Retirement strategy shift from the 4% rule to fresh advice by its creator
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In his latest book, "A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More," financial expert William Bengen has revised the traditional safe withdrawal rate for retirees. The updated rate, approximately 4.7%, allows for a slightly higher initial withdrawal but emphasizes the importance of adapting withdrawals to factors like market conditions, inflation, personal goals, and longevity uncertainty.
The 4 percent rule, first introduced by Bengen in a 1994 Journal of Financial Planning paper, assumes a portfolio split evenly between U.S. large-cap stocks and intermediate-term government bonds. However, Bengen's new model portfolio includes a more diverse range of assets, including U.S. large-cap stocks, U.S. mid-cap stocks, U.S. small-cap stocks, U.S. micro-cap stocks, international stocks, intermediate-term U.S. government bonds, and U.S. Treasury bills.
When determining this updated withdrawal rate, Bengen considers multiple factors, including stock market valuation, inflation, individual circumstances at retirement, ten variables overall, of which eight are controllable by the retiree. He regards inflation as the greatest threat to retirees; higher inflation reduces the safe withdrawal rate. Each retiree has an individual "SAFEMAX" withdrawal rate that depends on their specific retirement conditions, including market and inflation factors.
Bengen recommends starting with a set withdrawal percentage (around 4.7%) and then adjusting annually based on cost-of-living changes, similar to how Social Security benefits are adjusted. This approach is more flexible and tailored than the fixed original 4% rule from 1994, reflecting improved modeling of retirement outcomes and current economic conditions.
Planning for late-life out-of-pocket spending on health care is another crucial aspect. One way to do this is to pre-fund a medical reserve with T-bills or a short ladder of TIPS that mature in the years expected to have higher costs. Gradually contributing to a high-yield savings account specifically earmarked for health care costs is another option. Retirees should also build a separate, detailed budget that includes planned big-ticket expenses.
Bengen sees a potential role for alternative assets like Bitcoin, up to 1 percent in his own portfolio. He also suggests using simple annuities to steady retirement income. He challenges the traditional advice to scale back on stocks before retirement, advocating for staying 100 percent invested in equities until five years before retirement.
In conclusion, Bengen's updated guidance allows for a slightly higher initial withdrawal rate but emphasizes the importance of adapting withdrawals to factors like market conditions, inflation, personal goals, and longevity uncertainty. By following a flexible and tailored withdrawal strategy, retirees can potentially enjoy a richer retirement while minimizing the risk of running out of money.
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