A couple of thoughts on this. I just saw a stock market and 60/40 portfolio performance prediction tool at AllocateSmartly.com, it’s free “you get what you pay for”. By their own admission, they say it’s a blunt instrument and not suited for market timing. I consider it useful info because the median forecast for the nine methods cited is low. We know not to trust any one prediction in isolation, but just maybe the “crowd” of predictions speaks some truth. This would put the 4% rule in some jeopardy.
I got an out of print 2005 copy of “Work Less, Live More” by Bob Clyatt. He came up with “Clyatt’s 95% rule”; if the stock market is down in the prior year, then for the next year allow yourself to spend 4% of your portfolio, or 95% of what you spent last year, whichever is greater. That rule pretty much insures that you won’t run out of money… but if there are years of poor market performance, then you’re going to be giving yourself 5% pay cuts every year for several years in a row.
Below are some clippings readers may find useful, including quotes from Bill Bengen himself.
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4% Drawdown Rule Inventor: Cut Your Spending Now
Wednesday, 20 April 2022 - Newsmax
Since 1994, retirees have lived by a simple code: the 4% annual drawdown rule.
Created by now retired financial planner Bill Bengen, the longstanding plan has been for retirees to be able to safely withdraw an average of 4% of their savings portfolio each year. The thinking was that a well-diversified portfolio with a fair share of fixed income would be able to carry a retiree through a 25-year retirement, if they only withdrew 4% of their money each year.
With inflation running at 8.5%, a pace not seen since 1981, the mastermind of the 4% drawdown rule has a new message: Cut your retirement spending. Now.
“The problem is that there’s no precedent for today’s conditions,” Bengen tells The Wall Street Journal.
In fact, investment data and research firm Morningstar echoes Bengen’s updated advice, itself now calling for an initial withdrawal rate of 3.3% for new retirees.
Aside from inflation running at a 40-year high, Bengen says another big headwind for today’s retirees is overpriced price/earnings (P/E) valuations of 36 times corporate earnings for the past decade.
“That’s double the historic average,” Bengen tells the WSJ. “While low interest rates justify higher stock valuations, to some extent, I think the market is expensive.”
The U.S. economy has not experienced an environment quite like this since the 1930s, Bengen says. “There’s no precedent for today’s conditions,” he says.
A Quick Solution for Retirees
Bengen, who retired nine years ago in 2013, has been able to reap some of the upside of the stock market in the past few years, especially since COVID-19 stimulus money has helped boost the market since 2020. Since 2006, in fact, a strong equities market has given Bengen the confidence to increase his annual withdrawal rate to 4.7%.
Someone retiring in 2022 or in years ahead when returns are likely to be thinner and market volatility is predicted to be higher, might not be so lucky, says Bengen. Thus, he advises retirees to reduce their annual withdrawals to 4.4% a year now, and possibly even lower in years ahead.
Bengen has also slashed his monthly budget and recommends that retirees and near-retirees do the same. He also has dramatically changed how his retirement savings portfolio is invested, moving from his original rule of thumb for 55% in U.S. large-cap stocks and 45% in intermediate-term Treasury bonds.
Bengen’s portfolio is now 20% in stocks, 10% in bonds — and a whopping 70% in cash.
“I’m uncomfortable holding that much in cash,” he admits. But, with the Federal Reserve poised to raise interest rates as many as eight times this year, markets are going to be more unpredictable and volatile, Bengen reasons. “It’s not a great time to invest in financial assets.”
However — if valuations come down dramatically, Bengen might be tempted to buy up some individual stocks at attractive prices.
“I retired nine years ago, so I’m probably safe,” Bengen ventures. “But I’m not comfortable,” he quickly adds, “because I am still early enough in retirement that the combination of threats we face could be damaging.”
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Withdrawal Strategies for Retirees - Wade Pfau, March 2022 AAII Journal, p. 21
He thinks the 4% SWR Bengen rate is too high, because of low interest rates. He was thinking more about 2.8%, Morningstar came up with 3.3%. So in the ballpark of 3% is more realistic.
U-shaped glidepath - get more risk-averse early retirement, then more risky later in retirement to support spending in the face of inflation.
