September 20, 2025 • 21 mins
Financial planning’s most famous guideline just got an upgrade. In this exclusive interview, James speaks with Bill Bengen—the MIT-trained engineer turned financial advisor who created the 4% rule—about his updated research and what it means for retirees today.
Bengen reveals that diversification alone can raise the safe withdrawal rate to 4.7%, and under certain market conditions, retirees may be able to withdraw 6%, 7%, or even 8% annually. The original 4% rule was never meant to reflect average scenarios. It was built from the worst-case retirement timing in modern history. Even then, a 4% withdrawal strategy lasted 30 years. Bengen’s findings show that across history, the average sustainable withdrawal rate has exceeded 7%, suggesting many retirees could be living more cautiously than necessary.
In this conversation, James and Bengen discuss the two factors that matter most when determining safe withdrawals: inflation expectations and stock market valuations at retirement. They also explore why downturns don’t usually require major changes to a plan, but inflation threats demand immediate attention.
Rather than focusing on a single “magic number,” Bengen emphasizes a process-oriented approach—one that starts with your circumstances and considers the economic environment before setting a withdrawal strategy.
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Speaker 1 (00:00):
The 4% rule is the foundation of so much of what we
do as financial advisors, asretirees to see how much can we
actually spend in retirementwithout running too high a risk
of running out of money.
But the 4% rule in many ways isoutdated and today I'm talking
to the author himself, where hesays that the actual rate that
you can pull from your portfoliois closer to 4.7% or higher,
(00:20):
based on a few conditions.
That's what we're talking aboutin today's episode.
Today, my guest is Bill Bangan.
He is a former aeronauticalengineer from MIT.
He's a former financial advisor, he is the original author of
the 4% Rule White Paper and heis out with new research showing
us how you can live a richerretirement if you tweak a few
key things with your portfolioand with the way you determine
(00:42):
withdrawal rates.
Enjoy today's conversation withBill Bangan.
Bill, thank you so much forbeing on the show.
Really appreciate you makingthe time and excited to learn a
lot from you today.
Speaker 2 (00:52):
Well, thanks for the invitation.
I'm looking forward to it.
Speaker 1 (00:55):
One of the things that you're, of course, very
well known for is this whole 4%rule.
I think some people take forgranted as just a rule of thumb
that's existed forever.
But it hasn't.
That was based upon a lot ofresearch that you've done.
That you did back in 1994.
You have a new book, newresearch that I'm really excited
to talk to you about becauseit's going to really enhance the
(01:15):
way people can think abouttheir retirement and what their
retirements can look like.
But before we jump in there,I'm curious to hear from you,
prior to this seminal researchthat you released back in 1994,
how are people approachingretirement planning in terms of
figuring how much they couldpull from their portfolio?
Speaker 2 (01:32):
You know it was an issue that wasn't addressed in
the literature at all.
I know because I searched forit from magazines and
professional journals and endedup talking to some of my local
financial planner friends in SanDiego area and most of them
admitted they didn't have anysort of scientific basis for
doing you know.
They just tried to guesstimate.
(01:54):
That wasn't good enough for meor my clients, so I decided I'm
going to study it myself.
Speaker 1 (02:02):
And what was the point in which you decided to do
that?
You know, it was after onesingle conversation.
You said this doesn't exist,I'm going to go do it.
Or was it?
Was there some pivotal momentwhere you said I'm going to take
on this mountain of researchand jump into it?
Speaker 2 (02:15):
I saw more and more clients asking me the same
questions how much do I need tosave for retirement, how much
can I spend in retirement?
And it became a roar abackground roar, and I know I
didn't have answers, so I wasdesperate.
That's why I decided to goahead and find out for myself.
Speaker 1 (02:33):
Yeah, and I'm grateful you did.
I know a lot of great peopleare grateful you did, because
that has become a core part ofretirement planning today.
One thing that I often hearpeople say is hey, the 4% rule
works, we're going to take thatmoney out, but there might be a
market downturn, so I think I'mgoing to back off a little bit.
(02:53):
Or I'm concerned aboutinflation, so I'm going to back
off a little bit.
And what I don't think theyfully appreciate is the context
in which you did your research.
It wasn't the sense of ifeverything's good, you can spend
4%.
You referenced the big dipper,the little dipper, these various
market events.
Do you mind even just giving abackground for the context in
which this research was done,because I think that helps put
(03:15):
people's minds at ease that itcould work then.
It can work now.
Speaker 2 (03:18):
Yeah, what I was trying to identify in that first
paper back in 1994 was the oneretiree who historically had the
worst experience of them all,and then whatever withdrawal
rate would have worked for himthen should work for everyone
else, because he had the worstexperience and it turned out to
be the person who retired inOctober of 1968, which is, you
(03:39):
may recall, this preceded twomajor bear markets back to back
which were devastating, and then10 years of very high inflation
which forced people to increasewithdrawals every year at a
very high rate, and that was aterrible time of just devastated
portfolios, the 1970s, and Ihope we don't see that again
anytime soon.
Speaker 1 (04:01):
And as you're doing that, I think that one thing I
just want to add color aroundfor people listening is you know
we talk about inflation todayand is it higher than it's been?
And certainly higher than it'sbeen in a decade or two, but the
context that Bill's talkingabout, inflation was in the
double digits for a prolongedperiod of time.
You have this culmination ofhigh inflation and deflating
(04:23):
asset prices, not a goodsituation.
Yet that 4% rule was your wayof saying if you're not
exceeding this initialwithdrawal rate from your
portfolio, even in that periodof time, given a fixed duration
of retirement assets could lastfor that time period.
Speaker 2 (04:41):
Yeah, it's a worst case situation.
People need to be in timethemselves, and we haven't seen
a repeat of those circumstancessince then.
So naturally, today I'd berecommending higher withdrawal
rates than that to anybodyretiring today.
Speaker 1 (04:55):
Yeah, and I want to jump into that in one second
because I think the good newsjust a teaser for everyone and
the books in the background.
And, by the way, get the book ARicher Retirement Bill.
We're going to talk about moreof that in a second here, where
the good news is a lot of peoplecan spend more than 4%.
But before we go there, didanything surprise you about that
initial research you did on the4% rule or did it confirm what
you already felt to maybe betrue?
Speaker 2 (05:16):
No, always were surprised.
I think the first big surpriseI had when I was trying to test
how your safe withdrawal ratevaried with the asset allocation
of portfolio.
I thought it'd be a curvestarting lower left and going up
.
The more stocks, the betterTurns out.
It's more like a mesa.
It looks more like a mesa wherethere's a flat spot in the
(05:37):
middle between like 45 and 75%stocks, where you essentially
get the same withdrawal rate nomatter which allocation you
choose.
But if you go too much instocks or too little in stocks,
your withdrawal rate drops offinteresting.
Speaker 1 (05:52):
So, in other words, too aggressive or too
conservative, you can't make thecase.
You can't just assume that this4% rule is going to magically
materialize, regardless of howyour investments are positioned.
Speaker 2 (06:02):
You need to have a significant portion of your
investments in growthinvestments, stocks and the like
.
Speaker 1 (06:09):
And so, with that as a foundation, what was the ideal
allocation from just stocks tobonds allocation for someone
that did want to spend 4%throughout retirement?
Speaker 2 (06:24):
In that first paper I was working with just two asset
classes intermediate term USgovernment bonds and large
company US stocks and, as itturned out, for those particular
two asset classes, theycombined to produce this
particular withdrawal rate toproduce this particular
withdrawal rate.
Speaker 1 (06:41):
And with that withdrawal rate, what's changed?
Because if I'm rememberingcorrectly in your initial white
paper, the 4% rule in your wordsis that's kind of worst case
scenario.
If you are the unluckiestretiree and you retire right in
a period of high inflation, downmarkets, bear markets, 4% is
the most.
But if you take a random yearlike 1975, I think it was about
(07:03):
7.5% that that retiree couldhave spent.
And when you quantify thatthat's not just oh cool, you
could have spent more.
If you have a million dollarsin your portfolio, you could
have spent an additional $35,000per year throughout your
retirement.
How much more meaningful wouldyour retirement be?
How much richer would yourretirement be if you did that?
What does your new researchshow as you kind of solve that
(07:24):
and amplify that?
Speaker 2 (07:26):
What I've done, as I've made my research more
sophisticated, I've increasedthe number of assets, so now I'm
up to seven from the originaltwo in the portfolio I'm
including US micro cap stocks,us-cap stocks, international
stocks and also treasury bills,and that bumps the worst-case
number up to 4.7%.
But we have to keep in mindthat historically, over the last
(07:50):
100 years, the average for allretirees has been 7%, slightly
over that.
So getting 4.7, pretty meagercompared to that.
Speaker 1 (07:59):
So getting 4.7, pretty meager compared to that,
and so was it that alone.
Was it purely the fact thatyou've diversified the asset
classes that led the 4% toturning into the 4.7, or were
there other factors on top ofthat?
No, it was primarily theaddition of asset classes.
(08:21):
Just there wasn't a long enoughtrack record of these other
asset classes to use them.
Or was it just start?
I won't say simple, becausethere's a lot of research that
went into it, but what was thereason for that?
Speaker 2 (08:32):
uh, I I want to keep things simple.
To start, I took two assetswhich I thought would probably
be in everyone's portfolios andwhich had good returns, uh for
their respective types, and usethem, uh as a proxy for a
diversified portfolio.
Speaker 1 (08:49):
But we know you know, when you increase the number of
assets and diversify, youincrease your returns.
That's been established for along time and subsequent to that
you introduced a small capallocation to the research and
(09:11):
you saw that could increase thereturns.
What's now different about yournew book, your new research
that investors should know?
Speaker 2 (09:32):
Sure, I had started with a 4% rule, but I also
explained in some of my papersthat many investors retirees are
able to access much higherwithdrawal rates 5, 6, 7, even
up to 15%, depending upon thecircumstances in the retired.
So that I was looking for a wayto be able to scientifically
connect market circumstanceswith those higher withdrawal
rates so we could have a basisfor saying, no, don't take 4.7,
(09:52):
you should take 6.2 now, orsomething like that.
And about four years ago I hada breakthrough.
I learned that puttinginflation first, ahead of big
stock market declines, andorganizing the data in that
structure developed patternswhich I could use then to, if
you will, so-called forecast andpredict what your safer dollar
(10:15):
rate should be.
Speaker 1 (10:17):
And what do you mean by that?
Do you mean, for example, if Ilook at inflation today, that
should be the thing I start withwhen deciding how much I can,
or a client can, withdraw fromtheir portfolio, or monitoring
inflation throughout retirement?
Speaker 2 (10:31):
Yeah, I think there are two factors.
One is inflation you want todevelop an estimate of what
inflation will be like the first10 years of your retirement,
which can be very difficult,admittedly, ideally if you just
pick a number for all ofretirement.
And the other one is stockmarket.
Valuation is very important.
When stock markets areexpensive, we're probably close
(10:57):
to a major bear market, andmajor bear markets early in
retirement can devastate yourportfolio.
So if you have cheap stocks andyou have low inflation, you're
in nirvana.
If you have the opposite,you're in trouble.
Speaker 1 (11:06):
And so that much wider range, the 4.7 to, I think
, what do you say?
7%.
That's based upon a mix of whatis inflation today and
valuations of equities as well.
Speaker 2 (11:18):
Yeah, I mean the person retired, if you remember,
at the end of the greatfinancial crisis in April of
2009,.
I calculate there'd probably besuccess with an 8% withdrawal
rate and that's the highestwithdrawal rate we've had in the
last 30 years, because stockmarkets have been so expensive
For a few months.
Stocks actually got cheap,which was a wonderful feeling,
(11:39):
but not today.
Speaker 1 (11:42):
And even if we look at that time, so an 8% that
would be from the bottom of theGreat Recession on.
Is that what you're sayingRight?
Got it, which seems to alignwith the research well of prior
to that downturn?
That same dollar amount ofwithdrawal probably would have
represented somewhere in thefour and a half to five percent
range of the prior portfoliovalue.
(12:03):
That simply took a big beating.
Is that fair to say?
Speaker 2 (12:08):
I don't know if I characterize it that way.
Fair to say, I don't know if Icharacterize it that way.
It's just that you know,clearly, things had changed in
my perception of what wasimportant in the problem, and
having a way to that was a greatmoment for me when I was able
to develop that tool, becausethat was a missing link.
I really had no nothing to tellpeople in terms of choosing a
(12:29):
high withdrawal rate, exceptgive them a chart saying, oh, if
you take this rate, 50% ofinvestors have been successful,
otherwise 75%.
And that's really no way to runa railroad.
You know, clients deserve morecertainty than that.
Speaker 1 (12:44):
Yeah, one more question on that, and then I
want to shift the focus a littlebit.
Just even application for a lotof people.
And where does?
I don't want to call it theory,because it's very real, it's
very real research.
But where does that meet howpeople actually draw money from
their portfolio throughoutretirement, just out of
curiosity?
What drives your continuedresearch?
Is it simply playing with thenumbers, playing with the
(13:05):
modeling, or is it conversations?
You're having things, you'reseeing.
What are the things that leadto those breakthroughs that you
have?
Speaker 2 (13:11):
It's a combination of things.
I've got a lot of folks writeme with good ideas and I'm
developing a very long researchlist.
There's just a lot of areasthat I want to explore more
thoroughly to understand.
One of the most important Ithink right now is I've been
using a 55-45 or 60, 40portfolio.
Is that the best Earlyindications are that a higher
(13:35):
stock allocation would benefitmost investors, particularly
those who retired near thebeginning of a bull market, and
they could get significantlyhigher withdrawal rates than the
ones I've been using.
So I'm going to spend a lot oftime in that and see if I can
upgrade the withdrawal ratesscenario.
Speaker 1 (13:54):
What's the biggest mystery that's yet to be solved
when it comes to this topic?
What's the next big challengeyou're going to try to?
That's a good question.
Speaker 2 (14:07):
I would like to understand a little bit more
about that rising equity guidepath system which basically
assumes you're going to have alower allocation, equities that
begin in retirement.
You actually increase it duringretirement.
When I tested it against all myretirees, they all had a bump
to their adult rate upward bump,some more than others.
Don't fully understand why thatworks and I would like to
explore that in a lot ofdifferent scenarios to really
(14:28):
appreciate how that can benefitpeople, and a lot of different
scenarios to really appreciatehow that can benefit people.
Speaker 1 (14:32):
Love it when your research and the work you've
done meets practical application.
Because your history is as afinancial advisor, you are, of
course, what I would consider amuch more.
You were an aeronauticalengineer prior to founding your
own financial advisory firm, sothe rigor and the level of
(14:53):
detail that you approach thingswith, I would say, is very
unique.
But where do you find theresearch?
Where are there challenges orare there constraints?
Where that meets practicalapplication for a real life
retiree?
Speaker 2 (15:06):
Well, I try to emphasize developing means that
are readily accessible andusable by the individual and
that aren't too mathematicallycomplicated.
I don't think really complexmathematics fits our current
state of our profession.
You know, we just don't haveany underlying theories for
economics or for finance, likephysics has laws of motion.
(15:29):
We don't have those.
So everything we do isempirical.
We have to look at test results, what's happened in the markets
over time, and then try toanalyze what patterns are there
and then try to use those toextrapolate into the future.
Speaker 1 (15:46):
So, if I look at a couple of specific examples,
someone that retires at 62, butSocial Security doesn't start
until age 70.
There's this dynamic of you'regoing to withdraw more than 4%
up front or 5% up front, butmaybe far less on the back end.
Or even research aroundretirement spending as a whole
that doesn't necessarilyincrease in lockstep with
(16:07):
inflation, but people tend tospend less over retirement,
maybe until latter years oftheir life where medical
expenses really increase theiroverall costs.
Is there a way, or is it evennecessary, to try to marry that
research and that reality with,I don't want to say, a fixed
withdrawal rate, but startingwith a 4% or a 5%?
(16:27):
Or is that just what financialplanning is all about?
How do you take various piecesof empirical evidence or
research and say combining isthe way that works for the
investor?
Speaker 2 (16:38):
I think the latter would be the approach I'd
recommend you want to the client.
Every client is different,their needs are different and
their other source of incomevary, so that you have to treat
each case separately and developa plan based on what you see
before you.
Speaker 1 (16:55):
Are there any pieces that people commonly get wrong
about your research orapplication that people commonly
get wrong?
Because I've seen it talkedabout in many different ways and
sometimes it feels like peopleare inventing their own aspects
of what you've done.
But do you see people gettingit wrong and, if so, where?
Speaker 2 (17:13):
Less so than before.
But one of the biggest thingsover the years I've had is
people hear a 4% rule.
I think take 4% of yourportfolio value every year.
That's not how that systemworks.
It's more like a cost of livingadjustment, Social Security
kind of system.
The first year you apply thepercentage and then after that
you throw the percentage awayand just give yourself a cost of
(17:34):
living adjustment like SocialSecurity.
Speaker 1 (17:36):
Yeah, so it's not a fixed percentage.
That percentage is going tofluctuate.
It could go up or down, kind ofan inverse relationship to the
value of your portfolio.
What's the withdrawal rateactually doing?
Speaker 2 (17:48):
but not just you know .
So there are other ways towithdraw money.
One is to take more earlier andless later.
That's a perfectly valid wayand I analyze that in my book.
You can look at a fixedpercentage if you want, uh,
which is normally themisconception of what the 4%
rule works, but if you actuallyapply that rule you come out
(18:09):
with some interesting results.
And also, how much can youhandle in a big bear market with
your portfolio drops 30%, 35%and your withdrawal rate drops?
Can you handle that in thecontext of your lifestyle?
So it's got some uses, but it'sgot some warnings as well.
Speaker 1 (18:29):
Yeah, I don't want you to give away the contents of
your book.
I know we talked about it alittle bit.
I'm encouraging people gopurchase A Richer Retirement.
I think a lot of great researchthere.
But what are you most excitedfor people to learn or
understand about your book thatthey can use to create a richer
retirement?
Speaker 2 (18:50):
I think what I like people to come away from my book
is that planning for yourretirement roles is a process,
that the first step is not tofind a number.
That's actually the last step.
You have to identify all thepersonal factors or elements, I
call them that make you uniquein your retirement plan, unique.
You have to evaluate whereinflation is and where market
valuation is, and then you comeup with your number.
Finally but it's a process andnot a one-step go.
Speaker 1 (19:15):
Love it.
Where can people purchase yourbook, Bill?
Speaker 2 (19:19):
Any major online bookseller should have an
offering right now Amazon,barnes, noble Books, a Million
Powell's it's all availablethrough them, love it.
Speaker 1 (19:32):
I will include a link to that book directly in the
show notes for this YouTube,this podcast, this video.
Any final thoughts, though,bill?
Anything that you want to leavepeople with that you wish they
understood differently about the4% rule Now, I'm not going to
call it that, because it'sdifferent, but any final words
or things you'd want to leavepeople with?
Speaker 2 (19:51):
Yeah, when folks buy my book, I like to pay
particular attention to thatchapter, to the end, when I talk
about how to manage a planduring retirement, Because that
previously hadn't received muchattention in the literature, and
I identified a couple ofcircumstances where your plan
may deviate from the benchmarkand what you should do about it.
In summary, if it's a stockmarket decline, you probably
(20:12):
don't have to do anything, butif inflation rears its ugly head
again, you need to get worriedand start taking measures
immediately to protect yourportfolio.
Speaker 1 (20:21):
I think that's a great thing to end on, because I
think that it's always good tohave a plan going into
retirement, Always good to havea general framework for what
that's going to look like.
But if there's not adjustmentsbeing made along the way in
response to the right things andin this case the right thing
might be inflation, less soother aspects you're either
leaving money on the table orpotentially setting yourself up
(20:42):
for a less than ideal retirement, both of which are not ideal.
So, Bill, thank you very much.
Thank you for the work thatyou've done over the past 30
plus years for the retirementcommunity, for the financial
advisor community.
I know that a lot of people arebetter off because of it.
So thank you for spending a fewminutes with me and with us
here on this channel.
Speaker 2 (21:00):
Thanks for the invitation.
I enjoyed it.
The 4% rule is the foundation of so much of what we
do as financial advisors, asretirees to see how much can we
actually spend in retirementwithout running too high a risk
of running out of money.
But the 4% rule in many ways isoutdated and today I'm talking
to the author himself, where hesays that the actual rate that
you can pull from your portfoliois closer to 4.7% or higher,
(00:20):
based on a few conditions.
That's what we're talking aboutin today's episode.
Today, my guest is Bill Bangan.
He is a former aeronauticalengineer from MIT.
He's a former financial advisor, he is the original author of
the 4% Rule White Paper and heis out with new research showing
us how you can live a richerretirement if you tweak a few
key things with your portfolioand with the way you determine
(00:42):
withdrawal rates.
Enjoy today's conversation withBill Bangan.
Bill, thank you so much forbeing on the show.
Really appreciate you makingthe time and excited to learn a
lot from you today.
Speaker 2 (00:52):
Well, thanks for the invitation.
I'm looking forward to it.
Speaker 1 (00:55):
One of the things that you're, of course, very
well known for is this whole 4%rule.
I think some people take forgranted as just a rule of thumb
that's existed forever.
But it hasn't.
That was based upon a lot ofresearch that you've done.
That you did back in 1994.
You have a new book, newresearch that I'm really excited
to talk to you about becauseit's going to really enhance the
(01:15):
way people can think abouttheir retirement and what their
retirements can look like.
But before we jump in there,I'm curious to hear from you,
prior to this seminal researchthat you released back in 1994,
how are people approachingretirement planning in terms of
figuring how much they couldpull from their portfolio?
Speaker 2 (01:32):
You know it was an issue that wasn't addressed in
the literature at all.
I know because I searched forit from magazines and
professional journals and endedup talking to some of my local
financial planner friends in SanDiego area and most of them
admitted they didn't have anysort of scientific basis for
doing you know.
They just tried to guesstimate.
(01:54):
That wasn't good enough for meor my clients, so I decided I'm
going to study it myself.
Speaker 1 (02:02):
And what was the point in which you decided to do
that?
You know, it was after onesingle conversation.
You said this doesn't exist,I'm going to go do it.
Or was it?
Was there some pivotal momentwhere you said I'm going to take
on this mountain of researchand jump into it?
Speaker 2 (02:15):
I saw more and more clients asking me the same
questions how much do I need tosave for retirement, how much
can I spend in retirement?
And it became a roar abackground roar, and I know I
didn't have answers, so I wasdesperate.
That's why I decided to goahead and find out for myself.
Speaker 1 (02:33):
Yeah, and I'm grateful you did.
I know a lot of great peopleare grateful you did, because
that has become a core part ofretirement planning today.
One thing that I often hearpeople say is hey, the 4% rule
works, we're going to take thatmoney out, but there might be a
market downturn, so I think I'mgoing to back off a little bit.
(02:53):
Or I'm concerned aboutinflation, so I'm going to back
off a little bit.
And what I don't think theyfully appreciate is the context
in which you did your research.
It wasn't the sense of ifeverything's good, you can spend
4%.
You referenced the big dipper,the little dipper, these various
market events.
Do you mind even just giving abackground for the context in
which this research was done,because I think that helps put
(03:15):
people's minds at ease that itcould work then.
It can work now.
Speaker 2 (03:18):
Yeah, what I was trying to identify in that first
paper back in 1994 was the oneretiree who historically had the
worst experience of them all,and then whatever withdrawal
rate would have worked for himthen should work for everyone
else, because he had the worstexperience and it turned out to
be the person who retired inOctober of 1968, which is, you
(03:39):
may recall, this preceded twomajor bear markets back to back
which were devastating, and then10 years of very high inflation
which forced people to increasewithdrawals every year at a
very high rate, and that was aterrible time of just devastated
portfolios, the 1970s, and Ihope we don't see that again
anytime soon.
Speaker 1 (04:01):
And as you're doing that, I think that one thing I
just want to add color aroundfor people listening is you know
we talk about inflation todayand is it higher than it's been?
And certainly higher than it'sbeen in a decade or two, but the
context that Bill's talkingabout, inflation was in the
double digits for a prolongedperiod of time.
You have this culmination ofhigh inflation and deflating
(04:23):
asset prices, not a goodsituation.
Yet that 4% rule was your wayof saying if you're not
exceeding this initialwithdrawal rate from your
portfolio, even in that periodof time, given a fixed duration
of retirement assets could lastfor that time period.
Speaker 2 (04:41):
Yeah, it's a worst case situation.
People need to be in timethemselves, and we haven't seen
a repeat of those circumstancessince then.
So naturally, today I'd berecommending higher withdrawal
rates than that to anybodyretiring today.
Speaker 1 (04:55):
Yeah, and I want to jump into that in one second
because I think the good newsjust a teaser for everyone and
the books in the background.
And, by the way, get the book ARicher Retirement Bill.
We're going to talk about moreof that in a second here, where
the good news is a lot of peoplecan spend more than 4%.
But before we go there, didanything surprise you about that
initial research you did on the4% rule or did it confirm what
you already felt to maybe betrue?
Speaker 2 (05:16):
No, always were surprised.
I think the first big surpriseI had when I was trying to test
how your safe withdrawal ratevaried with the asset allocation
of portfolio.
I thought it'd be a curvestarting lower left and going up
.
The more stocks, the betterTurns out.
It's more like a mesa.
It looks more like a mesa wherethere's a flat spot in the
(05:37):
middle between like 45 and 75%stocks, where you essentially
get the same withdrawal rate nomatter which allocation you
choose.
But if you go too much instocks or too little in stocks,
your withdrawal rate drops offinteresting.
Speaker 1 (05:52):
So, in other words, too aggressive or too
conservative, you can't make thecase.
You can't just assume that this4% rule is going to magically
materialize, regardless of howyour investments are positioned.
Speaker 2 (06:02):
You need to have a significant portion of your
investments in growthinvestments, stocks and the like
.
Speaker 1 (06:09):
And so, with that as a foundation, what was the ideal
allocation from just stocks tobonds allocation for someone
that did want to spend 4%throughout retirement?
Speaker 2 (06:24):
In that first paper I was working with just two asset
classes intermediate term USgovernment bonds and large
company US stocks and, as itturned out, for those particular
two asset classes, theycombined to produce this
particular withdrawal rate toproduce this particular
withdrawal rate.
Speaker 1 (06:41):
And with that withdrawal rate, what's changed?
Because if I'm rememberingcorrectly in your initial white
paper, the 4% rule in your wordsis that's kind of worst case
scenario.
If you are the unluckiestretiree and you retire right in
a period of high inflation, downmarkets, bear markets, 4% is
the most.
But if you take a random yearlike 1975, I think it was about
(07:03):
7.5% that that retiree couldhave spent.
And when you quantify thatthat's not just oh cool, you
could have spent more.
If you have a million dollarsin your portfolio, you could
have spent an additional $35,000per year throughout your
retirement.
How much more meaningful wouldyour retirement be?
How much richer would yourretirement be if you did that?
What does your new researchshow as you kind of solve that
(07:24):
and amplify that?
Speaker 2 (07:26):
What I've done, as I've made my research more
sophisticated, I've increasedthe number of assets, so now I'm
up to seven from the originaltwo in the portfolio I'm
including US micro cap stocks,us-cap stocks, international
stocks and also treasury bills,and that bumps the worst-case
number up to 4.7%.
But we have to keep in mindthat historically, over the last
(07:50):
100 years, the average for allretirees has been 7%, slightly
over that.
So getting 4.7, pretty meagercompared to that.
Speaker 1 (07:59):
So getting 4.7, pretty meager compared to that,
and so was it that alone.
Was it purely the fact thatyou've diversified the asset
classes that led the 4% toturning into the 4.7, or were
there other factors on top ofthat?
No, it was primarily theaddition of asset classes.
(08:21):
Just there wasn't a long enoughtrack record of these other
asset classes to use them.
Or was it just start?
I won't say simple, becausethere's a lot of research that
went into it, but what was thereason for that?
Speaker 2 (08:32):
uh, I I want to keep things simple.
To start, I took two assetswhich I thought would probably
be in everyone's portfolios andwhich had good returns, uh for
their respective types, and usethem, uh as a proxy for a
diversified portfolio.
Speaker 1 (08:49):
But we know you know, when you increase the number of
assets and diversify, youincrease your returns.
That's been established for along time and subsequent to that
you introduced a small capallocation to the research and
(09:11):
you saw that could increase thereturns.
What's now different about yournew book, your new research
that investors should know?
Speaker 2 (09:32):
Sure, I had started with a 4% rule, but I also
explained in some of my papersthat many investors retirees are
able to access much higherwithdrawal rates 5, 6, 7, even
up to 15%, depending upon thecircumstances in the retired.
So that I was looking for a wayto be able to scientifically
connect market circumstanceswith those higher withdrawal
rates so we could have a basisfor saying, no, don't take 4.7,
(09:52):
you should take 6.2 now, orsomething like that.
And about four years ago I hada breakthrough.
I learned that puttinginflation first, ahead of big
stock market declines, andorganizing the data in that
structure developed patternswhich I could use then to, if
you will, so-called forecast andpredict what your safer dollar
(10:15):
rate should be.
Speaker 1 (10:17):
And what do you mean by that?
Do you mean, for example, if Ilook at inflation today, that
should be the thing I start withwhen deciding how much I can,
or a client can, withdraw fromtheir portfolio, or monitoring
inflation throughout retirement?
Speaker 2 (10:31):
Yeah, I think there are two factors.
One is inflation you want todevelop an estimate of what
inflation will be like the first10 years of your retirement,
which can be very difficult,admittedly, ideally if you just
pick a number for all ofretirement.
And the other one is stockmarket.
Valuation is very important.
When stock markets areexpensive, we're probably close
(10:57):
to a major bear market, andmajor bear markets early in
retirement can devastate yourportfolio.
So if you have cheap stocks andyou have low inflation, you're
in nirvana.
If you have the opposite,you're in trouble.
Speaker 1 (11:06):
And so that much wider range, the 4.7 to, I think
, what do you say?
7%.
That's based upon a mix of whatis inflation today and
valuations of equities as well.
Speaker 2 (11:18):
Yeah, I mean the person retired, if you remember,
at the end of the greatfinancial crisis in April of
2009,.
I calculate there'd probably besuccess with an 8% withdrawal
rate and that's the highestwithdrawal rate we've had in the
last 30 years, because stockmarkets have been so expensive
For a few months.
Stocks actually got cheap,which was a wonderful feeling,
(11:39):
but not today.
Speaker 1 (11:42):
And even if we look at that time, so an 8% that
would be from the bottom of theGreat Recession on.
Is that what you're sayingRight?
Got it, which seems to alignwith the research well of prior
to that downturn?
That same dollar amount ofwithdrawal probably would have
represented somewhere in thefour and a half to five percent
range of the prior portfoliovalue.
(12:03):
That simply took a big beating.
Is that fair to say?
Speaker 2 (12:08):
I don't know if I characterize it that way.
Fair to say, I don't know if Icharacterize it that way.
It's just that you know,clearly, things had changed in
my perception of what wasimportant in the problem, and
having a way to that was a greatmoment for me when I was able
to develop that tool, becausethat was a missing link.
I really had no nothing to tellpeople in terms of choosing a
(12:29):
high withdrawal rate, exceptgive them a chart saying, oh, if
you take this rate, 50% ofinvestors have been successful,
otherwise 75%.
And that's really no way to runa railroad.
You know, clients deserve morecertainty than that.
Speaker 1 (12:44):
Yeah, one more question on that, and then I
want to shift the focus a littlebit.
Just even application for a lotof people.
And where does?
I don't want to call it theory,because it's very real, it's
very real research.
But where does that meet howpeople actually draw money from
their portfolio throughoutretirement, just out of
curiosity?
What drives your continuedresearch?
Is it simply playing with thenumbers, playing with the
(13:05):
modeling, or is it conversations?
You're having things, you'reseeing.
What are the things that leadto those breakthroughs that you
have?
Speaker 2 (13:11):
It's a combination of things.
I've got a lot of folks writeme with good ideas and I'm
developing a very long researchlist.
There's just a lot of areasthat I want to explore more
thoroughly to understand.
One of the most important Ithink right now is I've been
using a 55-45 or 60, 40portfolio.
Is that the best Earlyindications are that a higher
(13:35):
stock allocation would benefitmost investors, particularly
those who retired near thebeginning of a bull market, and
they could get significantlyhigher withdrawal rates than the
ones I've been using.
So I'm going to spend a lot oftime in that and see if I can
upgrade the withdrawal ratesscenario.
Speaker 1 (13:54):
What's the biggest mystery that's yet to be solved
when it comes to this topic?
What's the next big challengeyou're going to try to?
That's a good question.
Speaker 2 (14:07):
I would like to understand a little bit more
about that rising equity guidepath system which basically
assumes you're going to have alower allocation, equities that
begin in retirement.
You actually increase it duringretirement.
When I tested it against all myretirees, they all had a bump
to their adult rate upward bump,some more than others.
Don't fully understand why thatworks and I would like to
explore that in a lot ofdifferent scenarios to really
(14:28):
appreciate how that can benefitpeople, and a lot of different
scenarios to really appreciatehow that can benefit people.
Speaker 1 (14:32):
Love it when your research and the work you've
done meets practical application.
Because your history is as afinancial advisor, you are, of
course, what I would consider amuch more.
You were an aeronauticalengineer prior to founding your
own financial advisory firm, sothe rigor and the level of
(14:53):
detail that you approach thingswith, I would say, is very
unique.
But where do you find theresearch?
Where are there challenges orare there constraints?
Where that meets practicalapplication for a real life
retiree?
Speaker 2 (15:06):
Well, I try to emphasize developing means that
are readily accessible andusable by the individual and
that aren't too mathematicallycomplicated.
I don't think really complexmathematics fits our current
state of our profession.
You know, we just don't haveany underlying theories for
economics or for finance, likephysics has laws of motion.
(15:29):
We don't have those.
So everything we do isempirical.
We have to look at test results, what's happened in the markets
over time, and then try toanalyze what patterns are there
and then try to use those toextrapolate into the future.
Speaker 1 (15:46):
So, if I look at a couple of specific examples,
someone that retires at 62, butSocial Security doesn't start
until age 70.
There's this dynamic of you'regoing to withdraw more than 4%
up front or 5% up front, butmaybe far less on the back end.
Or even research aroundretirement spending as a whole
that doesn't necessarilyincrease in lockstep with
(16:07):
inflation, but people tend tospend less over retirement,
maybe until latter years oftheir life where medical
expenses really increase theiroverall costs.
Is there a way, or is it evennecessary, to try to marry that
research and that reality with,I don't want to say, a fixed
withdrawal rate, but startingwith a 4% or a 5%?
(16:27):
Or is that just what financialplanning is all about?
How do you take various piecesof empirical evidence or
research and say combining isthe way that works for the
investor?
Speaker 2 (16:38):
I think the latter would be the approach I'd
recommend you want to the client.
Every client is different,their needs are different and
their other source of incomevary, so that you have to treat
each case separately and developa plan based on what you see
before you.
Speaker 1 (16:55):
Are there any pieces that people commonly get wrong
about your research orapplication that people commonly
get wrong?
Because I've seen it talkedabout in many different ways and
sometimes it feels like peopleare inventing their own aspects
of what you've done.
But do you see people gettingit wrong and, if so, where?
Speaker 2 (17:13):
Less so than before.
But one of the biggest thingsover the years I've had is
people hear a 4% rule.
I think take 4% of yourportfolio value every year.
That's not how that systemworks.
It's more like a cost of livingadjustment, Social Security
kind of system.
The first year you apply thepercentage and then after that
you throw the percentage awayand just give yourself a cost of
(17:34):
living adjustment like SocialSecurity.
Speaker 1 (17:36):
Yeah, so it's not a fixed percentage.
That percentage is going tofluctuate.
It could go up or down, kind ofan inverse relationship to the
value of your portfolio.
What's the withdrawal rateactually doing?
Speaker 2 (17:48):
but not just you know .
So there are other ways towithdraw money.
One is to take more earlier andless later.
That's a perfectly valid wayand I analyze that in my book.
You can look at a fixedpercentage if you want, uh,
which is normally themisconception of what the 4%
rule works, but if you actuallyapply that rule you come out
(18:09):
with some interesting results.
And also, how much can youhandle in a big bear market with
your portfolio drops 30%, 35%and your withdrawal rate drops?
Can you handle that in thecontext of your lifestyle?
So it's got some uses, but it'sgot some warnings as well.
Speaker 1 (18:29):
Yeah, I don't want you to give away the contents of
your book.
I know we talked about it alittle bit.
I'm encouraging people gopurchase A Richer Retirement.
I think a lot of great researchthere.
But what are you most excitedfor people to learn or
understand about your book thatthey can use to create a richer
retirement?
Speaker 2 (18:50):
I think what I like people to come away from my book
is that planning for yourretirement roles is a process,
that the first step is not tofind a number.
That's actually the last step.
You have to identify all thepersonal factors or elements, I
call them that make you uniquein your retirement plan, unique.
You have to evaluate whereinflation is and where market
valuation is, and then you comeup with your number.
Finally but it's a process andnot a one-step go.
Speaker 1 (19:15):
Love it.
Where can people purchase yourbook, Bill?
Speaker 2 (19:19):
Any major online bookseller should have an
offering right now Amazon,barnes, noble Books, a Million
Powell's it's all availablethrough them, love it.
Speaker 1 (19:32):
I will include a link to that book directly in the
show notes for this YouTube,this podcast, this video.
Any final thoughts, though,bill?
Anything that you want to leavepeople with that you wish they
understood differently about the4% rule Now, I'm not going to
call it that, because it'sdifferent, but any final words
or things you'd want to leavepeople with?
Speaker 2 (19:51):
Yeah, when folks buy my book, I like to pay
particular attention to thatchapter, to the end, when I talk
about how to manage a planduring retirement, Because that
previously hadn't received muchattention in the literature, and
I identified a couple ofcircumstances where your plan
may deviate from the benchmarkand what you should do about it.
In summary, if it's a stockmarket decline, you probably
(20:12):
don't have to do anything, butif inflation rears its ugly head
again, you need to get worriedand start taking measures
immediately to protect yourportfolio.
Speaker 1 (20:21):
I think that's a great thing to end on, because I
think that it's always good tohave a plan going into
retirement, Always good to havea general framework for what
that's going to look like.
But if there's not adjustmentsbeing made along the way in
response to the right things andin this case the right thing
might be inflation, less soother aspects you're either
leaving money on the table orpotentially setting yourself up
(20:42):
for a less than ideal retirement, both of which are not ideal.
So, Bill, thank you very much.
Thank you for the work thatyou've done over the past 30
plus years for the retirementcommunity, for the financial
advisor community.
I know that a lot of people arebetter off because of it.
So thank you for spending a fewminutes with me and with us
here on this channel.
Speaker 2 (21:00):
Thanks for the invitation.
I enjoyed it.
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