Every so often, a moment comes along that makes one really appreciate his job. When Bill Bengen called me earlier this year wanting to revisit his so-called 4% rule in an article prompted by those who asked if it was still valid, I was immediately excited.
As Bill mentions in his article, some of his subsequent work using more asset classes found the safe rate was 4.5%. But that was all before two brutal bear markets within a single decade made many serious advisors rethink some of their fundamental assumptions about financial planning.
The purpose of Bill's original research was to test how portfolios would hold up in the changing financial and economic environments that are inevitable in any 30-year retirement. When he conducted his initial research in 1993, he had only 38 complete 30-year time periods to work with; today he has 57 periods.
Back in 1993, the term "sequential returns"-synonymous with retiring at just the wrong time at the start of a bear market-was not a part of advisors' lexicon. Today, it is.
In those days, equities, bonds and money market funds all offered returns that appear generous compared with current benchmarks. A handful of seers worried about retirees and pre-retirees growing spoiled from what was more than a decade of outsized returns from financial assets.
As prescient as these individuals were, they did not know how the final years of the millennium would set financial markets up for a decade of disappointment. One of the key lessons Bengen's research taught him was "to never assume anything." We may have lived through hot and cold wars, depressions, extended economic booms and oil shocks since 1926, but it would be an absurdity, if not outright hubris, to think that we have experienced all the possible economic environments that the future could throw at us.
Bengen concedes that the 1982-2000 bull market could be viewed as "a freak accident, a product of the final years of a debt super cycle." Viewed in that light, the bleak back-to-back bear markets of 2000-2002 and 2008-2009 could be interpreted as an inevitable consequence of the same cycle.
Whatever your interpretation, the quandary for clients is the same. Stretching for yield may be a natural reaction, but it's worth recalling what happened to all the seniors who piled into bank stocks in the last decade.
You may be intrigued to know that out of the 57 complete 30-year time periods Bengen evaluated, only one hypothetical retiree among them virtually ran out of money using the 4.5% rule. You'll have to read the article to find out what year that person retired. But here is a hint: Inflation can be just as devastating to a retiree as lousy portfolio returns.
Of course, the jury is still out-and will remain there for a while-for millions of folks who have retired in the 21st century. For these people, Bengen cites a rule of thumb: When all else fails and markets produce unpleasant surprises-reduce spending pretty quickly. It is one of the few variables that clients can partially control.