The Retirement Spending Solution
William P. Barrett, 05.04.11, 06:00 PM EDT
Forbes Magazine dated May 23, 2011
Financial planner Bill Bengen defends his conclusion that retirees can spend 4.5% of their savings a year and not outlive their money.
Bill Bengen sure looks the part of a comfortable early retiree. At 63 he splits his time between two California homes--the one near Palm Springs has a back-yard pool and putting green. He spends his days clad in sports shirt and shorts and goes out to lunch frequently with his wife of 35 years, Cookie. "It's nice out here," the Brooklyn native says contentedly.
But Bengen still works full-time--from home--as a financial planner, and his reputation now extends far beyond his roster of 90 paying clients.
That's because in 1994 he wrote (under his full name of William P. Bengen) a seminal article in the Journal of Financial Planning that attempted to answer a question most retired and soon-to-be-retired folks ask: How much of my savings can I spend each year without outliving my money or losing buying power to inflation?
By sifting through reams of financial and market data back to the mid-1920s and running hundreds of scenarios, Bengen came up with an answer. Tweaked a little over the years, it goes like this: If you spend 4.5% of the assets in your tax-deferred accounts in your first year of retirement and increase that annual dollar amount each year by the inflation rate, your nest egg will last at least 30 years under all the historical scenarios tested.
Bengen calls this the "Safemax" withdrawal rate, but it's more widely known as the "4% rule" or the "Bengen rule." Even detractors consider it influential. "Among retirement-income planners [it] has caught on like wildfire," groused a recent Financial Analysts Journal article that deemed the rule arbitrary. In recent years it has been attacked as producing too high a withdrawal rate given current unsettled economic times. On the other hand, before the 2008 stock market meltdown--and even after--it has also been criticized as too low a rate.
Plus, his rule always came with qualifiers--he is, after all, a numbers guy. Bengen earned his math chops at the Massachusetts Institute of Technology, where he majored in aeronautics and astronautics, hoping to become an astronaut. But after concluding that the field had limited growth opportunities, he joined his family's soda bottling company in New York. "All I drank growing up was 7-Up," he laughs. Eventually he became the company's president.
The business was sold in 1987, leaving Bengen flush with his own cash to manage and looking for something to do. He moved his family to southern California, studied to become a Certified Financial Planner and in 1990 hung out his shingle. As a fee-only planner, he is paid solely by clients, not by commissions from selling products.
From the start many of the clients Bengen attracted were at or nearing retirement and asking the same thing: How much could they take out of savings? "It was a pretty good question," he says. "Most people in retirement want to spend as much as they can.''
To answer it he needed information on historical rates of return for various asset classes and how they're correlated (which go up when others go down). Bengen found the numbers in the annual data-filled yearbooks published by Chicago's Ibbotson Associates, now a division of Morningstar. He also made a number of assumptions. The money would have to last three decades, which he figured would cover more than 90% of all 65-year-olds, and to preserve purchasing power, withdrawal amounts would need to be indexed for inflation. The money would be in a tax-favored retirement account like an IRA or a 401(k), allowing for further tax-deferred accumulations of the unwithdrawn portion. He wanted protection for worst-case investment scenarios such as prolonged market meltdowns or renewed high inflation.
His initial answer: 4.2% of assets. In 2006, after further research, he raised the first-year base withdrawal to 4.5%. (From a taxable account, his figure is 4.1%, to accommodate the drag of annual taxes on investment returns.)
But this isn't a set-it-and-forget-it approach. The Bengen method requires periodic rebalancing of the remaining portfolio among different asset classes. Moreover, at odds with some but not all planners, Bengen urges that a relatively high percentage of a retiree's portfolio be allocated to stocks. "It's the best way to deal with inflation," he declares.
Whereas one traditional rule of thumb suggests a 65-year-old should have only 35% of his money in stocks, Bengen's 1994 study assumed a 50-50 division between stocks and bonds. He later pronounced himself comfortable with as much as 75% in stocks and now recommends 55%, mostly in large-cap multinationals. While he likes index mutual funds, for his clients he often also picks individual stocks--such as Coca-Cola ( KO - news - people ), Intel ( INTC - news - people ), McDonald's ( MCD - news - people ) and Procter & Gamble ( PG - news - people )--because "I can't find a mutual fund focusing on the specific stocks I want."
The remainder goes into intermediate-term government bonds (because of the increased volatility of long-term bonds, Bengen sees no additional value in them) and, as a further inflation hedge, gold. "A vital component of an investor's portfolio today," he says. Bengen hasn't studied in detail the possible impact of international stocks on the withdrawal rate. "A fertile area for future research,'' he says.
Bengen views the Safemax rate more as a starting point. His published works, including a 2006 book, Conserving Client Portfolios During Retirement, allow for variations based on such factors as risk tolerance and projected longevity from, say, genes or smoking. "A long-lived client should use a slightly lower withdrawal rate; a client planning on making an early exit can use a very high withdrawal rate," Bengen says.
Withdrawals might also vary with the stage of retirement (for instance, if you assume you'll spend less when you're too old to globe-trot) or even on the previous year's investment performance. This last variation, Bengen warns, would likely lead to sharp changes in money available to spend each year. But that might be okay if income generated by nonportfolio sources--such as traditional pensions and Social Security--covers most of your fixed living expenses.
One problem with withdrawing from a portfolio heavily into equities is the corrosive effect of a stock market drop early in retirement--a fall from which the retiree might never recover if he continues to make withdrawals based on 4.5% of his beginning balance. To reduce the chances of this, Bengen, at heart a value investor, looks at current price/earnings ratios and doesn't load up on stocks when they're expensive compared to historical norms--think 2000 and 2007.
Or today. "Buying most American stocks now seems to me like buying a house in late 2005 hoping to get a successful ‘flip,'" Bengen says. "You may end up like the Wicked Witch of the East"--meaning flattened in Oz by Dorothy's falling house.
In some ways Bengen's calculations and other withdrawal-rate studies are all aimed at fashioning an ersatz immediate annuity. That's where you hand over a large lump of cash to an insurance company now in return for a string of equal, usually monthly, payments that run until your death or, in a joint annuity, until your spouse's death, too. There's certainty and no investment risk aside from the remote prospect the insurer might go under. (That risk can be reduced by using multiple companies.) FORBES has long recommended low-cost immediate annuities for some retirees.
Right now immediateannuities.com quotes the yearly payout for a 65-year-old man buying a single life annuity at 6.3% of the annuity's purchase price. That's a lot higher than Bengen's 4.5% payout rule. But there are two big differences. The 6.3% includes no inflation protection. An inflation rider reduces the yearly payout to just 4.4%, close to Bengen's standard. And, of course, at the end of an immediate annuity (i.e., your death) there's nothing left for heirs. (The fear that retirees will get run over by a bus the day after buying an immediate annuity is one big reason they tend to shun them.) Also, with Safemax, unlike an annuity, the assets are available all along if the retiree wants to, say, lend a child a down payment for a home.
But does Bengen's method really guarantee you won't outlive your cash? His research uses a 30-year retirement span, presumably starting at age 65. However, actuarial tables for couples that age suggest at least one spouse will live to 95 or beyond 18% of the time. A problem? Not really, since there's almost always a cushion. Bengen figures with a 4.5% payout rate, when someone hits 95 he will still have a stash worth at least the initial value of his portfolio 96% of the time. Usually he'll have much more left. "It is a misconception that following the Safemax leads to terminal poverty," Bengen says.
Another issue: Implementing Bengen's method by yourself, with its portfolio rebalancing, can be tricky. Can an average retiree handle this himself? "There are plenty of individuals who could do it," he answers. "But they must be prepared to spend large blocks of time on portfolio management."
Meanwhile, Bengen remains confident that his 4.5% rule "does the job in terms of establishing a ballpark withdrawal rate." When he finally does retire, he fully expects to follow it.
|Notice||How to write your comments onto a webpage||운영자||2016.07.07||2016.07.07||883|
|Notice||How to use Rich Text Editor||운영자||2016.06.28||2017.07.19||400|
|Notice||How to Write a Webpage||운영자||2016.06.28||2017.07.19||384|
|Notice||Brief Instruction of using SNUMA Website||운영자||2008.04.28||2016.06.28||337|
|50||Death In the mountain - Story of Marty Schmidt ||운영자||2017.05.04||2017.07.11||63|
|49||How to autostart "iframe" youtube video||운영자||2017.03.02||2017.03.02||95|
|48||한국을 둘러싼 국제 정치 의 현주소||이건일*68||2017.01.08||2017.01.08||113|
|47||How to Upload Pictures in webpages||운영자||2016.07.07||2017.07.11||122|
|46||Rounded boder ||운영자||2016.07.03||2016.09.28||122|
|45||PC Keyboard Shortcuts You Need to Know ||운영자||2016.06.29||2016.07.09||388|
|44||Missing Language Bar||운영자||2015.05.17||2015.05.17||315|
|42||dt, dl codes||운영자||2013.11.17||2013.11.17||48|
|41||New "Sam-Kook-Ji" Drama Series, in Korean ||운영자||2012.09.06||2012.09.06||932|
|40||When your computer is taken over by a virus||운영자||2011.06.19||2011.06.19||191|
|»||Retirement Savings and Distribution ||운영자||2011.05.05||2011.05.05||126|
|38||YouTube Video by Embed Tag ||운영자||2011.03.29||2016.07.03||446|
|37||Mahjong Basics ||운영자||2010.12.23||2010.12.23||146|
|35||Good looking fancy fonts ||운영자||2010.10.09||2010.10.09||101|
|34||Good looking fancy fonts ||운영자||2010.10.09||2016.07.03||373|