William “Bill” Bengen, whose 1994 study introduced the concept of the 4% withdrawal rate for retirees, recently participated in a question and answer session on social media website Reddit. The conversation focused on retirement withdrawal strategies and portfolio allocation. I’ll provide some highlights here. The full exchange is interesting, though you will want to set aside some free time as it encompasses nearly 450 questions and comments in total. Keep your eyes open for an interview with Bengen to appear in the AAII Journal early next year.
Not surprisingly, there were several questions about Bengen’s withdrawal strategy. The 4.5% rule is a guideline for how much can be safely withdrawn each year without causing the retiree to run out of money over a period of 30 years. As such, it is referred to as a safe withdrawal rate (SWR). The strategy starts by withdrawing 4.5% of portfolio assets (Bengen has increased the percentage since his original research was published). The dollar amount is then increased by inflation each year thereafter. [Bengen uses the consumer price index (CPI) for determining by how much the withdrawals should be increased.]
There were several questions about whether or not the 4.5% rule is still applicable in the current environment. Bengen believes the state of the economy has had “little bearing on safe withdrawal rates.” Rather, he thinks the big dangers are encountering a “major bear market early in retirement” and/or experiencing high inflation during retirement. (Bengen called inflation “the retiree’s worst enemy.”) Though the average safe withdrawal rate has historically been 7%, a bear market similar to what occurred in 1937 or 2000 drops the SWR to 5.25%. Adding in the heavy inflation of the 1970s lowers the SWR to 4.5%. Bengen then added, “So far, I have not seen any indication that the 4.5% rule will be violated.” Continue Reading »
More on AAII.com
- Will Your Savings Last? What the Withdrawal Rate Strategies Show – William Reichenstein explained what the withdrawal studies found and discussed some of their shortcomings.
- A Key to a Lasting Retirement Portfolio – Analysis by Fidelity found that staying within or below a 4% to 5% withdrawal rate decreases a retiree’s risk of outliving their retirement savings.
Highlights from this month’s AAII Journal
- Target Wealth: A Better Bet for Achieving Wealth Goals – Shifting to a conservative allocation once a targeted level of wealth is reached reduces risk without sacrificing financial goals.
- Strategies for Managing Required Minimum Distributions – Retirees have options when it comes to RMDs, including Roth IRA conversions, trusts, life insurance and emptying the IRA early.
AAII Sentiment Survey
Optimism is above its historical average for the just the sixth time this year. Pessimism is at its lowest level in about a month. More about this week’s results.
This week’s results:
- Bullish: 39.8%, up 4.2 points
- Neutral: 33.3%, up 1.7 points
- Bearish: 26.9%, down 5.9 points
- Bullish: 38.5%
- Neutral: 31.0%
- Bearish: 30.5%
Take the Sentiment Survey.
The Week Ahead
Second-quarter earnings season will begin heating up with 56 members of the S&P 500 scheduled to report, primarily mega-cap companies. Included in this group are Dow components Goldman Sachs Group (GS), Johnson & Johnson (JNJ), UnitedHealth Group (UNH) and International Business Machines (IBM) on Tuesday; American Express Co. (AXP) on Wednesday; Travelers Companies Inc. (TRV) and Verizon Communications Inc. (VZ) on Thursday; and Procter & Gamble Co. (PG) and General Electric Co. (GE) on Friday.
The week’s first economic report will be the October Empire State Manufacturing Survey, released on Monday. Tuesday will feature September import and export prices, September industrial production and capacity utilization as well as the October Housing Market Index. The Federal Reserve’s periodic Beige Book and September housing starts and building permits will be released on Wednesday. Thursday will feature the October Philadelphia Fed Business Outlook Survey. Ending the week, September existing home sales will be released on Friday.
Six Federal Reserve officials will make public appearances: Minneapolis president Neel Kashkari will speak on Monday. Vice Chair Stanley Fischer, New York president William Dudley and Dallas president Robert Kaplan will speak on Wednesday. Chair Janet Yellen and Cleveland president Loretta Mester will speak on Friday.
The Treasury Department will auction $5 billion of 30-year inflation-indexed securities (TIPS) on Thursday.
Local Chapter Meetings
AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you! Upcoming Meetings »