Money Matters 334- The Man Behind the 4% Rule W/ Bill Bengen

Christopher Hensley RICP, CES: [00:00:00] How important is inflation to somebody who is thinking about retiring? They're trying to look at, you know, what is a sustainable drawdown plan? How important should they take inflation?

Bill Bengen: It's hard to take it important enough actually. Um, it's really what I consider the greatest enemy of retirees. So when you have high inflation, eight, 10% as you did in the 1970s.

You're forced to increase the amount of yours by that percentage every year, and it's not long before that. Just choose your portfolio up.

Christopher Hensley RICP, CES: what if the hardest part of retirement isn't the math, it's staying human when the math gets scary.

Today on Money Matters. We're here with Bill Big and creator of the 4% Rule. With his new book, A Richer Retirement, we'll explore what still works from the original research, what might shift in a world of higher rates and sticky inflation, and how to turn panic. Into policy. [00:01:00] Whether you advise clients or you're planning your own income, you'll leave with a cleaner starting point guidance, a smarter conversation about flexibility and a kinder checklist for sequence risk.

Let's trade certainty. Theater for durable decisions. Bill, welcome so much to the show today.

Bill Bengen: The.

Christopher Hensley RICP, CES: Absolutely. Well, I'm super excited to have you here. I have to, I have to have my podcast host hat on and try not to fanboy out here, but as an RICP, I can tell you that your work has been. Influential, uh, on my practice and on many people in the profession. So I am super excited to, to talk with you today here.

Let's start out just right out of the gate with this, with the new book that you have out. Uh, the book is called A Richer Retirement. Why did you Write A Richer Retire?

Bill Bengen: I wrote it because there were a lot of things I learned about retirement, [00:02:00] uh, spending and withdrawals over the last 10 or 15 years that hadn't communicated, uh, to folks yet. So I wanted to get that in book form and essentially, uh, establish a method, a, a process by which people can develop a withdrawal plan and manage it through our retirement.

Christopher Hensley RICP, CES: , I know, you know, for, we've got a good mix of, of pre-retirees, retirees, and other advisors who listen to this show as well. And so the 4% rule has been kind of a staple. Um, but when you wrote this new book, what would you say is the single biggest change in your conclusions now versus your, your night, your study that you originally did?

Bill Bengen: , The biggest single biggest change is that, uh, inflation is, uh, a more concern than stock market decline. Stock markets decline, but they come back, but inflation gets up there and stays high. It's devastating in our portfolio as it was for [00:03:00] retirees during the 1970s.

Christopher Hensley RICP, CES: That's so true. I mean, uh, and I am, I'm thinking back to, to the data that you used and what were some of the interest rates there on, on, like, uh, money markets and, and stable value type stuff at the time? I,

Bill Bengen: , You know, we've been fortunate, we're like 4% on money market mutual funds now, which is a lot better than we were five years ago. We're essentially zero. So then where Tina applied, there is no alternative. Uh, there is an alternative to investing in risk investments today, and that's the, at least of the time being, money Market Mutual Fund is a decent place to temporary store your money.

Christopher Hensley RICP, CES: , Now one of the things that you just mentioned right away was inflation. How important is inflation to somebody who is thinking about retiring? They're trying to look at, you know, what is a sustainable drawdown plan? How important should they take inflation?[00:04:00]

Bill Bengen: Taken important enough actually. Uh, it's really what I consider the greatest enemy of retirees. When you have high inflation, eight, 10%, as you did in the 1970s, you're forced to increase the amount of withdrawals by that percentage every year. And it's not long before that. Just choose your portfolio up.

Christopher Hensley RICP, CES: So I know, I love the idea of, of that, that it's not just a number that gets there in a static forever, that you're, you're, you're kind of changing it as, as it goes along the way. Talk to me a little bit about flexibility versus rigidity when you're looking at drawing down for retirement.

Bill Bengen: Sure. Uh, I think it's natural human instinct when the stock market is not doing well, to cut back on the expenses a little bit. And I think that's a healthy, uh, healthy tendency, uh, because you never know what's gonna happen, how deep the market decline will go. so I think there's some [00:05:00] need to have some flexibility in your, uh, your spending. Uh. Program. also think it makes sense to have some flexibility in your view of inflation. You know, be, be aware that it's a problem. Um, alert if it's starting to increase, and, uh, be prepared to cut back if that happens.

Christopher Hensley RICP, CES: I love that. I love that, keeping that open, um, uh, uh, flexibility there, whether it's inflation, whether it's the market beating up on us, right? Uh, when, when it comes time to start drawing down there, um. Tell me a little bit about, now, I did some research before getting on here and I saw you on another podcast where you had talked about, um, your, your opinion on active management and I'm when I had my financial advisor hat on.

I'm an active manager. I manage downside risk, looking for preserving, capital preservation, but I think you mentioned that that had changed over your, uh, lifetime. Tell me a little bit about that.

Bill Bengen: me a little bit about [00:06:00] Yeah. Originally I was, I was raised on Warren Buffett's philosophy, which is supposedly buy and hold, I was like that through the nineties. And, and then things started changing in the markets. It was clear that there was gonna be a lot more intervention in markets from governments, from central banks, uh, and that it was destroying markets that we couldn't count on. Behaviors of the past persist in future things are gonna be different. This, it is really different at this time. So, uh, you have to be really aware of the fact, what the monetary authorities are doing and how it might affect your withdrawal plan.

Christopher Hensley RICP, CES: That point you just made about things are different. They are different, right. Uh, uh, it's, it's a moving target

Bill Bengen: the number 4%, which was intended to be a worst case scenario, was basically retiree in history experienced the lowest safe withdrawal rate that turned out to be the one in October of 1968. Uh, and the one I did my research [00:07:00] back in 19 94, 93, I only used two asset classes over the last. some years, I've increased that to seven increased the number of asset classes, making your portfolio more sophisticated, increases returns.

It'll also increase withdrawal rates, so I've gone out from 4% on the worst case scenario to 4.7% as the worst case scenario.

Christopher Hensley RICP, CES: I think when people, you know, there's been mistakes where people have kind of misinterpreted or kind of, they've heard that 4% and they kind of hold it, you know, hold it literally. Right. But you're telling us that that was based kind of on a worst case scenario and you were using the October, 1968 situation there.

And so things change and, um. Tell, you know, in the book you also talk a little bit about, uh, guardrails and some of that. Can you tell us a little bit about how your approach has, has adapted and changed over the uh, years?

Bill Bengen: Well, I use a third [00:08:00] party, uh, risk manager, uh, to help me make decisions on what my stock allocations should be. And essentially they vary their recommendations on stock allocation based upon their perception of risk in the stock market. And currently they're recommending that you hold about 60% of which would normally hold in your account.

So if you normally have, let's say, 60% stock allocation, they'd be suggesting 36%.

Christopher Hensley RICP, CES: One of the things you also talked about, um, on, uh, another show as I was researching this and, and so we're gonna pivot a little bit, we're gonna talk about gifting, uh, because you, you mentioned on that show that you, you, um. Uh, you like the idea of gifting, uh, money before people pass as opposed to to waiting until they pass?

Right. Can, can you tell us a little bit about that? How you, what your opinion is on that?

Bill Bengen: Absolutely. Uh, it's important. It's a tradition. I know my dad started with me when I was [00:09:00] younger. He would start giving me checks at Christmas time I, my wife. when you were young and, and struggling, uh, that cash really comes in handy. And, uh, he know, he knew we appreciated it. And, uh, I think I was very happy while I was alive. To see evidence that his good works were bearing fruit. And I've taken that to heart and I'm doing the same thing with my kids too. Uh, it's nice to share the wealth, uh, as long as you have enough of it to share, you know, you'll hopefully do

Christopher Hensley RICP, CES: . And that's, you know, one of the, the benefits of that is a lot of times people aren't here to see the, the fruits of their gifts, right? So if we gift while we're still alive, you get the happiness units there of, of actually seeing your, your family members and your kids. I think the idea you mentioned, uh, the age of 50, right?

Getting a nice little. Shot in the arm at age 50, that's when a lot of these expenses come online. So I love that idea there. Um, bill, what message [00:10:00] do you have? I'm going to shift and talk to our retirees here. Somebody who is. Making that scary decision, right? They're right about to turn off their paycheck.

Uh, they've lived off of a, a paycheck for, for their entire lives, and they're now starting to, to draw down that income. What are some things outside of the 4% rule that you've learned, uh, that you'd like to share with those retirees? Things that they might, might not have on their radar?

Bill Bengen: I think it's important to enter retirement with a plan of some sort, uh, for certainly a financial plan. and, uh, also to focus on things that make for a successful retirement, which I, my opinion, there are four of them. One is friends, family. Uh, the second would be,, having passions and, and interests and also your health. Those four are very important and I think if you concentrate on those, [00:11:00] and develop them and cultivate them, you'll have a successful retirement as well as successful life in general.

Christopher Hensley RICP, CES: I love that. Those are some of the most important. I will piggyback off of what you just said because after doing this for 20 years, my retiree clients, the things that you're mentioning, the friends. Family, having those passions and then ultimately having good health. Right? Those are the things, doesn't matter how big that dollar sign is at the end, if you don't have those four things in alignment, there we're, you know, we're, that's where we see people come back and say, boy, I wish I did things differently.

So I love that. I love that so much there. Um, bill, uh, uh, when we talk about cash reserves or having a bucket of cash set aside. What's a good recommendation? What do you like to see people carry into retirement? As a good rule of thumb.

Bill Bengen: As far as having a cash reserve, I think somewhere at least 5%, which is pretty close to one year [00:12:00] withdrawals. although you can go up to 10% without really affecting withdrawal rate too significantly. It, it's a matter of what's comfortable. Uh, if a person is particularly nervous about the stock market and. Fearful of declines in their portfolio. If they know they have two years of cash sitting in a mutual fund, money market mutual fund is absolutely safe. That can take a lot of pressure off them 'cause that'll give you the stock market a chance to recover and things get back to normal.

Christopher Hensley RICP, CES: I love it. Uh, bill. All right. I'm gonna take you back in time here. So

Bill Bengen: back.

Christopher Hensley RICP, CES: when, when you were an advisor like me, right, and, and when you sat down and you came up with this 4% rule, did you think that this was gonna go this way? How did that come about and what was your reaction to, to how it blew up? What.

Bill Bengen: I blew up as a pretty apt description. I, uh, I was totally unprepared for the reaction I got. I just put that paper out there and all of a sudden I started getting [00:13:00] invitations to speak at financial planning conferences and calls and media. and it wasn't long before I realized I had a tiger by the tail, but here I am, 30 years still handing on to the tail of the tiger. So

Christopher Hensley RICP, CES: . The book is a Richer Retirement. I'm gonna encourage everybody to go out and get a copy of it. And, and this is gonna update us. Uh, this will, will let us know some of the best practices there for sure. Um, bill, while we're getting it, we got just a, you know, about 10 minutes or so before the show is at the tail end here.

Uh, but I, I'd like to ask you, uh, a little bit about. Social Security, um, when it comes to, you know, you get your, your draw down, a sustainable rate of draw down, how important is having social security in that, uh, calculation or in your planning there? Can you talk a little bit about that with us?

Bill Bengen: Sure, and I'm really talking outside my area of [00:14:00] expertise to a certain extent. I'm retired as an advisor now. Uh, my research is primarily focused on what happens inside investment accounts and how to maximize them without, uh, taking additional risk. It's nice to have that extra income if you have it in social Security, uh, but whether you have income from social security or not, you're still faced with a.

A maximization issue of how much can I take out of the retirement account? 'cause most people, even with Social security and pensions, are not in a position to say, well, I can get by on 1% for my investments. rare.

Christopher Hensley RICP, CES: Right.

Bill Bengen: Most people wanna get as much as they can.

Christopher Hensley RICP, CES: Yeah, I think that's good advice, right? Uh, I mean, even though social security. Is there for most people, some people it's not. Right. Um, having a plan that isn't completely reliant on social security and, and how volatile that's changed. You know, we've been, we thought that was something that was never, never gonna change.

And we've had so many [00:15:00] changes recently on it, so I love that. And the idea of, of being able to, to peel income off and, and getting a really good idea of, of, you know, what's a sustainable rate there. Um. Let's talk about, uh, the, the data that you used, right? I know when you started the 4% rule that you were only using some data.

Where is that? What were you using then and now? What are you looking at in the new book? I.

Bill Bengen: At the time of my original research, I was using just two assets, so-called asset classes or investments. One was a US large company stocks and the other was a, uh, intermediate term US government bonds like a five year US treasury bond. that's doesn't fit anybody's definition of a diversified portfolio, so over time I've added. Increased disinvestment. So up to seven now. I added micro cap stocks, small cap stocks, international stocks, uh, and treasury bills. Uh, [00:16:00] among other things to, uh, to my mix. And wanna say that even though I've increased, my number of assets is seven. It's still short of probably what most advisors would put in their client's portfolio. Uh, and I'm a fan of diversifying. You know, a substantial number of large qual, high quality assets, uh, to get the best results. If you, if you invest properly, the returns will take care of themselves.

Christopher Hensley RICP, CES: . And that is, um, you know, having the idea of having multiple asset classes in your mix, that gets us into a. You know, what might look like a asset allocation for, for a lot of people. Uh, the idea that it is a moving target and even bringing international in there when international hasn't done fantastic for a while, and then now we're seeing some reversal stuff.

It's all always, always a moving target.

Bill Bengen: Maybe even seeing some reverse on the small cap, uh, sphere too, you know, so it, it just shows you, you never know where your returns are gonna come from. And if [00:17:00] it's been 10 years where, value stocks have been under overwhelmed by growth. Over a period 10 years where large cap stocks have dramatically outperformed small cap, it doesn't mean that'll continue into the future and you may be missing a, a big opportunity fee to exclude those asset classes from your mix.

Christopher Hensley RICP, CES: A hundred percent. We forget that when, uh, some things work and then they don't work for a while and then they work again, it's, it's that, uh, past performance is not indicative of future results. Right. It's that reminder that always comes back. Always comes back and, and gets us there. Uh, bill, as we get towards the end of the show, what would you like to tell listeners that I've forgotten to ask you?

Bill Bengen: Well, if they're in retirement and they're, they have a plan and they're managing it, which means they're tracking their plan against some kind of a benchmark. Uh, it's important to recognize that if you encounter stock market decline early in retirement, it's gonna throw you off plan probably [00:18:00] pretty significantly. It's not something to be concerned about. Uh, generally the best tactic in a stock market decline is to do nothing and wait for stocks to come back, which they normally do. And my evidence is that except in the deepest of stock market declines, like 1929 or You'll be just fine by letting things play out. On contrast, if you encounter a period where inflation looks like it can be a real problem, you wanna react immediately and start cutting expenses at least temporarily to prepare yourself for the worst.

Christopher Hensley RICP, CES: . So, uh, not just set it and forget it, paying attention to what's going on there and, and reacting. And, uh, bill, for listeners who are listening to this now, who would like to get a copy of the book A Richer Retirement, where's the best place for them to get a copy of the book?

Bill Bengen: Any online books seller has it available when it's Amazon Books, A Million Barnes and Noble. all available through those outlets.

Christopher Hensley RICP, CES: [00:19:00] Perfect. And as we wrap up here, I'm gonna take my podcaster hat off, bill. And I just want to take a moment, uh, to personally thank you, uh, for your contribution to this profession. Um, I, I don't know of a lot of advisors who. You know, you could be a successful producer, manage a lot of assets, and not leave a, an impact on the profession.

So I just wanted to, to personally, uh, you know, tell you thank you for your work. It's made a big difference to me as an RICP. I know it's made a big difference to other, uh, income professionals out there. Uh, thank you for all that you've, that you've done.

Bill Bengen: That's very kind of you, Chris. I appreciate it.

Christopher Hensley RICP, CES: All right, bill. Well, with that, let me just try to, sorry to get sappy on you there again, but with, with that Bill, have a good rest of the day. Thank you so much for, for being on this show today

Bill Bengen: pleasure. Let's do it again sometime.