Bill Bengen, the long-time investment advisor who commanded national attention when he developed the 4% withdrawal rule for retirees back in 1994, has increased the withdrawal rate he uses on his own retirement portfolio to 4.7%, largely because of the upside he’s gained by adding small and microcap asset classes to his portfolio, he told the Bogleheads Live podcast this week.
The increase in the sustainable withdrawal rate is fairly dramatic since Bengen published his seminal paper in 1994, stating that retirees should plan to withdraw 4% of their assets every year during a 30-year retirement if they wanted their portfolio to last.
“My rule has been updated to 4.7%, so it’s no longer the 4% rule, and that comes from my research and adding a number of asset classes which have increased returns,” Bengen said.
U.S. microcap and U.S. small cap stocks in particular changed what he considers an ideal asset allocation. “When I added U.S. microcaps in my last round of research it did increase volatility, but significantly increased the withdrawal rate. That’s what helped bump it up to 4.7%,” Bengen said.
“But perhaps investors might consider taking 4.5% at this time when retiring until the smoke clears and we get a sense of where inflation is going. Inflation is the big wild card in this environment,” he added.
Bengen said he created his 4% rule based on an imaginary investor who retired in October of 1968 and ran into a terrible perfect storm” of bad stock market returns and very bad inflation.
“Are we in a similar period beginning this year with very high inflation and potentially low stock market returns, or entering something even worse? I don’t know, unfortunately, and we won’t know for quite a few years. But I think it’s serious enough that investors should perhaps be a little bit more conservative and perhaps plan as if this is a new situation and maybe take a little bit less than what the rule suggests,” he warned.
“Is the 50% to 70% stock allocation still required for the 4% rule to work?” Jon Luskin, a fee-only advisor and host of the podcast asked.
Bengen said his original research used a stock allocation of 50% to 75% to create the 4% rule.
Now, according to the retired advisor, the optimum stock allocation that allows the highest withdrawal rate over the long term is between 55% and 60% over the long term. If you have much less than that in equities your portfolio will not generate enough return to give you a good withdrawal rate. If you have much higher than that the volatility of the portfolio will also reduce your withdrawal rate, he said.
“Right now, I use seven asset classes, including five in stocks, cash and Treasury bonds. I think it tracks closer to what a sophisticated investor would use and I don’t think by adding additional asset classes I ‘ll be able to increase the withdrawal rate a heck of a lot more,” he said.
As for rebalancing, Bengen said he uses a third-party service that recommends changes to his asset allocation based on perceived changes in the marketplace.