Ready For Retirement
Ready For Retirement
You Could Spend WAY More Than the 4% Rule Suggests (Says the Man Who Created It)
Financial planning’s most famous guideline just got an upgrade. In this exclusive interview, James speaks with Bill Bengen—the MIT-trained engineer turned financial advisor who created the 4% rule—about his updated research and what it means for retirees today.
Bengen reveals that diversification alone can raise the safe withdrawal rate to 4.7%, and under certain market conditions, retirees may be able to withdraw 6%, 7%, or even 8% annually. The original 4% rule was never meant to reflect average scenarios. It was built from the worst-case retirement timing in modern history. Even then, a 4% withdrawal strategy lasted 30 years. Bengen’s findings show that across history, the average sustainable withdrawal rate has exceeded 7%, suggesting many retirees could be living more cautiously than necessary.
In this conversation, James and Bengen discuss the two factors that matter most when determining safe withdrawals: inflation expectations and stock market valuations at retirement. They also explore why downturns don’t usually require major changes to a plan, but inflation threats demand immediate attention.
Rather than focusing on a single “magic number,” Bengen emphasizes a process-oriented approach—one that starts with your circumstances and considers the economic environment before setting a withdrawal strategy.
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The 4% rule is the foundation of so much of what we do as financial advisors, as retirees to see how much can we actually spend in retirement without running too high a risk of running out of money. But the 4% rule in many ways is outdated and today I'm talking to the author himself, where he says that the actual rate that you can pull from your portfolio is closer to 4.7% or higher, based on a few conditions. That's what we're talking about in today's episode. Today, my guest is Bill Bangan. He is a former aeronautical engineer from MIT. He's a former financial advisor, he is the original author of the 4% Rule White Paper and he is out with new research showing us how you can live a richer retirement if you tweak a few key things with your portfolio and with the way you determine withdrawal rates. Enjoy today's conversation with Bill Bangan. Bill, thank you so much for being on the show. Really appreciate you making the time and excited to learn a lot from you today.
Speaker 2:Well, thanks for the invitation. I'm looking forward to it.
Speaker 1:One of the things that you're, of course, very well known for is this whole 4% rule. I think some people take for granted as just a rule of thumb that's existed forever. But it hasn't. That was based upon a lot of research that you've done. That you did back in 1994. You have a new book, new research that I'm really excited to talk to you about because it's going to really enhance the way people can think about their retirement and what their retirements can look like. But before we jump in there, I'm curious to hear from you, prior to this seminal research that you released back in 1994, how are people approaching retirement planning in terms of figuring how much they could pull from their portfolio?
Speaker 2:You know it was an issue that wasn't addressed in the literature at all. I know because I searched for it from magazines and professional journals and ended up talking to some of my local financial planner friends in San Diego area and most of them admitted they didn't have any sort of scientific basis for doing you know. They just tried to guesstimate. That wasn't good enough for me or my clients, so I decided I'm going to study it myself.
Speaker 1:And what was the point in which you decided to do that? You know, it was after one single conversation. You said this doesn't exist, I'm going to go do it. Or was it? Was there some pivotal moment where you said I'm going to take on this mountain of research and jump into it?
Speaker 2:I saw more and more clients asking me the same questions how much do I need to save for retirement, how much can I spend in retirement? And it became a roar a background roar, and I know I didn't have answers, so I was desperate. That's why I decided to go ahead and find out for myself.
Speaker 1:Yeah, and I'm grateful you did. I know a lot of great people are grateful you did, because that has become a core part of retirement planning today. One thing that I often hear people say is hey, the 4% rule works, we're going to take that money out, but there might be a market downturn, so I think I'm going to back off a little bit. Or I'm concerned about inflation, so I'm going to back off a little bit. And what I don't think they fully appreciate is the context in which you did your research. It wasn't the sense of if everything's good, you can spend 4%. You referenced the big dipper, the little dipper, these various market events. Do you mind even just giving a background for the context in which this research was done, because I think that helps put people's minds at ease that it could work then. It can work now.
Speaker 2:Yeah, what I was trying to identify in that first paper back in 1994 was the one retiree who historically had the worst experience of them all, and then whatever withdrawal rate would have worked for him then should work for everyone else, because he had the worst experience and it turned out to be the person who retired in October of 1968, which is, you may recall, this preceded two major bear markets back to back which were devastating, and then 10 years of very high inflation which forced people to increase withdrawals every year at a very high rate, and that was a terrible time of just devastated portfolios, the 1970s, and I hope we don't see that again anytime soon.
Speaker 1:And as you're doing that, I think that one thing I just want to add color around for people listening is you know we talk about inflation today and is it higher than it's been? And certainly higher than it's been in a decade or two, but the context that Bill's talking about, inflation was in the double digits for a prolonged period of time. You have this culmination of high inflation and deflating asset prices, not a good situation. Yet that 4% rule was your way of saying if you're not exceeding this initial withdrawal rate from your portfolio, even in that period of time, given a fixed duration of retirement assets could last for that time period.
Speaker 2:Yeah, it's a worst case situation. People need to be in time themselves, and we haven't seen a repeat of those circumstances since then. So naturally, today I'd be recommending higher withdrawal rates than that to anybody retiring today.
Speaker 1:Yeah, and I want to jump into that in one second because I think the good news just a teaser for everyone and the books in the background. And, by the way, get the book A Richer Retirement Bill. We're going to talk about more of that in a second here, where the good news is a lot of people can spend more than 4%. But before we go there, did anything surprise you about that initial research you did on the 4% rule or did it confirm what you already felt to maybe be true?
Speaker 2:No, always were surprised. I think the first big surprise I had when I was trying to test how your safe withdrawal rate varied with the asset allocation of portfolio. I thought it'd be a curve starting lower left and going up. The more stocks, the better Turns out. It's more like a mesa. It looks more like a mesa where there's a flat spot in the middle between like 45 and 75% stocks, where you essentially get the same withdrawal rate no matter which allocation you choose. But if you go too much in stocks or too little in stocks, your withdrawal rate drops off interesting.
Speaker 1:So, in other words, too aggressive or too conservative, you can't make the case. You can't just assume that this 4% rule is going to magically materialize, regardless of how your investments are positioned.
Speaker 2:You need to have a significant portion of your investments in growth investments, stocks and the like.
Speaker 1:And so, with that as a foundation, what was the ideal allocation from just stocks to bonds allocation for someone that did want to spend 4% throughout retirement?
Speaker 2:In that first paper I was working with just two asset classes intermediate term US government bonds and large company US stocks and, as it turned out, for those particular two asset classes, they combined to produce this particular withdrawal rate to produce this particular withdrawal rate.
Speaker 1:And with that withdrawal rate, what's changed? Because if I'm remembering correctly in your initial white paper, the 4% rule in your words is that's kind of worst case scenario. If you are the unluckiest retiree and you retire right in a period of high inflation, down markets, bear markets, 4% is the most. But if you take a random year like 1975, I think it was about 7.5% that that retiree could have spent. And when you quantify that that's not just oh cool, you could have spent more. If you have a million dollars in your portfolio, you could have spent an additional $35,000 per year throughout your retirement. How much more meaningful would your retirement be? How much richer would your retirement be if you did that? What does your new research show as you kind of solve that and amplify that?
Speaker 2:What I've done, as I've made my research more sophisticated, I've increased the number of assets, so now I'm up to seven from the original two in the portfolio I'm including US micro cap stocks, us-cap stocks, international stocks and also treasury bills, and that bumps the worst-case number up to 4.7%. But we have to keep in mind that historically, over the last 100 years, the average for all retirees has been 7%, slightly over that. So getting 4.7, pretty meager compared to that.
Speaker 1:So getting 4.7, pretty meager compared to that, and so was it that alone. Was it purely the fact that you've diversified the asset classes that led the 4% to turning into the 4.7, or were there other factors on top of that? No, it was primarily the addition of asset classes. Just there wasn't a long enough track record of these other asset classes to use them. Or was it just start? I won't say simple, because there's a lot of research that went into it, but what was the reason for that?
Speaker 2:uh, I I want to keep things simple. To start, I took two assets which I thought would probably be in everyone's portfolios and which had good returns, uh for their respective types, and use them, uh as a proxy for a diversified portfolio.
Speaker 1:But we know you know, when you increase the number of assets and diversify, you increase your returns. That's been established for a long time and subsequent to that you introduced a small cap allocation to the research and you saw that could increase the returns. What's now different about your new book, your new research that investors should know?
Speaker 2:Sure, I had started with a 4% rule, but I also explained in some of my papers that many investors retirees are able to access much higher withdrawal rates 5, 6, 7, even up to 15%, depending upon the circumstances in the retired. So that I was looking for a way to be able to scientifically connect market circumstances with those higher withdrawal rates so we could have a basis for saying, no, don't take 4.7, you should take 6.2 now, or something like that. And about four years ago I had a breakthrough. I learned that putting inflation first, ahead of big stock market declines, and organizing the data in that structure developed patterns which I could use then to, if you will, so-called forecast and predict what your safer dollar rate should be.
Speaker 1:And what do you mean by that? Do you mean, for example, if I look at inflation today, that should be the thing I start with when deciding how much I can, or a client can, withdraw from their portfolio, or monitoring inflation throughout retirement?
Speaker 2:Yeah, I think there are two factors. One is inflation you want to develop an estimate of what inflation will be like the first 10 years of your retirement, which can be very difficult, admittedly, ideally if you just pick a number for all of retirement. And the other one is stock market. Valuation is very important. When stock markets are expensive, we're probably close to a major bear market, and major bear markets early in retirement can devastate your portfolio. So if you have cheap stocks and you have low inflation, you're in nirvana. If you have the opposite, you're in trouble.
Speaker 1:And so that much wider range, the 4.7 to, I think, what do you say? 7%. That's based upon a mix of what is inflation today and valuations of equities as well.
Speaker 2:Yeah, I mean the person retired, if you remember, at the end of the great financial crisis in April of 2009,. I calculate there'd probably be success with an 8% withdrawal rate and that's the highest withdrawal rate we've had in the last 30 years, because stock markets have been so expensive For a few months. Stocks actually got cheap, which was a wonderful feeling, but not today.
Speaker 1:And even if we look at that time, so an 8% that would be from the bottom of the Great Recession on. Is that what you're saying Right? Got it, which seems to align with the research well of prior to that downturn? That same dollar amount of withdrawal probably would have represented somewhere in the four and a half to five percent range of the prior portfolio value. That simply took a big beating. Is that fair to say?
Speaker 2:I don't know if I characterize it that way. Fair to say, I don't know if I characterize it that way. It's just that you know, clearly, things had changed in my perception of what was important in the problem, and having a way to that was a great moment for me when I was able to develop that tool, because that was a missing link. I really had no nothing to tell people in terms of choosing a high withdrawal rate, except give them a chart saying, oh, if you take this rate, 50% of investors have been successful, otherwise 75%. And that's really no way to run a railroad. You know, clients deserve more certainty than that.
Speaker 1:Yeah, one more question on that, and then I want to shift the focus a little bit. Just even application for a lot of people. And where does? I don't want to call it theory, because it's very real, it's very real research. But where does that meet how people actually draw money from their portfolio throughout retirement, just out of curiosity? What drives your continued research? Is it simply playing with the numbers, playing with the modeling, or is it conversations? You're having things, you're seeing. What are the things that lead to those breakthroughs that you have?
Speaker 2:It's a combination of things. I've got a lot of folks write me with good ideas and I'm developing a very long research list. There's just a lot of areas that I want to explore more thoroughly to understand. One of the most important I think right now is I've been using a 55-45 or 60, 40 portfolio. Is that the best Early indications are that a higher stock allocation would benefit most investors, particularly those who retired near the beginning of a bull market, and they could get significantly higher withdrawal rates than the ones I've been using. So I'm going to spend a lot of time in that and see if I can upgrade the withdrawal rates scenario.
Speaker 1:What's the biggest mystery that's yet to be solved when it comes to this topic? What's the next big challenge you're going to try to? That's a good question.
Speaker 2:I would like to understand a little bit more about that rising equity guide path system which basically assumes you're going to have a lower allocation, equities that begin in retirement. You actually increase it during retirement. When I tested it against all my retirees, they all had a bump to their adult rate upward bump, some more than others. Don't fully understand why that works and I would like to explore that in a lot of different scenarios to really appreciate how that can benefit people, and a lot of different scenarios to really appreciate how that can benefit people.
Speaker 1:Love it when your research and the work you've done meets practical application. Because your history is as a financial advisor, you are, of course, what I would consider a much more. You were an aeronautical engineer prior to founding your own financial advisory firm, so the rigor and the level of detail that you approach things with, I would say, is very unique. But where do you find the research? Where are there challenges or are there constraints? Where that meets practical application for a real life retiree?
Speaker 2:Well, I try to emphasize developing means that are readily accessible and usable by the individual and that aren't too mathematically complicated. I don't think really complex mathematics fits our current state of our profession. You know, we just don't have any underlying theories for economics or for finance, like physics has laws of motion. We don't have those. So everything we do is empirical. We have to look at test results, what's happened in the markets over time, and then try to analyze what patterns are there and then try to use those to extrapolate into the future.
Speaker 1:So, if I look at a couple of specific examples, someone that retires at 62, but Social Security doesn't start until age 70. There's this dynamic of you're going to withdraw more than 4% up front or 5% up front, but maybe far less on the back end. Or even research around retirement spending as a whole that doesn't necessarily increase in lockstep with inflation, but people tend to spend less over retirement, maybe until latter years of their life where medical expenses really increase their overall costs. Is there a way, or is it even necessary, to try to marry that research and that reality with, I don't want to say, a fixed withdrawal rate, but starting with a 4% or a 5%? Or is that just what financial planning is all about? How do you take various pieces of empirical evidence or research and say combining is the way that works for the investor?
Speaker 2:I think the latter would be the approach I'd recommend you want to the client. Every client is different, their needs are different and their other source of income vary, so that you have to treat each case separately and develop a plan based on what you see before you.
Speaker 1:Are there any pieces that people commonly get wrong about your research or application that people commonly get wrong? Because I've seen it talked about in many different ways and sometimes it feels like people are inventing their own aspects of what you've done. But do you see people getting it wrong and, if so, where?
Speaker 2:Less so than before. But one of the biggest things over the years I've had is people hear a 4% rule. I think take 4% of your portfolio value every year. That's not how that system works. It's more like a cost of living adjustment, Social Security kind of system. The first year you apply the percentage and then after that you throw the percentage away and just give yourself a cost of living adjustment like Social Security.
Speaker 1:Yeah, so it's not a fixed percentage. That percentage is going to fluctuate. It could go up or down, kind of an inverse relationship to the value of your portfolio. What's the withdrawal rate actually doing?
Speaker 2:but not just you know. So there are other ways to withdraw money. One is to take more earlier and less later. That's a perfectly valid way and I analyze that in my book. You can look at a fixed percentage if you want, uh, which is normally the misconception of what the 4% rule works, but if you actually apply that rule you come out with some interesting results. And also, how much can you handle in a big bear market with your portfolio drops 30%, 35% and your withdrawal rate drops? Can you handle that in the context of your lifestyle? So it's got some uses, but it's got some warnings as well.
Speaker 1:Yeah, I don't want you to give away the contents of your book. I know we talked about it a little bit. I'm encouraging people go purchase A Richer Retirement. I think a lot of great research there. But what are you most excited for people to learn or understand about your book that they can use to create a richer retirement?
Speaker 2:I think what I like people to come away from my book is that planning for your retirement roles is a process, that the first step is not to find a number. That's actually the last step. You have to identify all the personal factors or elements, I call them that make you unique in your retirement plan, unique. You have to evaluate where inflation is and where market valuation is, and then you come up with your number. Finally but it's a process and not a one-step go.
Speaker 1:Love it. Where can people purchase your book, Bill?
Speaker 2:Any major online bookseller should have an offering right now Amazon, barnes, noble Books, a Million Powell's it's all available through them, love it.
Speaker 1:I will include a link to that book directly in the show notes for this YouTube, this podcast, this video. Any final thoughts, though, bill? Anything that you want to leave people with that you wish they understood differently about the 4% rule Now, I'm not going to call it that, because it's different, but any final words or things you'd want to leave people with?
Speaker 2:Yeah, when folks buy my book, I like to pay particular attention to that chapter, to the end, when I talk about how to manage a plan during retirement, Because that previously hadn't received much attention in the literature, and I identified a couple of circumstances where your plan may deviate from the benchmark and what you should do about it. In summary, if it's a stock market decline, you probably don't have to do anything, but if inflation rears its ugly head again, you need to get worried and start taking measures immediately to protect your portfolio.
Speaker 1:I think that's a great thing to end on, because I think that it's always good to have a plan going into retirement, Always good to have a general framework for what that's going to look like. But if there's not adjustments being made along the way in response to the right things and in this case the right thing might be inflation, less so other aspects you're either leaving money on the table or potentially setting yourself up for a less than ideal retirement, both of which are not ideal. So, Bill, thank you very much. Thank you for the work that you've done over the past 30 plus years for the retirement community, for the financial advisor community. I know that a lot of people are better off because of it. So thank you for spending a few minutes with me and with us here on this channel.
Speaker 2:Thanks for the invitation. I enjoyed it.
