William P. Bengen’s Newest Updates: How Retirees Can Safely Withdraw 4.7% or Even 5.5% Ep. 33

Welcome to the Ideas by Mike podcast, where your one-of-a-kind life meets a one-of-a-kind financial plan. Every episode, we provide insights into financial markets, discuss strategies for navigating Wall Street, and explore how to make informed decisions in a constantly evolving financial landscape, all with the goal of helping you. So, Sit back, relax. This is not your typical money show. We're going to be all in on helping you live a one-of-a-kind life. Today on Ideas by Mike, we welcome a true original, a man whose work didn't just change the numbers in our spreadsheets, but rewrote the story of retirement itself. He's the rocket scientist who traded the stars for safe withdrawal rates, giving us the 4% rule. A concept as iconic in our field as Newton's apple is to physics. William P. Benchin just didn't break new ground. He did it so every retiree could create a plan as distinctive as their own dreams. Join me as we meet the man who proved your financial path should be one of a kind, just like your life and mine. Well, Bill, thanks for joining us on the Ideas by Mike podcast. I really appreciate your time today.

Yeah, pleasure being here. Thanks for having me.

Absolutely. You really shook up the retirement planning world with the original 4% rule, but now you've gone back to the drawing board and made some big updates. Um, what made you take another look and how did you land on that new 4.7% figure? figure that's published in your new book, A Richer Retirement?

Sure. I've been working on this for 30 years, continuing my research, learning a lot, and making some breakthroughs. And essentially the 4.7% rule, which is an enhancement of the original 4.15% rule, is all a result of the fact that I'm using a lot more diversified portfolio with more investments in it. Each investment, you know, adds a little bit to the portfolio, and I could probably still add more. It's possible we could reach 5% if I, you know, start adding gold, commodities, REITs, emerging markets, and so forth. But that's where it stands right now. And it's a good guide, but a dangerous guide in the sense that it only applies to a very small number of retirees who want to be ultra-conservative. and not face anything worse than has been faced in the past. Most other people can take out more than that.

Oh, wow. You said an ultra-conservative group of people, right?

Right.

And then you just ended that with, people can take more than that. I'm very intrigued by what you mean by people can actually take more than the 4.7%.

Sure. The 4.7% rule was created by the person who retired in October of '68 and ran into a terrible environment for investing. They had 2 big bear markets almost back to back, and then had a decade of inflation which forced them to increase their withdrawals dramatically year after year. That just devastated their portfolio. We haven't had a recurrence of that, and I don't see anything in the economic data right now that suggests we'll be entering a period like that. So for a better period economically with better stock market valuations, maybe better inflation numbers in particular, you're going to have an opportunity to take out more. And in this environment, I'd probably be looking at, you know, like a 5.5% rate rather than 4.7%. And remember, the long-term historical average is 7% for the last 100 years. So even though 5.5% 5 sounds great. It's not great compared to the long-term average.

You're a student of numbers, right? It dates back to your job before you became a financial advisor. There are some reckless things that are out there in the financial entertainer space right now. There was a major podcaster that recently said that you could take an 8% safe withdrawal just simply because his mutual funds have averaged 12% per year and there's been 4% inflation. So why can't you take 8%? Do you see that an 8% withdrawal could be like, like general overgeneralizations like that could cause problems to people in the future?

The last time we had an 8% withdrawal rate was back at the very bottom of the stock market. Decline after the great financial crisis in the spring of 2009. The person retired in April of that year probably could have taken 8%, it appears. Since then though, we've had much lower numbers, primarily because the stock market has been so expensive and volatile so that, you know, you really have to be careful with what you're saying about what's possible.

Right. You're a huge advocate for diversification these days, way beyond the old just stocks and bonds. If someone wants to get the most out of their retirement, what's your go-to asset allocation now? And are there some lesser-known investments you think retirees should be including?

Well, that's a tough one. I think, you know, I work with a, in my, most of my research, a 55% stock, 40% bond, 5% cash And I'm looking at from a research angle whether that should be higher than that. There are some indications that in many cases people could take, have a 70% or 75%, even a higher allocation to stocks during all of retirement and do well because stocks return much higher than bonds. The time you need bonds is when the stock market is not doing well. And that happens, but not that often.

I heard you on another podcast, I guess it's been about a year ago, and you said that, you said something that caught my attention, right? You said that as you age and you get closer to the end of your life, you can actually take more risk. Do you remember, is that a belief you have or is that just somewhere that they produced that into that podcast?

I'm sorry, I don't remember saying that. I might have in a moment of weakness, but I think there's a certain level of risk you have to maintain. You don't necessarily have to increase it later in retirement. It depends upon how you've done up to date. You know, are you ahead of plan or with plan? If you're on plan, just stay with what's working.

Right. We've all seen how inflation can take a bite, out of retirement planning, especially if it ramps up right after someone hangs up their working boots. If, uh, uh, and inflation's a big conversation point right now. People feel like it's going to come back, and, you know, uh, recent history obviously brings that anxiety up. But if we hit high inflation early in retirement, what's the smartest way to adjust your withdrawals?

Yeah, uh, Inflation is a difficult issue and I had a blind spot for inflation for a long time. I was trying to determine how you can access some of those higher withdrawal rates people had in the past. And I knew there were 6, 7, 8% or more available at certain times, but I didn't know how to be able to tell people that this was the time to do it. And one of the problems I had is I was putting stock market valuation first and foremost as my primary variable. I knew inflation had something to do with it, but I couldn't work it in. Only when I started thinking of inflation as the number one thing, the most dangerous thing during retirement, and put stock market decline second, did I come to the realization that you can definitely take out an appropriate amount if you take those 2 factors into account.

Oh, wow. In the book, right, A Richer Retirement, you said that there are 10 big variables that impact a solid withdrawal plan.

Okay.

And 8 of them are actually in your own hands. What do you see as the most important levers retirees or their advisors should put— should pull to boost their spending and their financial confidence?

Yeah. In terms of identifying what you think are the most important factors, in other words?

Yes.

Yeah. Of the 8 elements, not all the 8 elements are equally important, but maybe I could just go over what I consider 3 or 4 most important ones.

We'd love that.

Okay. The first one would be withdrawal scheme, which is the rule you use to determine how you're going to take money out of your retirement account. Most of my research, I use what I call the COLA, cost of living adjustment scheme. Where you start out with a rule, let's say 5% first year, apply it to your portfolio. If you have a million-dollar portfolio, take out $50,000. And then after that, throw away the 5% and just simply, as Social Security, give yourself an increase for inflation each year. You don't have to take money out that way. There are all different kinds of ways. You can take a fixed percentage of your portfolio every year if you wanted, which has interesting ramifications. You never run out of money with that. That's one of the big ones. But you may end up with much lower withdrawal rates in a stock market bash. And then, you know, a fixed annuity, fixed amount. Some people even prefer to take more out early in retirement deliberately and with the intent of cutting back after 10 or 15 years. So there's all kinds of variations to that, and you have to understand what works best for you. The second one, the most important one in my opinion, is planning horizon, the length of time you're planning to withdraw your money. Not the same as life expectancy. Life expectancy is something you can go on the internet and figure out. But being an engineer, I feel you need to build a margin of safety into your plan so that if your life expectancy is 30 years, perhaps you should plan for 40 years or even more so that you don't run into a difficult decision in your 90s. You know, if you're starting to run short on money. Next couple, taxable versus non-tax portfolios. It depends upon very much the type of account you're withdrawing from, what your withdrawal rate will be. Taxable portfolios have much lower withdrawal rates generally, although I think when you take a look at the taxes on the withdrawals from IRA and compare it to withdrawal from a taxable portfolio, probably not too far apart. You also have to specify whether or not you want to leave a balance in your account at the end of retirement, what I call a legacy. I assume in most of my research is zero, but it doesn't have to be. You can put any dollar amount you wish down with the knowledge that is a heavy price to pay for leaving an inheritance because you're trying to assure a balance at the end of your portfolio. So it's either going to shorten the portfolio's life or it's going to reduce your withdrawal rate. And the 5th one, which I consider of the 5 most important, is asset allocation, how you set your investments up. In retirement. And I frequently work with a 55% stocks, 40% bonds, 5% cash portfolio. That may not be ideal for all circumstances. I'm doing a study right now trying to determine, you know, how high can you go? Because stocks return a lot more than bonds. If you have a lot more stocks in your portfolio and less bonds, you should have higher returns and higher withdrawal rates. And there's early indications that that could work, but I'm not at the point now where I understand that well enough to be able to give rules or suggestions. The other 2 important factors, which are not controllable by the investor directly, are inflation. What will inflation be like during retirement, particularly the first 10 years? And next to that, of course, is the— let's see, let's say inflation, right? The second factor is stock market valuation. It's very important to the investor because when the stock market values are very high, probably means we're getting close to a major bear market. And certainly this time could qualify. I'm not predicting anything, but we are really up there. So high stock market valuations and high inflation all argue for low withdrawal rates and vice versa.

I mean, those variables you just mentioned are so amazing that you have outlined them on like the ones you can control versus the ones you can't. Bill, I just, when you saw, when 1994, when you wrote your first paper about safe withdrawal, did you have any impact what your research was going to mean to Wall Street and everyday people?

Not a clue. I honestly was completely naive. I wrote the paper figuring, well, maybe a couple of financial advisors will read it, maybe to help them too. And all of a sudden I started getting invited to conferences and interviews and the whole thing ballooned as something far beyond my expectations.

And a lot of times, right, rules get misinterpreted, right? And they, people use them in ways that you never intended your research to be used for? Like your research, because I've read the paper and I've also read your new book, has, when read and can be interpreted by somebody who understands what you're saying, what should your research not be used for?

Should my research not be used for? Well, I think definitely should not accept the idea of a single rule, one size fits all. My research is only about customizing a plan for an individual's needs using those 10 factors. And you need to evaluate each of those 10 factors to properly execute or create a plan for yourself.

Yeah. You also have, you have You've been retired for a few years, even though you're still working on research. You obviously have some friends, family, colleagues who've been retired also for a long time. What is retirement like?

Well, I'm enjoying it myself. I mean, when I went to retirement, I figured there are really 4 things that are very important. One is family. Next is friends. Third is your health. And fourth is having passions, interests, hobbies, avocations that can occupy you and make you want to get up in the morning with an excited attitude. I think if you focus on those 4 considerations, those 4, you're going to have a successful life and a successful retirement.

Bill, you and I did not talk about that question before today, did we?

No.

Um, interesting facts is I've actually, I've got a manuscript that's being written and it, 'cause I have a philosophy called Retirement Chi. You know, chi is the inner peace and harmony, like in the Far East that people have.

Mm-hmm.

With like, uh, with nature in the world. And I believe that one of the things I believe is un— that too many people who work their whole life cannot envision what retirement looks like because they don't have a vision for it. And what you just described without us even talking about is retirement chi, because what I think retirement chi is, is it's your community, it's your health, and it's your impact. And when you look at those things, when you look at those things together, your community, your health, and your impact, you, and you write it down, you actually can then move on to say, okay, how can I withdraw from my accounts? How can I have the income I have? But without a vision, Right? You're not going to be able to really execute and have a fulfilling retirement like you've had.

Yeah, I think it's important as individuals that we feel as if we're needed, if we, as us, you know, our thoughts, our ideas, our love is something that sustains someone else or some other cause, something bigger than ourselves and outside of ourselves. That Really is to me what gives meaning to life.

I 100%. And like what you're, you saying it like that means something a little bit different than me as a 48-year-old financial planner saying it, right? Because it's just a little bit different. Comes from a little different because we're at different stages in our life. Just a couple other things to talk about here, if you don't mind. A lot of people I talk to are really anxious about ever touching their principal. And they just want to live on interest and dividends. What would you say to someone feeling that fear?

Well, I'm going to probably say that their heirs are going to be very rich because they're going to have an awful lot of money left over in their retirement accounts. And the question they have to ask themselves is that really what they want to do with their wealth, or do they want to enjoy all these savings they put together at such a high price over so many years? I would advocate that they try to loosen up a little bit and enjoy spending.

I would 100% as being a certified financial planner since 2002 and being in this industry from '99, I've seen so many people pass away with more money than they ever thought they would have. And you know who spends that money and does the things is the kids.

Yeah. There you go.

Right. It's the kids. Bill, you mentioned a couple times that you're still doing a little research. What is going to come next from Bill Bengen?

Well, I'm seriously looking at how high we can push the asset allocation for stocks in retirement. I'm beginning to believe that it probably needs to be toward the higher end, you know, 70% or more, but I don't have complete evidence for that. And I'm— there's a lot of, a long list of research topics, longer than ever it seems. It's amazing after 30 years about things I want to learn more about. I want to learn more about what's called the equity glide path, increased equity glide path approach to allocation, where you start out with a lower allocation of stocks early in retirement and let it increase during retirement. That, according to my research, for all the retirees I studied, gave them at least a nominal increase in withdrawal rates. So it's worth something considering. I want to look at that more closely and see if I can really nail it down. There are some of the other withdrawal schemes I'd like to explore more fully. There's just no end to new stuff to learn.

Yeah. Outside of numbers and money, what do you like to do in retirement?

Oh, well, I'm a golfer, tennis player, like to play bridge. Travel with my wife, you know, just enjoy the company of good friends too.

Yeah. So often when we see such an accomplished, you know, numbers guy who's written just such an amazing book, we forget that there's a human attached behind that person. And it's good to hear that you have some other interests and some other hobbies just beyond equity glide paths and withdrawal rates and equity allocations. And so many other things. Bill, I want to thank you for your time today. There's so many people I think that are going to listen to this and realize that you are somebody beyond just numbers, but that you can provide extreme value. I mean, people are going to be thrilled that, and I mean, I think there's going to be a lot of people on Wall Street that are not thrilled with your research now, Because so many advisors want to limit clients to a 3.5% or a 4% rule. Like Morningstar just came out this year and said that they think the withdrawal rate's much less. Did you see that study?

Yeah. And they did that also a couple years ago and I asked for a copy of the study and they were very gracious. They let me see it. I have a lot of respect for those folks at Morningstar. My methodology is completely different than theirs. They're We're forecasting very dire low returns for stocks for many years into the future. Well, I tend to take a more optimistic view. I suspect we'll have a big bear market here before too long, but we'll get back on track after that and continue the upward march of stocks.

Right. And I mean, I think there's so many people that, you know, I mean, companies are not earning less money, right?

Oh, they're swimming in it. Right, right.

There's more cash out there than there's ever been, right?

Oh, unbelievable.

And so, you know, I, I, I think some people on Wall Street are going to be, you know, disappointed in your research because, you know, a lot of companies just want to keep as much money invested in assets under management to keep raking in fees, to keep raking in profits. And I know that you, you're, you're one that puts, you know, the clients or the end user, right, the actual person first.

Mm-hmm.

So, I mean, I think your study's going to be a breath of fresh air to people who are struggling to keep up with inflation. to live. And it's almost like, I want to say it's almost like a permission slip to do something a little bit different.

Yes, it is. Is that what you definitely hear?

Yeah. Is that how, is that what you want people to hear is like, my research shows that you can probably maybe splurge a little bit more, do something a little bit different.

Yeah. The whole thrust of my research for 30 years has been finding ways for people to withdraw more money from their accounts without taking any additional investment risk. You know, and, uh, made some progress toward that.

Yeah. Well, I want to, I mean, I want to thank you for coming on the podcast today. I think, uh, I started saying this earlier and then I caught you. I got you in another question there, but like, if people want to like connect deeper to your research or, uh, find ways to purchase your book, I know your book's on Amazon, but what, where else can they find you?

Uh, I have a website they may want to visit, uh, www.bengenfs.com. FS stands for Financial Services, my old company name. And there I provide a lot of useful charts and information. I give them sample retirement plans that they might be able to use. I give them an indication of, you know, where we are in terms of withdrawal rates at the current time and the current market. I also reproduce all the charts in my book, which are black and white, In color, and they look a lot better in color, I can tell you.

Yeah. Well, I mean, we're gonna, we're gonna make sure that people have that in the comment section of our podcast so they know your, your website again. Again, it's bingenfs.com. Right. Um, and Bill, I just want to thank you for your time today. You, uh, you, uh, again, uh, this has been so worth my time. It's been worth the listeners' times who are going to listen to this. And, uh, and you are a breath of fresh air. To, to people who need some hope and optimism right now. And I thank you for that.

It's my pleasure. Thanks for having me on.

Absolutely. Thank you for joining us today on the Ideas by Mike podcast. This has been Mike Milligan, your host, where I look to bring real-world conversations with you of people changing the game. In the financial planning, investment, and retirement income space. If you want to reach out to our firm to learn more, go to ideasbymike.com. As a reminder, in the coming weeks, we will change over from Ideas by Mike to One Oak Financial. One Oak Financial is a nationwide firm here to help you build a one-of-a-kind financial plan for your one-of-a-kind life. You can go to oneoakfinancial.com To see our transition. That's the number one oakfinancial.com. CFP Board owns the marks CFP, Certified Financial Planner, and CFP in the United States. As a reminder, Mike Milligan, Certified Financial Planner, is an investment advisor representative of Advisory Alpha LLC, an SEC-registered investment advisory firm. All opinions expressed by me or our guests are solely our own opinions. opinions and do not reflect the opinions of Advisory Alpha. This recording is for informational purposes only. It should not be relied on for investment, tax, or legal decisions, and it's in no way intended to communicate or guarantee specific performance or suitability of any security instrument or product as we may have discussed. Investment advisory and financial planning services offered through Advisory Alpha LLC are registered investment advisor. Insurance is offered through Ideas by Mike, a Virginia-based LLC here to serve you in all 50 states and the District of Columbia. Ideas by Mike is a separate and unaffiliated entity of Advisory Alpha LLC. While tax and legal issues may be discussed in the general course of financial and investment planning, Advisory Alpha does not provide tax or legal services. Please consult with your tax or legal professional prior to making decisions. Relative to those decisions. Any and all statements of purported or observed general practices of non-affiliated firms and advisors or conditions of the broad financial services industry are solely the opinions of Mike and are not intended to be offered as factual. The validity of these statements has not been verified, and as such, no representation of their validity are made. An annuity is a long-term financial product designed largely for asset accumulation and retirement needs. All guarantees Guarantees are backed by the claims-paying ability of the issuing insurance company. This podcast is produced in conjunction with Mike Milligan, LLC. Thank you again for joining us today. We'll see you on the next podcast.