5? Well, the person retired in 1968 faced a perfect storm. You had two terrific bare markets back-to-back and 60. $19.737.74. They were big. And then inflation came in. And inflation is a thief in the night for retirees because it forces them to increase the redrawls every year. And then it locks that in. I mean, stock market, full, bear markets, they come and go. You're here. You lose some money. Then you make it back. But when you have high inflation and you're increasing withdrawal rate, that's locked in for all your retirement. So it's really a scary prospect to face high inflation during retirement. Yeah, so in your article, you point out that the period in 1973 and 1974 is actually worse than, for example, the Great Depression for retirees because of that inflation component. Could you kind of walk us through how you thought about that? Yeah, sure. The Great Depression was very interesting because it was a deflationary period. The first three, four years, if you retire, let's say 1929, let's say the stock market crashed today. I think I'll retire. and you went to the next four years of a terrible bear market.

We lost 90%. But your withdrawals, because of deflation, were coming down by 10% a year for each year for four years, and they, to a large extent, offset the stock market losses that you incurred. As a result, Great Depression was not the worst-case scenario. It was the high inflation of the 70s, which holds the record down. Yeah, I want to come in here and read, this is almost verbatim from the original that you wrote.

It said an analysis of a retiree with $500,000 retiring in 1929 shows his portfolio dipping to or sees his portfolio dipping to a low of $200,000. If he converted to 100% bonds in 1933, his funds would run out in 17 years. 25% stocks runs out in 20 years. 50% stocks runs out in 27 years. But if he stayed in his original. 75% stock portfolio, he would have $1.2 million in 1992, assuming he was still alive. And this is the part that I love the most. If he converted to 100% stocks in 1933, he'd have $42 million in 1992.

Well, that would have been a nice reward for extreme bravery because 1933 was a tough time to go 100% stock, that took four years of miserable performance. You know, how do you? How do you? get over that, the best time to invest is likely to be right after the worst time to invest. In 2008, when the stock market crashed, if you put money into the stock market, you saw some pretty amazing growth. In March of 2020, if you pulled all your money out as it was crashing and then you didn't have it back in there, it was going, like marched right back up. What, in weeks? Yes. How do you advise a client who is freaking out about the current? stock market because, and this is a great time to say my little disclaimer, past performance

is not indicative of future gains. But how do you advise somebody to stay the course when you could have just a horrible, this guy in 1929 lost $300,000. He lost most of his savings. How do you advise them to keep the course? Speaking metaphorically now, because I have no clients, of course, I'm retiring myself. But if I did have a client, I'd tell you. them at that point, stocks very cheap. And when stocks are cheap, it's always a great time to buy stocks. No matter what your fears, what your lizard brain is telling you about the terrible things that are going on in the world, you should just take the money and put it in there because they will eventually bottom and you'll do extremely well for a number of years.

You mentioned earlier that you identified more than four things besides inflation, the things we discussed, but the inflation, the size your portfolio, the return of stocks and return of bonds. Have you in future years been able to identify ways to increase that safe withdrawal from that 4.15% that you mentioned earlier to a higher number? And if so, what are some of the things that you found that people can do to retire faster? Sure. Absolutely. Well, that 94 was baby steps for me. I was working with only two acid classes. I was working with large company U.S. stocks and U.S. Treasuries. Then about a few years later, after that, I added small company stocks into the mix, and they dramatically improved the picture. They actually raised a withdrawal

rate to about four and a half percent. And that's using a modest amount of small company stocks. If you really want to go strictly by what happened historically, there have been periods of time when you could have gotten 25% withdrawal rates just by using small company stocks. I know that sounds absurd, but that's what's happened historically. So that's an asset class that's worth looking into having your portfolio because they boost returns and boost your withdrawal rates as well. Let's clarify for the listeners. What do you consider large companies and what do you consider small companies? Ibbotson, Morningstar, Ibbotson has a database and for them, you know, The large companies are the mega large companies, a company who's many billions of dollars.

You know, I think generally small companies are those with market capitalizations of less than one or two billion dollars. In today's terms, that's a small company. One of the things that really annoys me on a regular basis, frankly, is when folks say, yeah, the 4% role, it doesn't apply in this, it doesn't apply to that. It's not good for early retirees. So, for example, I just turned 30 years old. recently. And I created a position of financial independence. And I considered myself financially free the

moment I hit the 4% rule when I had 25 times my annual spending for life. Your research really works on that 30-year timeline. I realize that in some cases, you'll deplete the initial reserve and you'll end up after 30 years with less overall wealth. You start for the million dollars, withdraw at that 4% rate. You might end up with less wealth at the end of 30 years. But you'll, but you don't run out entirely. For a young person who's thinking about early financial independence, how would you walk through the idea of using the 4% rule to inform their journey there? Okay.

Well, how much, you think it's what, 40, 50 years, perhaps they might be in retirement or more? Oh, I hope to live to be 100. I'll be 70 years. Okay, 70 years. I don't want to plug my book, but I wrote a book about it, and I'd recommend you get a hold of that because I went through much gritty detail in my original article, all these kinds of things. issues, but I'll be happy to tell you what I discovered. I discovered that as you lengthen the time

horizon, you start out at four and a half percent for 30 years, and you go to 40, 50, and finally, what I call a Methuselah client, who's going to live forever, still is 4%. It approaches a minimum of 4% doesn't go below that. And that is a worst case scenario. That's if you're retiring into a time where there's high inflation and terrible bull markets. Four percent, I think you can do better than that if you're careful about managing your investments and choosing a good time to retire in terms of market valuations and inflation. I don't see why 5% is not feasible or even higher. Absolutely. Yeah. And I kind of, I've researched enough of this to know that that's the inevitable conclusion. And for those who are not math nerds, there's this kind of rule of the

difference between 30 years and forever is not very mathematically significant in these types of calculations when you're looking at compounding returns and those types of things. But another item on that, and again, a big debate in our fire community here is how rigidly to adhere to the 4% rule. And there's a lot of naysayers out there. Mindy and I are on your side and completely understand the math and the research behind it and feel that a balanced portfolio at 4% is it, is it, you're ready to go. But what I love about your research is that your research doesn't, it assumes that it's just that portfolio and nothing else. There's no, adjustment for lifestyle spending in down years. There's no other sources of income. There's no social

security involved in it, right? It's just the asset class and spending from that in isolation. Is that right? That's right. That's the issue that I chose to study. I mean, other research that have looked at a lot of other topics that you talked about, but I kind of want to look. I call a retirement boy. It's like a cow. It's your retirement cow and you want to get milk for the rest of your life out of it. So, oh, I'm studying, what is the care and maintenance of this cow to last year your whole life? So you get milk, you know, right to the last breath. And I'm, the other issues I'm leaving to other people. I've got enough to study those issues, believe me. I don't know much about cows. So much. Took a lot of money. I want to tag on what Scott was just asking about, oh, I want a 70-year

retirement. He's not retiring this year. He might retire next year. Michael Kitzis wrote an article called, how has the 4% rule held up since the tech bubble and the 2008 financial crisis? And if you scroll through this article, you will come to a chart called Terminal Wealth after 30 years of following the 4% safe withdrawal rate all historical years. And he, unfortunately, there's so many years in here that the lines get kind of mixed up. But you can see that if you start off with a million dollars, in almost every case, you still have at least a million dollars after 30. years. So you've essentially not taken anything out because your portfolio has grown. There was,

I believe he said one year where it dipped below zero and that was even in 31 years out, I think. So, I mean, math doesn't lie. The people that are sending you nasty grams should rescind those because you used math and math doesn't lie. And this art, this, I'm very thankful to Michael for doing this chart because it's so easily viewable and it's so easily understood that, hey, this makes sense. This 4% rule makes sense. But even if you don't want 4%, if this still, like Bill Bangan, brilliant Bill Bengen, isn't able to convince you that 4% works, 3% in your initial study said if you withdraw at

3% every single year without fail, 50 years plus that. initial retirement account would last you. I'm going to take your word for it because I haven't looked at my original paper in a long time. I'm glad you mentioned Michael Kitsy. He's a brilliant guy, a great friend of mine. And he's right about a lot of things. If you take a look at it, how much money do most people have less?

97% of people, all retirees end up with as much money as I started with in nominal terms. In other words, almost everyone. But, you know, when inflation is eating away at that during the 30 years. So the question is, how much do you really end up with in terms of purchasing power? Well, still, 75% of retirees end up with as much as they had in purchasing power as they started. So still, it's a very high percentage. And that's using, you know, the worst case scenario. That's why, you know, there's a good case to be made.

If you can take out more and you can justify it, you should and enjoy it. We've interviewed a lot of people here over the years and really come to know a lot of early retirees. And while the 4% rules, math is very sound, and we've discussed it at length, and there's a ton of reasons to be able to be willing to rely on it, perhaps most importantly, is that most of the time, the vast majority of the time, you're going to end up with much more wealth in real or nominal terms than you started with if you abide by the rule. But in practice, we find that people still don't rely on it. People hit that 4% rule. Then they have got a cash reserve. then they might have another asset or two, and then they might have part-time work for those types of things.

And so a problem that I'm sensing that I've encountered in this world of early retirees is this, I think, abundant over-conservatism, building a portfolio and sets of income that are so far in a way more than is what's needed to sustain their lifestyles that it's delaying retirement. Do you ever wonder why psychologically a lot of people can't accept the 4% rule in isolation and rely on that without all these other buffers? And they feel they need to take out less to be safe? That's right, yes. I just think, you know, when you think about retirement, it's scary in the sense that if you start running out of money, there's not much you can do, you know, at age 85.

Are you going to become a fashion model at 85? I don't think so, you know, I'm bringing the big bucks. So I understand the reason people want to be conservative. That's why I looked at the worst case scenario, the first thing. But I don't think it's necessary to be that negative. I mean, let's say you're investor in 2009 March when the market bottomed, okay? Recently, I discovered a way to predict what your withdrawal rate should be based on inflation and market valuations at the time. It was a big breakthrough. It was based on Mike Kitsy's article. And he did it with market valuations. I had inflation. And I looked at the 2009 March

investor and I figured out he could have taken out six and a half percent very comfortably because the market was cheap inflation was low so if you retired there you could take out six and a half and probably if you're going to retire for 70 years it would have been five and a half to six so there are times if you don't want to die outrageously rich that you can do much better than four and a half percent yeah and again the the challenge I have or the frustration I have for some folks is like, hey, that's the problem is in pursuit of dying outrageously rich, you know, which is not what they're intending it, but their intent is to be conservative. The output is going to die outrageously rich and you're going to miss out on those extra

years, for example, if you hate your job, of working that job instead of retiring early, if you're not familiar and comfortable with the mathematics of these things. So this can have a real world impact on how happy people, are how productive they are in a lot of ways, if they could begin relying more on the math and understanding it more. Yeah, I agree with you. I trust the math because I've been through for 27 years, you know, and that things worked very well. Although you have to have a caveat. You have to tell people that there's a possibility. It's not a law of nature we're looking at, you know, things could change. If you got into a really bad period of very high inflation that lasted for a long time,

you know, even the four and a half percent rule could be in trouble. But I don't see that. on the horizon. I don't. Even though the Federal Reserve is trying to get inflation up there, it's not having much luck. So we'll see what happens. So I hear what Scott's saying, and I hear a lot of these early retirees or future early retirees with one more year syndrome. Oh, I just need to work one more year to really cement my position. And it's math. It's so hard to just not sit here and keep saying it's math, it's math, it's math. But this is the worst case scenario. And like you said in your most recent article,

you could have taken up to 13% in some situations. Now, unfortunately, you can't know that inflation isn't on the horizon. You can guess, you can look at a lot of indicators, but it seems that it just seems that 4%, you keep coming back to this number. And, you know, if 4% doesn't give you calm, if Bill Bangan saying that it's 4%, doesn't give you calm.

And Scott and I agreeing with him 100% because he's totally right. 3% was when you did the math, 3% every year, every time anybody retired, 50 years at least. Yeah. And I know there are people, some my colleagues who have warned about 4% being dangerous in this environment with very low acid returns to be expected. But we've had periods of time where assets have returned poorly. 1996, 1982, the S&P basically price returns zero.

It did nothing for 16 years. And we may have a period like that coming up, who knows. But once again, it's got to be a combination of really bad inflation, low returns, low returns enough for not to do it at least as far as I can see. We have a lot of folks, again, listening to our show that have other assets, outside of stocks and bonds and traditional portfolios. Do you have a framework that you apply for clients, maybe past clients, you know, I know you're retired now,

but where, hey, I've got a business income and I've got a real estate portfolio, and then I've also got this stock and bond portfolio and those types of things. And how do you think through layering those different types of assets and being conservative with all of that to get as fast as possible to the finish line? I guess my quick answer to that is,

when I was an advisor, I didn't do it. Essentially, I told them, look, whatever assets you have like that business, real estate, you understand it better than I do, you know, what the prospects are for that. I just said, let me focus here on your portfolio, which I understand something, an animal I've studied for very many years. Do you need to get the maximum out of it or not? That's the first question. If you need to get the maximum out of it, I can tell you what you can safely take out. If you need less, well, then we'll take less. And then you're your wealth is going to balloon during retirement. So I usually didn't try to get into details of clients' assets

because they understood them a lot better generally than I did. Got it. Well, fair enough. One of the thoughts I've just had as a real estate investor in conjunction with my stock portfolio is, you know, it seems to me that a real estate investor would intend to live off of cash flow after not just their financing, but their other expenses that are related to the property,

like management, vacancy allowance, maintenance, those types of things. And by doing so, you're really living off of the dividend produced by the real estate and not even counting the inflation aspect. And so in a lot of ways you can, and I don't even know, but I wanted to test this framework out on you at a high level of like, is that even more conservative perhaps than the income and drawdown on a stock and bond portfolio because I'm only spending the cash flow, for example? Well, once again, I guess it depends upon the quality of your real estate of portfolio, what you know about it and what its prospects are.

Completely different stocks and bonds, you know, different kinds of assets with different kind of track records. Real estate is so individual, isn't it, really, compared to buying an S&P 500 stock fund, which gives you a blended portfolio across many companies, and you're not worried about the performance of any one real estate or any one particular company. So unless you have a vast real estate portfolio, which you can treat as a fund, you know, I guess you just got to be sure you know what you're investing in. That's really important. Fair enough.

Okay, let's talk about withdraw. What does it actually look like when you are withdrawing these funds? When you're investing in the beginning, there's the argument for dollar cost averaging versus lump sum investing. And when we pose that to Michael Kitsis in episode 120, he said, if you've got a big pile of cash, throw it all in at once. Don't worry about the dollar cost averaging. Just put it all in now. Because in 50 years, does it matter that you bought it at 780 or 782?

No. What do you recommend for the actual withdrawing? Do you do it lump sum every year or do you do it every month or quarterly? How do you recommend that? I had clients who did all of the above. basically to their desires. You know, if you want it monthly, we'll have it sent you out monthly. If you want it quarterly, annually.

The research is based on annual withdrawal is done toward the end of the year. Okay, so that's, now some people have done research where they've withdrawn the money at the beginning of the year. And it gives you a lower withdrawal rate. Instead of four and a half, it's probably 4.2. It's just, you know, just the way the math goes. But it's up to the client, what they want to do. Probably my four and a half percent would, if they're going to be taking money out during the year,

four and a half percent might be a little optimistic for them. They should maybe work with a little lower, maybe four, four, or four or three because they're taking money out of the portfolio sooner than research expected. Okay. And why would you take it out at the end of the year? Why do you recommend that? I just simply use that. I adopted that.

I think it was based a lot of my clients retired with some substantial case. cash accounts and they used that money to start retirement and then they went into their IRAs and their other retirement accounts. So it just seemed like a reflection of what my client's practice was at the time. I could have set up spreadsheets take out monthly, but I want to tell you, my spreadsheets with one annual withdrawal or 100 megabytes, they take 25 seconds to load. And I need a much faster computer like a cray or something to get this. to the next level. You mentioned rebalancing earlier and how that can affect the withdrawal rates.

Can you walk us through kind of your thought process on how rebalancing appropriately can maximize your or reduce your safe withdrawal rate? Sure. And this is a controversial area. You know, this is kind of cutting-edge research. And I've talked to people about it in my field who don't agree with me, but haven't been able to explain why I'm wrong. Essentially, I've been testing.

People disagree with them, but they're wrong. Yeah. Well, you know, I know I'm not always right. So I'm going to listen to what folks say to me. There's a lot of smart people out there can teach me things. But essentially, I've been testing a lot of different retirement dates. I have 260 retirements between 1926, let's say, and 1991, which have 30-year time horizons. And I've been discovering consistently that if you withdraw at one year and do it each year, it does not optimize your withdrawal rate.

That if you wait for three years or five years, and it depends upon the particular circumstances, you know, you can increase your withdrawal rate by two-tenths, 25 basis points, you know, go from four and a half to four and three-quarters, which is not insignificant, you know, in the context. of things. And that's difficult for some people to accept. But that's what my research is showing. It's very consistent and I haven't completed it, but that's the indications that I have that rebalancing at a much longer interval and is commonly accepted is probably beneficial for your retirement. Fair enough. One of the concerns I have as a younger investor about bonds in general is I think we've just kind of seen like 40 to 45 years of falling, interest rates, basically. And so every time that happens, that increases the equity value of your bond portfolio, right?

Right. You know, seeing rates as low as they are today, that, you know, every time a rate is reduced even just a little bit, it gives a lot more leverage to that lowered interest rate. But it seems to me as a young investor that that can't continue forever and that rates will have to rise during a large chunk of my lifetime. Does that forecast change anything about how you think about rebalancing portals? portfolios, you're thinking through them? Or am I crazy? And I should just kind of... No, I think you have a tremendously valid point. I mean, interstates have been declining for so long.

There are a lot of people around who don't remember a period of time when they rose. I mean, 1982 is when the big decline started. It's almost 30 years ago. And bonds for years have provided income and they provided diversification. But I agree. That long game is probably over, at least for the foreseeable future, which the industry will interest rate start getting back up to closer to what we used to expect. When that happens, I don't know. But I was thinking myself that although I advocate like a 55, 60 percent equity allocation and the rest in bonds, that the next time I get an opportunity to rebounce my portfolio, you know, when there's this big stock market decline, we were almost there earlier this year. It just didn't quite come down

far enough. I might go to a much higher allocation of stocks than I would normally expect. I might go 75, 80, 85, recognize that bonds really don't contribute to anything anymore, as you pointed out. And then, you know, not hold that allocation forever. You know, stock market rises, grant, and interest rates rise, pair it back. But I think that's one time you could make a case for a very aggressive stock allocation when bonds offer so little. Yeah, and again, just if you're listening and trying to follow along here and you're not familiar with how interest rates and affect bond portfolios, if I have $100,000 in bonds, and interest rates are 1%, you know, then that's the yield, right? And if yields go down to half a percent, for example, then my portfolio has ballooned to $200,000

because people want to pay $200,000 to get a 1% yield, I can sell my bond portfolio at a half a percent yield, right? And so the challenge that's happening right now in 2020 for me to reconcile in my head is, why have bonds done so well in the last year? Well, it's because bonds were really low and they went even lower recently. And so great. I'm thinking here, like, if I've got a very low interest rate, I'm not going to get any income from that.

That's going to be meaningful to my lifestyle. Certainly, it doesn't seem like it'll be in line with inflation. And my upside is only if they continue to go down. That said, by getting out of the bonds game, we're moving away, you're losing this, like, huge leverage that's happening every time the interest rates fall further because they're lowering them in 25, 50 basis point chunks. So anyways, it's just a kind of interesting problem that I'm trying to grapple with in the context of this whole discussion about portfolio balancing.

Yeah, well, it's the first time we've really come into a situation like this. For interest rates have been this low and bonds have been that useless. One thing I just want to quantify or clarify, I wouldn't be going 85% stocks in this environment right now with the very high valuations. I'd be real careful about that. And where do you put your money in this environment? That's a real dilemma, real dilemma for folks. Yeah, well, the other one is like, is it going to be inflation, right?

It's almost like we've got this whole problem here of like, do I balance into cash? Well, no, I'm going to, I might have a lot of inflation. Do I put it into stocks? They may be overvalued. Do I put it into bonds? There's no yield. Yeah. So that's my bigger pockets.

It's really popular right now, I guess, with the real estate. Yeah, there's a lot of merit to that. So, yeah, it could be interesting with all that. I want to talk about taxed accounts because in your original article, you said, note that since we are assuming that all retirement assets are held in tax deferred accounts, capital gains taxes are not a concern. If the assets had been held in a taxable account, the conclusion might have been different, as the certainty of substantial capital gains taxes would have to be weighed against the probability of a large stock market decline and the loss of the benefit of a step-up in basis upon death. So assuming that all of my accounts are not in tax deferred, how do taxes, how do you account for capital gains taxes? You know, I did research on taxable accounts as well, and that's in the book. I don't know if I did it on any of the papers. And generally, the withdrawal rates are about 10%, maybe 15% lower. It depends upon your, you know, your effective tax rate.

So if you're starting with 4.5% you might end up with a 4% or a 3.8% withdrawal rate for a taxable account. Still okay because we talk about withdrawals from tax deferred accounts, but we don't talk about the taxes you're going to have to pay in those eventually anyway. So I think you're going to end up with about the same amount of money after taxes using those different withdrawal rates, whether it's a tax deferred or taxable account. You have mentioned this book. Can you tell us the name of this book, please? Oh, yeah. Conserving client portfolios during retirement. And I'm using this COVID experience here to upgrade that book and revise it and add a lot of new research. That's happened in the last 15 years since I wrote that book. What are some of those learnings that you're specifically interested in layering in?

The recent discoveries you're saying? Yes. Well, for a long time there, you know, we were all stuck in that 4.5% we know that road mood. We knew that was the worst case scenario. And then Michael Kitsy's, you know, had the wonderful chart, which he showed cheap stock markets you can take out more. He raised that guideline to 5% and 5.5%. But we had no process by which we could go from these low levels to 6 or 8 or 13. And just recently, using my little research as a base, I was able to.

to find a way to actually raise those withdrawal rates to the very high rates they're achieving in the past, if you're lucky enough to come into the circumstances that prevailed, you know, which is basically very low stock market valuations, which you don't have, and low inflation, which we do have. But very high valuations we have today, you know, force you down around 5%. And unfortunately, until those valuations come down, you really can't. take advantage of the much higher withdrawal rates that we were able to enjoy in the past. That was a big piece. That was the last big piece and allowed basically me to specify a whole process from soup to nuts,

picking a withdrawal rate, following your plan and monitoring, and also deciding if it's in trouble. So sometimes withdrawal plans will get in trouble if you got a little greedy with your withdrawal rates and then deciding what to do with your plan once it is in trouble. So that's all in place on writing an article for the journal financial planning where it all began, you know, years ago, and that should come out early next year and I'll lay out that whole process for the first time. Well, I mean, that's fascinating because if you're interested in early retirement and you want to spend $40,000 per year, for example, if you're using the 4% rule, you've got to build up

a million dollar portfolio, if you can get to eight with some of this timing and some of the, you know, by leveraging this research, and it sounds like there's a little bit of a timing element to it as well, that could potentially cut your portfolio needed to 500,000 in half. How many years does that shave off your timeline? I don't know, but it's a lot. It's a big deal. Yeah, I think that's very significant. That's what I'm looking at, the issue is so heavily because I'm sensitive to the criticism people gave years ago that you couldn't make too much wealth. They were right. You do that. Lately, though, the criticism has been the opposite way. You can't win sometimes.

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Get tickets now. Okay, so we've talked about a lot of things here, but we haven't talked about how frequently somebody should be reviewing what's in their portfolio in general. My husband gets up and every morning he looks at the retirement portfolio, the stock holdings and all of that, because he is the biggest money nerd ever. And that gives him joy to be able to see that and know that we're on track. You don't have to check it every day, sweetie, but he does. So then there's other people who are like, I never look at it ever.

And I know there's a false, I've given this false statement many times, but like the best returns are for dead people or something like that. And when you don't look at it, you tend to do better. How often do you advise people look at their portfolios? Oh, no more than every 15 minutes. I think that's... It's a good idea not to look at it too big. I mean, I'm a once-a-day person myself, but that's a habit I develop

because I manage money for clients and had a big responsibility. I think once a month is good enough because how much do things change in a month, really? And I wouldn't do it more often than that because it can lead you into some trouble was a lizard brain kicking in and you're starting to say, oh, I better sell. This doesn't look good.

Then the market takes off the next week. That's the way markets are. Totally unpredictable. Totally unpredictable. Okay, when the crash happened in March, six months ago March or eight or whatever, we interviewed a bunch of people about early retirees about their portfolio and how they're feeling. And the mad scientist, Brandon, said, you know, I really thought I was going to.

going to be totally fine with whatever happened. And then this giant crash. And I realized that I was not as fine as I thought I was going to be. So I am not making any rash decisions right now. I'm writing down my feelings. And then when the market comes back, because he has utter faith that the market will come back, as do most of us, when the market comes back, I'm going to revisit my asset allocation based on the feelings that I have written down in real time. And I think that's a really brilliant piece of advice. So I just wanted to share that again. Yeah, self-analysis. Yeah, I think that makes sense. Yeah, take your emotions, put them down on a piece of paper, and then don't act on them. Great advice. He's a smart guy. Have you seen that happen across your clients over a period of

years where, in spite of the, you know, all of that education up front, people still panic and sell and do the wrong thing at the wrong time to blow up this formula? Yeah, I've had clients, you know, just simply take control of their portfolio and sell everything. And I remember going to a financial planning conference in the fall of 2008. Remember October and November were terrible months, 15, 20 percent down. And I was talking to financial planners. I'd got my client completely out of stocks at that time. So I was feeling pretty good.

But there are financial planners there who are literally in tears because their client's portfolios have been devastated. and they didn't know how they were able to tell their clients how to grow up with that. It's a serious problem. One of the markets declined that much and unexpected. If the markets came back, you're right. The question is, well, they always come back as fast as I have. Will the Federal Reserve always be there, you know, with QE to pump markets back up? Who knows?

Yeah, I think it's like the outlook that I think Mindy and I share is that the investment is there for the very, very, very long term. you know, and it doesn't matter if I'm buying it at 100 today or 70 tomorrow. You know, I'm going to continue to buy consistently for the long term with my portfolio outlook and stay the course on that. And, you know, in March this year, it was scary. We didn't know it was going to come back. We just knew it was tanking. But my belief was not that it was going to come back within a month. My belief was that over my methuselah lifetime of investing, as you mentioned, I will be in a better, place over the long run by continuing to apply my formula and trusting the math over the long term.

Well, you folks are in the saving phase of this problem. And I agree with the 100%. That's the way to look at it in the saving phase. When you pass over the rubicon and go into retirement, I suggest that there may be a different outlook. That amount of money you've accumulated is all you're going to have. So I would be very, very protective of that asset base at that time, and I wouldn't expose it to undue risks from very highly valued markets or from inflation. But I agree with you during the saving phase. You're doing the right thing. You need to be aggressive. You need to trust in financial investments and let it ride so you build a pile as big as possible. So let me ask you about that. There's a period between the savings phase and the retirement

phase, right, where it's not a light switch. It's a I'm thinking about, I'm planning it, I'm going tease into it. No, I'm not. Yes, I am, that we've experienced with a lot of folks. Perhaps you've experienced that with your clients. How does that transition look? How do you set yourself up for a really healthy transition with your portfolio there from a thought process perspective? That's a complex issue. It depends on, let's say you're 100% stocks at age 60 and you're saying five years, I'm going to retire. I might say, well, you know, we're getting to a 60-40 portfolio at age 65. You're at 100% stocks now, why don't we just knock, you know, so many percentage of stocks each year and transition phase into that ideal portfolio? That's one way I've done it with clients.

And once again, it depends on market outlook, you know. If you're age 60 and it's 2000 and the tech bubble is happening, maybe you'll say, why don't we do 60% now, you know, and conserve some of that stuff? So it's a complex issue, really tough. would tend to look at it some kind of phase in. Kind of like reverse buying in. You're accumulating capital gradually. In the original article, you mentioned a 50-50 stock bond allocation, and then you looked into 0% stocks, 25, 50, 75, and 100% stocks. And in the article, you came to the conclusion that it was between 50 and 75% stocks. What are you thinking about now?

It almost seems like bonds return nothing, so you don't want those, but the stock market is so highly valued. Maybe you don't want everything there. How do you determine what's best for you? Scott is 30. I am a little older. If you're at your age, you probably don't need to worry too much about anything. We've got many years left to accumulate and just let it ride.

When the stock market crash in February, I was just 10% stocks. I actively managed my portfolio. And I rapidly moved it up to 25%. But you have to buy. When the market goes down and you're light on stocks, you have to buy. And once you end, it's blind faith. The market's going to come back, okay? Because that's always worked.

They always have. And I was looking for the market to go even lower. I would have got to 60 or 70% stocks very quickly, but it didn't happen. So I'm stuck somewhere right now about 20% stocks, 5% gold, and the rest in various forms of fixed income investments. I'm not happy about that, but I just feel that these valuations is a lot of risk. And I don't want to expose that nest egg to the big risks. Warren Buffett says, you know, first rule of investing, don't lose money,

second rule, don't forget the first rule. So you're having a very good 2020, I'm hearing, if most of that is in fixed income investments, and you bought right at the bottom of that dip there in March. Yeah, I'm pretty happy with the prices I got back in early in March, mid-March. And I was lucky a couple of years ago there were forecasting interest rates. We're going to go down to zero. So CDs were about 3% there. I bought a bunch of CDs at 3%, which really looked awful at the time, but now look pretty good

because I got about five, seven-year percent. and they're going to last a little the risk that bonds have. So, you know, I am not, I think Mindy would say she's not, you know, an expert on price levels in the stock market, for example, with those types of things. And so we passively manage our portfolios for the vast majority of them. Is that right, Mindy? Yeah, well, I don't do it at all.

My husband passively manages it, but he's always, I don't know that I could call it passive because he looks at it every single day. He's not trading. he's not like a day trader. He is. The investments, the funds are probably pastly managed, index funds or some. Index funds, but we do have some individual stocks because he is a tech geek as well and loves to research that and jump in on some of those properties or some of those companies.

I feel like I'm not in a position to be able to assess the stock markets pricing, for example, like to me, whether the stock market, again, maybe that's because I'm in the savings phase, and not the retirement phase with that. For other folks, though, who maybe are in the retirement phase, how do you, but aren't, don't have that skill set to actively manage their portfolios or take advantage of those dips in those types of things or just have their portfolio in there

and it's just a rebalancing act. Is there like a rule of thumb or something that you can do that's totally automatic to negate the need for those decisions? Well, it goes back to the research I did recently. I told you about where we, we're able to specify based upon today's inflation and today's market valuation, what your withdrawal rate should be. And historically, you know, we've got a template, let's say, from 1947,

we've had the same characteristics, same market valuation, and we use that basically to use, to measure your retirement against. And you shouldn't have to do anything. If you just want to lock in, you know, that 60, 40 portfolio and balance every three or five years, that's all you need. to do. It may get a little uncomfortable at times, but if the market performs that it has in the past, you should be okay. Inflation is the real, you know, boogeyman here that nobody can foresee, and that's the danger. Okay. Well, with that, let's go ahead and transition to our famous four. These are the same four questions that we ask every single one of our guests. Okay, yeah. And we'll get right into it.

I am so fascinated to hear what is your favorite finance book, Bill? Oh, security analysis, that great book that Warren Buffett based his career on. Classic from the 1930s, you know, I cut my teeth on that book, and I read it once every couple of years, even though I don't buy individual stocks much anymore. It's just the logic, the understanding of how markets work, you know. And Graham. Yeah. Classic. What was your biggest money mistake?

Oh, I told you how well I did with my clients getting out of the market in 2008, but I didn't tell you what a lousy job I did getting them back in after the market came back. I have to be full disclosure here. I did a poor job of that. That's because I did not have in place the methods that I have now to take advantage of lower prices. I was very scared of what was happening in the world, like a lot of people were. but I should have taken advantage of the low evaluations at that point and just held my nose and put my client's money. And it took me a couple of years.

And by then, you know, we had lost a lot of the advantage we gained and being out of the market in October, November 2008. So that was a big and very painful mistake. Love that opportunity cost. It's a great mistake. Always one of my favorites that when people mentioned that, hey, I could have done this better. Yeah, that's right. Yeah. Bill, what is your best piece of advice for people who are just starting out?

Oh, learn to be savers. You have to stack it away. And no matter what, no matter what the circumstances are, do the best job you can, put as much as you can, grit your teeth, and it'll you really enjoy it once you get on the other end of the journey. Yep. And the other end of that journey is when you have 25 times your annual spending. or can withdraw on the 4% rule. Not way past that.

I agree. All right, well, what is your favorite joke to tell at parties? Oh, gosh. Oh, I got an Abraham Lincoln joke, if you can tolerate it. Fantastic. You probably don't have many people tell Abraham Lincoln jokes. Remember where he was a young politician before the Civil War was running for the Senate, U.S. Senate, and he was stumping around the country with his opponent.

and his opponent just finished a very impassioned speech in which he called Lincoln all kinds of names, including a two-faced politician. And then he sat down and Lincoln stood up. And Lincoln yelled not a handsome man. But ladies and gentlemen, my opponent has called me a two-faced politician. I want to ask you, if I had another face, would I be wearing this one? I wish I could have been there to hear that. I wish I could have been there to hear that. He was a brilliant man, remarkable man. He was a brilliant man from my home state of Illinois. Oh, okay.

Bill, where can people find out more about you? On the internet, I have a Wikipedia page for what it's worth. That's huge. Yeah, LinkedIn. I have a small biography. If I get my book, I have some biographical information. It depends on what they want to know. Where can people find your book or when does the new updated version and work get released?

Yeah, it's currently on Amazon.com, probably down to the last 50 copies that I bought the access to the publishers after they stop publishing. And then my new book, I hope to get out sometime later in 2021, probably in Kindle, because I use a lot of charts. I love charts and I love to use color. Very expensive to do print color. But Kindle, I would think, will be still very affordable. And sorry, I just missed it. When will that come out? Hopefully later next year, later in 2021, yeah.

Okay, great. Well, we'll be on the lookout for that. And maybe when that comes out, we can ask you some more questions about some of the newer research. Love to get back with you, folks. I enjoyed this. That would be awesome. Okay, Bill, thank you so much for your time today. This was fabulous.

and I'm so happy to have had a chance to talk to you. It was a real thrill. Thanks for inviting me. Thank you for coming. Thank you so much. It was a real pleasure to learn from you and to hear you talk about this original research yourself. So what an honor and thank you very much. You had best luck to you, folks.

Okay, thanks, Bill. We'll talk to you soon. Hope so. Have a nice holiday. Thanks, you too. Bye-bye. Okay, Scott, that was Bill Benkin. What did you think?

I thought it was great. I thought it was a fun discussion to have about some of these items here. I was surprised. I shouldn't have been because that was his job. But for whatever reason, it kind of surprised me when he started talking about his active portfolio management. But, you know, I guess like if you spend, you know, decades researching this topic and you know your numbers and those types of things, yeah, you're going to actively manage your portfolio. But man, what a brilliant conversation. And, you know, great questions from us. Great answers from Bill. I just had a lot of fun today.

Great questions from you, the listener. well. That's right. You listeners set us up with really good questions. So thank you. Yes. I absolutely was delighted to have him on the show today. He knows his stuff.

He's super sharp. And you can ask him. I was actually really surprised that people were talking smack about him and saying, oh, this isn't right. It's math. How many times did I said that in the episode? It's math. You can't lie with math.

And he didn't lie with math. And look at this. Now he's saying, you know what? And he wrote an article in September. And it was for Financial Advisor Magazine. It was called Bill Bangan Revisits, the 4% Rule using Schiller's Cape Ration and Michael Kitsis' research that updated his position and said, you know what? 4% was the safe withdrawal rate, was the absolute worst case scenario withdrawal rate. In that article, he says that a lot of people can go 7 to 13%, depending on when they're retiring.

I'm still basing mine on the 4% rule and I'm going to withdraw 4%. I've got to that point. It's actually we've gotten more than that because I'm still working. But it just reinforces the fact that he's right. He's totally right. He's 100% right. And if you want to argue with him, call him up and he will tell you just how wrong you want. He's actually very sweet and won't do that.

But he's right. If you want to retire early, the 4% rule is, it should be written. in stone. Well, yeah, I think the 4% rule, by definition, finds the worst case in all of history, right? So the only way you wouldn't believe the 4% rule is if you think there's going to be a period coming up that is way worse than all of history. In that case, you might run out of money or more likely just end up with less wealth than you started with after a 30-year time horizon. But again, if you're using this, if you're listening to this and you're on the way to early retirement, what you think about is, great, the 4% rule is the worst case in history. Here's how I think

about it. Once I'm at 4%, I'm retired. That's it. I'm retired. And I also acknowledge that there's this 2% chance that I run out of money before the end of that period. And there's maybe a 25% chance that I end up in that period with less wealth than I started with. But what a great starting point for someone who is retiring early because, look, that 4% rule does not assume that you're not going to earn another dollar in your life. It assumes that you're not going to adjust your spending if there's a time that that calls for it and your portfolio begins to shrink. It assumes that you're not going to get Social Security income. It assumes all of these different things that make it incredibly, even more conservative than that. So if you're trying to think about like what is FI to me,

and you're not a real estate investor or small business owner, you're just earning money and stacking it away in stocks and bonds. The 4% rule is as good as starting place as you're going to find. There's just not going to be a more conservative, reasonable assumption with that. That said, I also acknowledge that a lot of folks go on to then build up cash piles and excess of that. They go on to buy other assets and those types of things and layer those into their calculations. So go for it. But use it as a starting point and the rule of thumb. You're free when you get to 4%.

You could be free. You can choose to stay working if you really enjoy your job. But the whole point of financial independence is to have the choices available to you. And yeah, once you hit the 4%. My super math geek, brilliant husband still was not convinced after reading all of the things. He still wasn't convinced and had that one more year syndrome. And once he finally left, he's like, yeah, just continues to grow. And yes, he's got me working, but the portfolio continues to grow without

adding to it as well. So, yeah, this is the safe withdrawal rate. And it was just so much fun to talk to Bill. Should we get out of here, Scott? Let's do it. Before we do, I want to send a huge thank you to Michael Kitsis for introducing us to Bill for Michael's brilliant research extension into the 4% rule and just in general for being a superhuman being. The notes for today's show can be found at biggerpockets.com slash money show 153. Do you know somebody

who argues with you about the 4% rule? Have them listen to this episode and have them read the article, the original article we will link to in the show notes as well. Have them read that and then have an intelligent conversation

and don't tell them I told you so. From episode 153 of the Bigger Pockets Money podcast, he is Scott Trench and I am Indy Jensen saying later, Tater.