William P. Bengen, the father of the so-called 4% rule, is now retired in the Tucson, Ariz., suburbs, and he shares the concern of many current retirees about the resurgence of inflation and the bear market in stocks and bonds. Yet he also doesn’t believe that the “uncharted waters” of today’s markets and economy warrant a reduction in withdrawal rates for retirees, even if it is understandable that many advisors would counsel clients to cut their capital consumption to 3%—at least temporarily.
Clients worked so that their money could serve them, he says. It doesn’t work the other way around. He has personally adjusted his portfolio to less than 20% equities and bonds to ride out this period of uncertainty. “I’d rather adjust my portfolio for risk than adjust my lifestyle,” he says, though he acknowledges that what he considers risk management others might call market timing.
In his research, Bengen found that inflation could be more threatening to retirees than even the cruelest bear market, even the one the U.S. suffered after the Wall Street Crash of 1929. After all, retirees during the Great Depression at least had the benefit of deflation, which enhanced their purchasing power. This stood in sharp contrast to the 1970s, when persistent inflation reached double-digit levels dramatically influencing retirees' living standards.
“Bear markets come and go,” he says. “But if you have to increase withdrawals [at the rate of inflation], that gets locked in.”
This current bear market began not just with stocks and bonds at elevated levels, but with “multiple bubbles” in many other asset classes such as art, housing and fine wine. “A 20% decline won’t clean out all the excesses” in many of these asset classes, he adds.
Each client’s situation is different. But Bengen believes it would take “a catastrophic set of circumstances” before clients had to cut down to a 3% withdrawal rate.
“If inflation were to continue at 6% or 8% for close to a decade, then that would change things,” he says. “But that scenario is far from certain.”
Ultimately, the best strategy for clients is to maintain their flexibility to adjust their withdrawal rates, something Bengen argued in the October 2020 issue of Financial Advisor. A year before the pandemic, his withdrawals exceeded 5%. This year, thanks to other circumstances, he’s running about $25,000 under budget.