How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

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MikeG62
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How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by MikeG62 »

Pretty interesting podcast with Kitces and Bengen.

https://www.kitces.com/blog/bill-bengen ... c-57069329

The link contains a full transcript for those who don't have 80 minutes to listen to the full podcast.

A couple of quick observations:

1) I did not realize Bengen was such an active manager of his clients portfolios. Twice he entirely exited his clients from equities (once in or around 2000 and a second time in Sept of 2008). In the earlier case, he claimed to have gotten them back in at much lower levels. In the latter case, he admits to not having gotten them fully back in. Said he only began to get them back into equities around 2010. Said it was one of his biggest regrets. Attributes his mistake to under-appreciating the impact of QE.

2) He seems to put much more weight to the impact of inflation on SWR's than to the richness of equity valuations (as measured by CAPE). I believe he actually said inflation was a more important driver of portfolio longevity than sequence of returns (as relates to past history).

3) When pressed, he said he thinks the Safe Max going forward for a 30-year retirement is probably closer to 4.75% to 5.0%. Again, he cited low inflation as the big driver. Yet at the same time he called out the very high equity valuations and terribly low bond yields. So that was a bit of a disconnect for me. In fact, he said his personal allocation to equities is currently under 15%. Again, cited the high equity valuation (as measured by CAPE) as the reason for such a low equity allocation. Admitted it would be hard for an advisor to do this managing client portfolios (as that would lead to some tough conversations - "lots of explaining to do" is the way he characterized that), but said it's ok for him to do this with his own portfolio because he has no one to answer to but himself.

I wish Kitces had asked him why it was that if he believes in his own published research would he hold such a low % of his portfolio in equities. After all, his research indicated the sweet spot for equity allocations as between 50% and 60%. Why is it that he would hold such a low allocation to equities? Does he somehow think the future will not look like the past? Seems his actions might suggest that...

Moderators - I'd respectfully ask that this thread not be merged into the other thread current running on Bengen's recently published article on the 4.0% WD rate ("New Bengen Article Citing Kitces. SWR vs Valuation). I think this is different enough to warrant keeping it separate.
Last edited by MikeG62 on Wed Oct 14, 2020 6:30 am, edited 2 times in total.
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by rascott »

My guess to his low equity allocation is simply a factor of him having way more than "enough"... and having no need to take equity risk.
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by Svensk Anga »

MikeG62 wrote: Tue Oct 13, 2020 7:37 pm
A couple of quick observations:

1) I did not realize Bengen was such an active manager of his clients portfolios. Twice he entirely exited his clients from equities (once in or around 2000 and a second time in Sept of 2008).
There was another earlier case of his making a big allocation change. He convinced his father to exit the soft drink bottling business before he became a financial advisor. Apparently, that move was well timed as the business had very limited potential. Having made this call, he may have been more confident to make big moves in allocation later.
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by MikeG62 »

Svensk Anga wrote: Tue Oct 13, 2020 9:34 pm
MikeG62 wrote: Tue Oct 13, 2020 7:37 pm
A couple of quick observations:

1) I did not realize Bengen was such an active manager of his clients portfolios. Twice he entirely exited his clients from equities (once in or around 2000 and a second time in Sept of 2008).
There was another earlier case of his making a big allocation change. He convinced his father to exit the soft drink bottling business before he became a financial advisor. Apparently, that move was well timed as the business had very limited potential. Having made this call, he may have been more confident to make big moves in allocation later.
He talked about that during the podcast as well.
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by MikeG62 »

rascott wrote: Tue Oct 13, 2020 8:08 pm My guess to his low equity allocation is simply a factor of him having way more than "enough"... and having no need to take equity risk.
True, but then he takes other risks with such a high allocation to near zero yielding fixed income. If he has way more than enough, then shouldn't he be managing his money for those who are going to inherit it?

Here is an interesting quote from the interview, "once you get into preserving the capital, when you retire, you’ve got that chunk of money, you want to preserve it; you don’t want it to get diminished by any substantial amount because it may not come back. It may not."

Doesn't sound like someone who believes one should start retirement with a 4.0%-4.5% WD rate, increase it annually for inflation, and hold 50%-60% in equities.

I've read his book and I believe all the published articles ever written by him at one time or another and I don't recall him recommending retirees dive into or out of the stock market from time to time. Wasn't the conclusion of his research that a retiree holding an allocation of 50% to 60% in equities can comfortably withdraw 4.0%-4.5% of their portfolio in year one of retirement, increase that withdrawal level by inflation every year and not worry about money running out? Or was his research simply a recap of history without any attempt to suggest it is what one should/could do going forward? I don't recall it being the latter. Listening to this podcast, I am now not so sure...
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by balbrec2 »

rascott wrote: Tue Oct 13, 2020 8:08 pm My guess to his low equity allocation is simply a factor of him having way more than "enough"... and having no need to take equity risk.
Maybe he is a closet market timer
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by FearlesslyFifty »

balbrec2 wrote: Wed Oct 14, 2020 8:14 am
rascott wrote: Tue Oct 13, 2020 8:08 pm My guess to his low equity allocation is simply a factor of him having way more than "enough"... and having no need to take equity risk.
Maybe he is a closet market timer
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by Leesbro63 »

Here’s my recent thread on Kitces & Bengen:

viewtopic.php?f=10&t=326680

If you read it, you’ll see that Bengen panic-sold in 2008-9. He very well may be a (not so closet) market timer.

His SWR work is the gold standard; his credibility as an investment advisor isn’t quite as clear.
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by MikeG62 »

Leesbro63 wrote: Thu Oct 15, 2020 6:01 am Here’s my recent thread on Kitces & Bengen:

viewtopic.php?f=10&t=326680

If you read it, you’ll see that Bengen panic-sold in 2008-9. He very well may be a (not so closet) market timer.

His SWR work is the gold standard; his credibility as an investment advisor isn’t quite as clear.
The question in my mind is how much he believes in his own research when he does not follow it himself. Not for his clients and not for himself.

There is the old adage, don’t do as I say, but do as I do. What are we who follow his recommendation (or some variant of it) to make of this?
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by Leesbro63 »

MikeG62 wrote: Thu Oct 15, 2020 6:35 am
Leesbro63 wrote: Thu Oct 15, 2020 6:01 am Here’s my recent thread on Kitces & Bengen:

viewtopic.php?f=10&t=326680

If you read it, you’ll see that Bengen panic-sold in 2008-9. He very well may be a (not so closet) market timer.

His SWR work is the gold standard; his credibility as an investment advisor isn’t quite as clear.
The question in my mind is how much he believes in his own research when he does not follow it himself. Not for his clients and not for himself.

There is the old adage, don’t do as I say, but do as I do. What are we who follow his recommendation (or some variant of it) to make of this?
I share your concern. If you don’t eat your own cooking, why should I?
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by sixtyforty »

Aside from the fact that I doubt anyone follows the 4% rule as Bengen described, his story underscores how large a role emotions play into investing and withdrawals.
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by heyyou »

His SWR work is the gold standard; his credibility as an investment advisor isn’t quite as clear.
Bengen was the best of the first, but much more has been learned since then.

Retirement spending research based on historical returns started with Bengen's publishing the 4% plus inflation of a 60/40 allocation in 1994. His work replaced the then common suggestion of 100% dividend paying stocks as a retirement spending method that was known and obvious, but not deeply researched due to previous lack of data. The older method likely did not do well in the high inflation of the 1980's, prompting Bengen's computer analysis of newly available stock price history compiled from old newspapers stored in museums. Stock prices from 50 years prior were not useful in those days.
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by McGilicutty »

sixtyforty wrote: Thu Oct 15, 2020 7:05 am Aside from the fact that I doubt anyone follows the 4% rule as Bengen described, his story underscores how large a role emotions play into investing and withdrawals.
For being a board that seems to be mostly focused on investing for retirement, we don't seem to have many posters who are currently retired and living off investments. (Or maybe there's just not a lot that post about it).

The one poster that I know who posts about his experiences is Sheepdog. If I recall correctly, he retired with a 4.5% withdrawal rate many years ago, had to be talked off the 'selling out of equities' ledge in 2008, and now has around a 35%(?) allocation to equities.

It's his first-hand, white knuckle experience from 2008 that convinced me that I need a lower than 4% SWR when I retire. It's not that it won't work, it's just there may be times where the market takes a serious nosedive and suddenly you're withdrawing way more from your portfolio than is comfortable.
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by MikeG62 »

McGilicutty wrote: Thu Oct 15, 2020 5:40 pm

...For being a board that seems to be mostly focused on investing for retirement, we don't seem to have many posters who are currently retired and living off investments. (Or maybe there's just not a lot that post about it)...
FWIW, I early retired 5 years ago at 53. No pension and no plan to begin drawing SS until I hit 70. DW and I are living 100% off our portfolio. We are following a modified version of Guyton & Klinger's withdrawal decision rules (which rules were based upon Bengen's seminal work on Safe Withdrawal Rates). The modifications I've made is starting with a materially lower initial WD rate (low 3.0% area) and then developing customized guardrails off that lower initial WD rate. As an aside, over the last 5 years we have skipped the inflation adjustment in years following those where we underspent our budget by 5% or more. Just another way to add further conservatism.

Because we are largely following G&K's methodology, this interview was so intriguing to me.

I think there are lots of others who are retired like me, but don't post as frequently (not nearly as those still in the accumulation stage). Also, retired Boogleheads in general live a frugal/modest lifestyle. One only need to read the hundreds of threads here where the majority of comments are from people who are clearly much more interested in their ability to spend as little money as possible in retirement than on living up to the level of their means (although too be fair these people would claim to be perfectly content with their lifestyles at their spending level). I say this just to suggest that many retired Boogleheads aren't drawing anywhere close to 4.0% annually from their portfolio in retirement. Many are able to live off their pension and SS and their portfolio is gravy. So maybe a reason why there does not seem to be nearly as much interest/concern over the comments Bengen made in this interview as I expected?
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by Leesbro63 »

MikeG62 wrote: Fri Oct 16, 2020 9:11 am
McGilicutty wrote: Thu Oct 15, 2020 5:40 pm

...For being a board that seems to be mostly focused on investing for retirement, we don't seem to have many posters who are currently retired and living off investments. (Or maybe there's just not a lot that post about it)...
FWIW, I early retired 5 years ago at 53. No pension and no plan to begin drawing SS until I hit 70. DW and I are living 100% off our portfolio. We are following a modified version of Guyton & Klinger's withdrawal decision rules (which rules were based upon Bengen's seminal work on Safe Withdrawal Rates). The modifications I've made is starting with a materially lower initial WD rate (low 3.0% area) and then developing customized guardrails off that lower initial WD rate. As an aside, over the last 5 years we have skipped the inflation adjustment in years following those where we underspent our budget by 5% or more. Just another way to add further conservatism.

Because we are largely following G&K's methodology, this interview was so intriguing to me.

I think there are lots of others who are retired like me, but don't post as frequently (not nearly as those still in the accumulation stage). Also, retired Boogleheads in general live a frugal/modest lifestyle. One only need to read the hundreds of threads here where the majority of comments are from people who are clearly much more interested in their ability to spend as little money as possible in retirement than on living up to the level of their means (although too be fair these people would claim to be perfectly content with their lifestyles at their spending level). I say this just to suggest that many retired Boogleheads aren't drawing anywhere close to 4.0% annually from their portfolio in retirement. Many are able to live off their pension and SS and their portfolio is gravy. So maybe a reason why there does not seem to be nearly as much interest/concern over the comments Bengen made in this interview as I expected?
I agree that IT SEEMS that many/most here are withdrawing or shooting to withdraw somewhere in the 2-3% range. And that many ARE retired and withdrawing, but post less frequently than those in the age 45-65 range "on their way" to retiring.

And I agree that I don't think there are many who are blindly following the original 1995 Bengen concept of starting with a 4% SWR then blindly increasing (or decreasing) that with inflation.
Last edited by Leesbro63 on Fri Oct 16, 2020 11:26 am, edited 1 time in total.
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by BogleFan510 »

McGilicutty wrote: Thu Oct 15, 2020 5:40 pm
sixtyforty wrote: Thu Oct 15, 2020 7:05 am Aside from the fact that I doubt anyone follows the 4% rule as Bengen described, his story underscores how large a role emotions play into investing and withdrawals.
For being a board that seems to be mostly focused on investing for retirement, we don't seem to have many posters who are currently retired and living off investments. (Or maybe there's just not a lot that post about it).

The one poster that I know who posts about his experiences is Sheepdog. If I recall correctly, he retired with a 4.5% withdrawal rate many years ago, had to be talked off the 'selling out of equities' ledge in 2008, and now has around a 35%(?) allocation to equities.

It's his first-hand, white knuckle experience from 2008 that convinced me that I need a lower than 4% SWR when I retire. It's not that it won't work, it's just there may be times where the market takes a serious nosedive and suddenly you're withdrawing way more from your portfolio than is comfortable.
Good point. Those years were tough times.

As a retired member of the board living off our investments, I will admit to lowering my equity allocations then as well. Losing half our portfolio net worth, roughly, was super scary.

That said, context is everything. We were ahead of plan on savings and very high equities. Seeing my 500k 401k become 250k and having some guaranteed return options seemed so tempting.

Also, at the time, in our taxible account we had mostly all stocks, but were generating cash from my job. Real estate and tax free muni bonds in my state had tanked. We saw solid 30 year individual tax free local and state muni bonds yielding 5% coupons, falling in rating to A- and BBB+ ratings and could be bought for .75 to .80 of par. So a tax free 8% for 30 years seemed a better risk, reward, as it would meet our retirement basic income needs to buy a bunch of them, since no pension. They underperformed the recoving market and were called after 10 years, but were a great investment. Later our facts changed as I qualified for a small pension, so now more equities. Personal circumstances change all the time, and none of us know the future. Some day I may regret being 70% equities when we are well over our target WR (we are something like a 2% SWR, retired at 53).
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by rixer »

I'm 72 and retired 8 years ago. No pension, we draw SS and our portfolio. While we don't use the 4% plan as written, we use it as a guide. Like Taylor, we take a little more if it's a good year and less if it isn't. It still hovers around the original 4% either way.
We have more in our portfolio now than when we made our last contribution. We also are invested moderate conservative.
So far, so good.
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by gjlynch17 »

I am in my early 50s and planning for an early retirement in the next few years so withdrawal strategies in retirement (as well as the corresponding issue how much assets are required) is of great importance to me. I am of the belief that while there is no scientific formula to address these issues, there are excellent guidelines that have started with Bengen's "4% rule" and supplemented by later research by Guyton, Klinger, McClung, Kitces, Pfau, Blanchett, and others. These guidelines all point to the same implementation strategies of picking a prudent initial withdrawal rate based on needs, diversify, have an investment allocation that allows one to sleep at night and have flexibility in spending as conditions change.

For me, that involves using a PMT withdrawal strategy that has been discussed on this forum as it accounts for current valuations and expected returns. All of the retirement research indicates that valuations matter for withdrawal rates. One interesting piece of research that is new (at least for me) is Bengen's recent article on the impact of inflation. Specifically, Bengen's article referenced below, derived a SAFEMAX withdrawal rate based on equity valuations and historical 12-month CPI inflation and came up with an 86% predictive correlation.

https://www.fa-mag.com/news/choosing-th ... =40&page=4

While the precision of withdrawal recommendations is limited due to limited data set, the directionality and conclusion that inflation matters makes a lot of sense. It also provides comfort to retirees and those considering retirement in a world with negative real yields on fixed income, assuming that inflation stays low. I am still trying to work out the implications of this, but various alternatives to protect against the risk of inflation and/or long-term equity declines include the following:

-- deferring social security until age 70 (which is a no-brainer if financially possible and in good health)
-- not taking interest adjustments on withdrawals all or some of the time
-- including TIPS in a portfolio (despite my aversion to locking in negative interest rates
-- having a greater percentage to equities (70/30)
-- having a greater percentage to unhedged international equities (or at least market weight) to protect against U.S. inflation
-- including bond tents or other rising equity strategies (e.g. McClung) that avoid taking equity distributions in a down market
-- including MYGAs, SPIAs and DIAs to capture a liquidity premium and mortality credits to enhance fixed income returns

Coincidentally, my PMT withdrawal formula assuming projected returns based on an average of public information (e.g. Vanguard, BlackRock, Star, Research Affiliates, JP Morgan, AIQ), retirement in three years at age 55 and my current portfolio (assuming no growth in three years) is 4.15%, the same as Bengen's original recommendation. I am becoming more comfortable with this approach, although I still plan on working for three more years to build in a greater margin of safety.

I am interested in how others in the near retirement stage are thinking about these issues.
Last edited by gjlynch17 on Sat Oct 17, 2020 9:36 am, edited 2 times in total.
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by gjlynch17 »

Duplicate post.
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by firebirdparts »

Be cautious of thinking what hypocrites do is great and what they say is false. I don’t think this is a safe or smart response to hypocrisy. If I was going to guess based on human nature, I’d guess the opposite. This applies double to panic sellers.
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by Leesbro63 »

firebirdparts wrote: Sat Oct 17, 2020 9:46 am Be cautious of thinking what hypocrites do is great and what they say is false. I don’t think this is a safe or smart response to hypocrisy. If I was going to guess based on human nature, I’d guess the opposite. This applies double to panic sellers.
Who says panic sellers are hypocrites?
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by MikeG62 »

gjlynch17 wrote: Sat Oct 17, 2020 9:28 am

While the precision of withdrawal recommendations is limited due to limited data set, the directionality and conclusion that inflation matters makes a lot of sense. It also provides comfort to retirees and those considering retirement in a world with negative real yields on fixed income, assuming that inflation stays low. I am still trying to work out the implications of this, but various alternatives to protect against the risk of inflation and/or long-term equity declines include the following:

-- deferring social security until age 70 (which is a no-brainer if financially possible and in good health)
Yes, that is my plan as well.
gjlynch17 wrote: Sat Oct 17, 2020 9:28 am -- not taking interest adjustments on withdrawals all or some of the time
Yup, I am doing this in the years following those where we underspend our budget by roughly 5%+/-.
gjlynch17 wrote: Sat Oct 17, 2020 9:28 am -- including TIPS in a portfolio (despite my aversion to locking in negative interest rates
I have not been doing this. I feel like my strategy to identify promotional rate CD opportunities has been yielding more than I would get in TIPS. If inflation runs away the CD's will have matured by then and I can redeploy the funds into higher yielding opportunities.
gjlynch17 wrote: Sat Oct 17, 2020 9:28 am -- having a greater percentage to equities (70/30)
Not comfortable doing that.
gjlynch17 wrote: Sat Oct 17, 2020 9:28 am
-- having a greater percentage to unhedged international equities (or at least market weight) to protect against U.S. inflation
Not really.
gjlynch17 wrote: Sat Oct 17, 2020 9:28 am -- including bond tents or other rising equity strategies (e.g. McClung) that avoid taking equity distributions in a down market
I think this will naturally happen as we live off interest on fixed income, dividends on equities and cash or maturing CD's or muni bonds. We won't need to sell any equities for a very long time. So our fixed income will slowly drift down over time and equities should rise. This will cause equities as a % of our overall asset allocation to rise.
gjlynch17 wrote: Sat Oct 17, 2020 9:28 am -- including MYGAs, SPIAs and DIAs to capture a liquidity premium and mortality credits to enhance fixed income returns
Can't get enough funds in MYGA's (as a % of our overall portfolio) to have it make a difference (and not willing to invest funds above the state guarantee). Personally, not a huge annuity fan as I think the situation one is trying to ensure against in buying the annuity (repeat of the great depression or worse) would call into question the financial survival of the underlying insurance company. Otherwise I think a broadly diversified portfolio will outperform an annuity.
gjlynch17 wrote: Sat Oct 17, 2020 9:28 am I am interested in how others in the near retirement stage are thinking about these issues.
While I am not preparing for retirement, I am 5 years in. Thought I'd take a stab at providing my perspective on your question,
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by fishandgolf »

rixer wrote: Fri Oct 16, 2020 11:36 am I'm 72 and retired 8 years ago. No pension, we draw SS and our portfolio. While we don't use the 4% plan as written, we use it as a guide. Like Taylor, we take a little more if it's a good year and less if it isn't. It still hovers around the original 4% either way.
We have more in our portfolio now than when we made our last contribution. We also are invested moderate conservative.
So far, so good.
+1

Similar situation here. I'll be 67 soon...retired at age 55. DW age 65....retired in June 2020. I've been drawing ~3.4% from portfolio for the past 10 years. I started SS at age 62, DW at age 65. We just built a new house so this year I've been taking probably close to 5% from portfolio to cover projects like cement driveway, patio, landscape etc. I also use the 4% rule as a guide and will continue to do so.....we can adjust up or down as needed.

Before DW retired, my AA was 60/40......it's now 40/60. My portfolio is heathier today than it was when I first retired. My 3.4% draw covers ~50% of our annual budget.....SS covers the rest. Neither DW or I have a pension.....so far, so good.
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by Leesbro63 »

fishandgolf wrote: Sun Oct 18, 2020 10:00 am
Before DW retired, my AA was 60/40......it's now 40/60. My portfolio is heathier today than it was when I first retired. My 3.4% draw covers ~50% of our annual budget.....SS covers the rest. Neither DW or I have a pension.....so far, so good.
Having 60% of my portfolio earning a zeroish percent coupon would concern me. I get it that at age 72, you’ll probably be fine for the long haul. But with that much earning zero I’m guessing the odds are great of a declining portfolio over your retirement from here.

Put another way, I think many retired Bogleheads have an unstated secondary SWR goal of growing, maintaining or not greatly shrinking our portfolio.
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by 1210sda »

gjlynch17 wrote: Sat Oct 17, 2020 9:28 am Coincidentally, my PMT withdrawal formula assuming projected returns based on an average of public information (e.g. Vanguard, BlackRock, Star, Research Affiliates, JP Morgan, AIQ), retirement in three years at age 55 and my current portfolio (assuming no growth in three years) is 4.15%, the same as Bengen's original recommendation. I am becoming more comfortable with this approach, although I still plan on working for three more years to build in a greater margin of safety.
What is your projected return and how long is your target retirement horizon. (i.e. "n")
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by MikeG62 »

Leesbro63 wrote: Sun Oct 18, 2020 10:09 am
fishandgolf wrote: Sun Oct 18, 2020 10:00 am
Before DW retired, my AA was 60/40......it's now 40/60. My portfolio is heathier today than it was when I first retired. My 3.4% draw covers ~50% of our annual budget.....SS covers the rest. Neither DW or I have a pension.....so far, so good.
Having 60% of my portfolio earning a zeroish percent coupon would concern me. I get it that at age 72, you’ll probably be fine for the long haul. But with that much earning zero I’m guessing the odds are great of a declining portfolio over your retirement from here.
I would share that view if one were to purchase all of their fixed income at today's yields. However, most folks close to or in retirement have been holding their fixed income for a long time and their investments were made at much more attractive yields. Now, if rates remain at or around current levels for the next 5-10 years or longer, then I agree as bonds that mature will get replaced with lower yielding bonds. It seems like a bigger problem down the road if rates remain at such low levels. Of course, inflation will come into play as well.
Real Knowledge Comes Only From Experience
Leesbro63
Posts: 6813
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by Leesbro63 »

MikeG62 wrote: Sun Oct 18, 2020 10:20 am
Leesbro63 wrote: Sun Oct 18, 2020 10:09 am
fishandgolf wrote: Sun Oct 18, 2020 10:00 am
Before DW retired, my AA was 60/40......it's now 40/60. My portfolio is heathier today than it was when I first retired. My 3.4% draw covers ~50% of our annual budget.....SS covers the rest. Neither DW or I have a pension.....so far, so good.
Having 60% of my portfolio earning a zeroish percent coupon would concern me. I get it that at age 72, you’ll probably be fine for the long haul. But with that much earning zero I’m guessing the odds are great of a declining portfolio over your retirement from here.
I would share that view if one were to purchase all of their fixed income at today's yields. However, most folks close to or in retirement have been holding their fixed income for a long time and their investments were made at much more attractive yields
What happened before doesn’t matter. This Boglehead’s 40/60 portfolio is based on TODAY’s values. He already reaped the gains from rising bond prices (lowering of yields) BEFORE.
Topic Author
MikeG62
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Location: New Jersey

Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by MikeG62 »

Leesbro63 wrote: Sun Oct 18, 2020 10:27 am
MikeG62 wrote: Sun Oct 18, 2020 10:20 am
Leesbro63 wrote: Sun Oct 18, 2020 10:09 am
fishandgolf wrote: Sun Oct 18, 2020 10:00 am
Before DW retired, my AA was 60/40......it's now 40/60. My portfolio is heathier today than it was when I first retired. My 3.4% draw covers ~50% of our annual budget.....SS covers the rest. Neither DW or I have a pension.....so far, so good.
Having 60% of my portfolio earning a zeroish percent coupon would concern me. I get it that at age 72, you’ll probably be fine for the long haul. But with that much earning zero I’m guessing the odds are great of a declining portfolio over your retirement from here.
I would share that view if one were to purchase all of their fixed income at today's yields. However, most folks close to or in retirement have been holding their fixed income for a long time and their investments were made at much more attractive yields
What happened before doesn’t matter. This Boglehead’s 40/60 portfolio is based on TODAY’s values. He already reaped the gains from rising bond prices (lowering of yields) BEFORE.
Sure it does. He hasn't reaped any gains if he hasn't sold his fixed income. No matter what happens with interest rates, the bonds will mature at par (assuming they don't default). So he has seen a rise in the NAV of his fixed income, but hasn't monetized that unless he sells. Otherwise he will enjoy that upside in the form of the coupon until the bonds mature - which for him will be higher (coupon / cost basis of his investment) than for those who are buying at today's inflated NAV.

For example, I hold about 3 dozen individual muni bonds. All those bonds currently trade at prices (have a FMV) greater than I paid. However, the yield I am enjoying, based upon what I paid for those bonds ,is the same today as the yield on the day I bought them. What's happened to interest rates in the meantime is water under the bridge for me. It will be an issue when those bonds are called or mature and I need to reinvest the proceeds if rates remain at or near historic lows.

Another way of looking at it. Let's say his 60% fixed income is all in the form of a 7-year CD he bought two years ago at a 3.5% yield. The fact that other people buying a 7-year CD today might be getting between 1.5%-2.0% (at best) does not mean he is not enjoying a 3.5% yield on "his investment".
Real Knowledge Comes Only From Experience
coffeeblack
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by coffeeblack »

MikeG62 wrote: Fri Oct 16, 2020 9:11 am
McGilicutty wrote: Thu Oct 15, 2020 5:40 pm

...For being a board that seems to be mostly focused on investing for retirement, we don't seem to have many posters who are currently retired and living off investments. (Or maybe there's just not a lot that post about it)...
FWIW, I early retired 5 years ago at 53. No pension and no plan to begin drawing SS until I hit 70. DW and I are living 100% off our portfolio. We are following a modified version of Guyton & Klinger's withdrawal decision rules (which rules were based upon Bengen's seminal work on Safe Withdrawal Rates). The modifications I've made is starting with a materially lower initial WD rate (low 3.0% area) and then developing customized guardrails off that lower initial WD rate. As an aside, over the last 5 years we have skipped the inflation adjustment in years following those where we underspent our budget by 5% or more. Just another way to add further conservatism.

Because we are largely following G&K's methodology, this interview was so intriguing to me.

I think there are lots of others who are retired like me, but don't post as frequently (not nearly as those still in the accumulation stage). Also, retired Boogleheads in general live a frugal/modest lifestyle. One only need to read the hundreds of threads here where the majority of comments are from people who are clearly much more interested in their ability to spend as little money as possible in retirement than on living up to the level of their means (although too be fair these people would claim to be perfectly content with their lifestyles at their spending level). I say this just to suggest that many retired Boogleheads aren't drawing anywhere close to 4.0% annually from their portfolio in retirement. Many are able to live off their pension and SS and their portfolio is gravy. So maybe a reason why there does not seem to be nearly as much interest/concern over the comments Bengen made in this interview as I expected?
I like this method. I'm 53 seriously considering walking away. I'd like to know more about the modified Guyton & klinger. Our WR will be around 3.2 to 3.3 %. We also won't need to adjust for inflation every year. Our pervious spending didn't require it. Perhaps every 3 to 5 years we will have to adjust.
Leesbro63
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by Leesbro63 »

MikeG62 wrote: Sun Oct 18, 2020 10:40 am
Leesbro63 wrote: Sun Oct 18, 2020 10:27 am
MikeG62 wrote: Sun Oct 18, 2020 10:20 am
Leesbro63 wrote: Sun Oct 18, 2020 10:09 am
fishandgolf wrote: Sun Oct 18, 2020 10:00 am
Before DW retired, my AA was 60/40......it's now 40/60. My portfolio is heathier today than it was when I first retired. My 3.4% draw covers ~50% of our annual budget.....SS covers the rest. Neither DW or I have a pension.....so far, so good.
Having 60% of my portfolio earning a zeroish percent coupon would concern me. I get it that at age 72, you’ll probably be fine for the long haul. But with that much earning zero I’m guessing the odds are great of a declining portfolio over your retirement from here.
I would share that view if one were to purchase all of their fixed income at today's yields. However, most folks close to or in retirement have been holding their fixed income for a long time and their investments were made at much more attractive yields
What happened before doesn’t matter. This Boglehead’s 40/60 portfolio is based on TODAY’s values. He already reaped the gains from rising bond prices (lowering of yields) BEFORE.
Sure it does. He hasn't reaped any gains if he hasn't sold his fixed income. No matter what happens with interest rates, the bonds will mature at par (assuming they don't default). So he has seen a rise in the NAV of his fixed income, but hasn't monetized that unless he sells. Otherwise he will enjoy that upside in the form of the coupon until the bonds mature - which for him will be higher (coupon / cost basis of his investment) than for those who are buying at today's inflated NAV.

For example, I hold about 3 dozen individual muni bonds. All those bonds currently trade at prices (have a FMV) greater than I paid. However, the yield I am enjoying, based upon what I paid for those bonds ,is the same today as the yield on the day I bought them. What's happened to interest rates in the meantime is water under the bridge for me. It will be an issue when those bonds are called or mature and I need to reinvest the proceeds if rates remain at or near historic lows.

Another way of looking at it. Let's say his 60% fixed income is all in the form of a 7-year CD he bought two years ago at a 3.5% yield. The fact that other people buying a 7-year CD today might be getting between 1.5%-2.0% (at best) does not mean he is not enjoying a 3.5% yield on "his investment".
Unrealized gains have no impact on current allocation. Let’s say have a 40/60 portfolio. The 40% equity part was Vanguard Total Market that was purchased in 1980. The fact that that portion started as 1/10th (just a guess for illustration purposes) of what it is today has no bearing on the fact that the current value makes up 40% of the current portfolio. Same for bonds.
Leesbro63
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by Leesbro63 »

MikeG62 wrote: Sun Oct 18, 2020 10:40 am
Leesbro63 wrote: Sun Oct 18, 2020 10:27 am
MikeG62 wrote: Sun Oct 18, 2020 10:20 am
Leesbro63 wrote: Sun Oct 18, 2020 10:09 am

Having 60% of my portfolio earning a zeroish percent coupon would concern me. I get it that at age 72, you’ll probably be fine for the long haul. But with that much earning zero I’m guessing the odds are great of a declining portfolio over your retirement from here.
I would share that view if one were to purchase all of their fixed income at today's yields. However, most folks close to or in retirement have been holding their fixed income for a long time and their investments were made at much more attractive yields
What happened before doesn’t matter. This Boglehead’s 40/60 portfolio is based on TODAY’s values. He already reaped the gains from rising bond prices (lowering of yields) BEFORE.
Sure it does. He hasn't reaped any gains if he hasn't sold his fixed income. No matter what happens with interest rates, the bonds will mature at par (assuming they don't default). So he has seen a rise in the NAV of his fixed income, but hasn't monetized that unless he sells. Otherwise he will enjoy that upside in the form of the coupon until the bonds mature - which for him will be higher (coupon / cost basis of his investment) than for those who are buying at today's inflated NAV.

For example, I hold about 3 dozen individual muni bonds. All those bonds currently trade at prices (have a FMV) greater than I paid. However, the yield I am enjoying, based upon what I paid for those bonds ,is the same today as the yield on the day I bought them. What's happened to interest rates in the meantime is water under the bridge for me. It will be an issue when those bonds are called or mature and I need to reinvest the proceeds if rates remain at or near historic lows.

Another way of looking at it. Let's say his 60% fixed income is all in the form of a 7-year CD he bought two years ago at a 3.5% yield. The fact that other people buying a 7-year CD today might be getting between 1.5%-2.0% (at best) does not mean he is not enjoying a 3.5% yield on "his investment".
Unrealized gains have no impact on current allocation. Let’s say someone has a 40/60 portfolio. The 40% equity part was Vanguard Total Market that was purchased in 1980. The fact that that portion started as 1/10th (just a guess for illustration purposes) of what it is today has no bearing on the fact that the current value makes up 40% of the current portfolio. Same for bonds. You state that “he hasn’t monetized the (increased value of his) bonds”. Monetizing isn’t the issue; the issue is (correctly) using the current value of the bonds to determine that fixed income is 60% of the current portfolio.

I maintain my concern that the OP has 60% of his current portfolio earning near zero. Also it would be good if someone(s) would confirm or refute my thinking. Maybe I’m wrong.
rich126
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by rich126 »

This was an article that discussed SWR at Morningstar. One thing people had trouble understanding was how a SWR < return rate could initially increase the value but then the value of the portfolio decreased. They wrote a follow up article explaining that it was due to the SWR and returns being so close because over time the inflation rate caused the SWR to increase and the balance to start decreasing.

A confusing way of saying that if SWR+inflation > return then you may be in trouble. I think their example was SWR=4% but the return was only 4.1% and inflation estimate was 2% so eventually the SWR would increase > 4.1% and cause the balance to start decreasing.

https://www.morningstar.com/articles/10 ... ome-puzzle

Probably common sense here.
Topic Author
MikeG62
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Location: New Jersey

Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by MikeG62 »

coffeeblack wrote: Sun Oct 18, 2020 10:44 am
MikeG62 wrote: Fri Oct 16, 2020 9:11 am
McGilicutty wrote: Thu Oct 15, 2020 5:40 pm

...For being a board that seems to be mostly focused on investing for retirement, we don't seem to have many posters who are currently retired and living off investments. (Or maybe there's just not a lot that post about it)...
FWIW, I early retired 5 years ago at 53. No pension and no plan to begin drawing SS until I hit 70. DW and I are living 100% off our portfolio. We are following a modified version of Guyton & Klinger's withdrawal decision rules (which rules were based upon Bengen's seminal work on Safe Withdrawal Rates). The modifications I've made is starting with a materially lower initial WD rate (low 3.0% area) and then developing customized guardrails off that lower initial WD rate. As an aside, over the last 5 years we have skipped the inflation adjustment in years following those where we underspent our budget by 5% or more. Just another way to add further conservatism.

Because we are largely following G&K's methodology, this interview was so intriguing to me.

I think there are lots of others who are retired like me, but don't post as frequently (not nearly as those still in the accumulation stage). Also, retired Boogleheads in general live a frugal/modest lifestyle. One only need to read the hundreds of threads here where the majority of comments are from people who are clearly much more interested in their ability to spend as little money as possible in retirement than on living up to the level of their means (although too be fair these people would claim to be perfectly content with their lifestyles at their spending level). I say this just to suggest that many retired Boogleheads aren't drawing anywhere close to 4.0% annually from their portfolio in retirement. Many are able to live off their pension and SS and their portfolio is gravy. So maybe a reason why there does not seem to be nearly as much interest/concern over the comments Bengen made in this interview as I expected?
I like this method. I'm 53 seriously considering walking away. I'd like to know more about the modified Guyton & klinger. Our WR will be around 3.2 to 3.3 %. We also won't need to adjust for inflation every year. Our pervious spending didn't require it. Perhaps every 3 to 5 years we will have to adjust.
Here are some posts where I have discussed G&K and how I am applying it. Hopefully that will add clarity.

Your Retirement W/D method and why?
viewtopic.php?f=10&t=270480&p=4336633&h ... n#p4336633

Nearing early retirement, how to adjust planned withdrawal rate if market corrects?
viewtopic.php?f=1&t=204546&p=3137731&hi ... n#p3137731

How many of you use the "4% rule" during retirement?
viewtopic.php?f=10&t=241608&p=3790811&h ... n#p3790811
Real Knowledge Comes Only From Experience
gjlynch17
Posts: 198
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by gjlynch17 »

MikeG62 wrote: Sun Oct 18, 2020 9:23 am
While I am not preparing for retirement, I am 5 years in. Thought I'd take a stab at providing my perspective on your question,
Thanks for sharing!
gjlynch17
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by gjlynch17 »

1210sda wrote: Sun Oct 18, 2020 10:20 am
gjlynch17 wrote: Sat Oct 17, 2020 9:28 am Coincidentally, my PMT withdrawal formula assuming projected returns based on an average of public information (e.g. Vanguard, BlackRock, Star, Research Affiliates, JP Morgan, AIQ), retirement in three years at age 55 and my current portfolio (assuming no growth in three years) is 4.15%, the same as Bengen's original recommendation. I am becoming more comfortable with this approach, although I still plan on working for three more years to build in a greater margin of safety.
What is your projected return and how long is your target retirement horizon. (i.e. "n")
My model uses a longevity of 100 so my "n" is 100 - age. I did not put a lot of thought into that number but it seems conservative and it is the default of the VPW spreadsheet which I used for my model (adjusting, among other things, the expected return to be forward looking rather than backward looking).

The current projected real return is 3.27%. This is based on a 70%/30% split as follows:

17.5% U.S. Large (3.10%)
17.5% U.S. Small (3.68%)
25% International Developed (5.70%)
10% Emerging Markets (6.82%)
15% AGG (-0.46%)
15% Intermediate Investment Grade Corporate (0.28%)

These estimates are updated monthly.
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sperry8
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by sperry8 »

MikeG62 wrote: Fri Oct 16, 2020 9:11 am
McGilicutty wrote: Thu Oct 15, 2020 5:40 pm

...For being a board that seems to be mostly focused on investing for retirement, we don't seem to have many posters who are currently retired and living off investments. (Or maybe there's just not a lot that post about it)...
FWIW, I early retired 5 years ago at 53. No pension and no plan to begin drawing SS until I hit 70. DW and I are living 100% off our portfolio. We are following a modified version of Guyton & Klinger's withdrawal decision rules (which rules were based upon Bengen's seminal work on Safe Withdrawal Rates). The modifications I've made is starting with a materially lower initial WD rate (low 3.0% area) and then developing customized guardrails off that lower initial WD rate. As an aside, over the last 5 years we have skipped the inflation adjustment in years following those where we underspent our budget by 5% or more. Just another way to add further conservatism.

Because we are largely following G&K's methodology, this interview was so intriguing to me.

I think there are lots of others who are retired like me, but don't post as frequently (not nearly as those still in the accumulation stage). Also, retired Boogleheads in general live a frugal/modest lifestyle. One only need to read the hundreds of threads here where the majority of comments are from people who are clearly much more interested in their ability to spend as little money as possible in retirement than on living up to the level of their means (although too be fair these people would claim to be perfectly content with their lifestyles at their spending level). I say this just to suggest that many retired Boogleheads aren't drawing anywhere close to 4.0% annually from their portfolio in retirement. Many are able to live off their pension and SS and their portfolio is gravy. So maybe a reason why there does not seem to be nearly as much interest/concern over the comments Bengen made in this interview as I expected?
I've posted on my withdrawal retirement SWR before, see here for full info:
viewtopic.php?p=5496535#p5496535

I think Kitces is right based on my decade + of retirement and data points so far. While my SWR since retirement has been 3.28%, my data points to being able to withdraw ~4.5% (probably up to 5%) without issue as well. I have no need to withdraw those amounts, as I have everything I need... but it's nice to know there is a lot more that could be withdrawn if the need arose (or on the flip side, nice to know that much lower future returns wouldn't affect me at all).
BH contest results: 2019: #233 of 645 | 18: #150 of 493 | 17: #516 of 647 | 16: #121 of 610 | 15: #18 of 552 | 14: #225 of 503 | 13: #383 of 433 | 12: #366 of 410 | 11: #113 of 369 | 10: #53 of 282
JBTX
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by JBTX »

Interesting thread. It just reaffirms my belief that theory and history can only take you so far. It is one thing knowing what worked in history, it is another thing to be at one of those low points, or in a protracted multi year downturn, and pulling out a larger than comfortable withdrawal rate, hoping that the market goes up in time, as it historically has (in the US) to bail you out.

It's like having a front end car crash sensor. Maybe it keeps you from crashing into a wall. But it will probably be a harrowing and uncomfortable experience, and it isn't something you want to repeat, because the sensor could fail. So you decide to drive more defensively.

We are approaching retirement - maybe 5 years out for spouse give or take. Our goal would be to use a flexible withdrawal rate not to exceed 3.0%, and probably adapt if the market goes down a lot. Id expect we would be somewhere between 60/40 and 40/60. I can't imagine going to 15%. We are currently at 60/40. Unlike some others to we want to have some leftover for children.
coffeeblack
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by coffeeblack »

MikeG62 wrote: Sun Oct 18, 2020 12:26 pm
coffeeblack wrote: Sun Oct 18, 2020 10:44 am
MikeG62 wrote: Fri Oct 16, 2020 9:11 am
McGilicutty wrote: Thu Oct 15, 2020 5:40 pm

...For being a board that seems to be mostly focused on investing for retirement, we don't seem to have many posters who are currently retired and living off investments. (Or maybe there's just not a lot that post about it)...
FWIW, I early retired 5 years ago at 53. No pension and no plan to begin drawing SS until I hit 70. DW and I are living 100% off our portfolio. We are following a modified version of Guyton & Klinger's withdrawal decision rules (which rules were based upon Bengen's seminal work on Safe Withdrawal Rates). The modifications I've made is starting with a materially lower initial WD rate (low 3.0% area) and then developing customized guardrails off that lower initial WD rate. As an aside, over the last 5 years we have skipped the inflation adjustment in years following those where we underspent our budget by 5% or more. Just another way to add further conservatism.

Because we are largely following G&K's methodology, this interview was so intriguing to me.

I think there are lots of others who are retired like me, but don't post as frequently (not nearly as those still in the accumulation stage). Also, retired Boogleheads in general live a frugal/modest lifestyle. One only need to read the hundreds of threads here where the majority of comments are from people who are clearly much more interested in their ability to spend as little money as possible in retirement than on living up to the level of their means (although too be fair these people would claim to be perfectly content with their lifestyles at their spending level). I say this just to suggest that many retired Boogleheads aren't drawing anywhere close to 4.0% annually from their portfolio in retirement. Many are able to live off their pension and SS and their portfolio is gravy. So maybe a reason why there does not seem to be nearly as much interest/concern over the comments Bengen made in this interview as I expected?
I like this method. I'm 53 seriously considering walking away. I'd like to know more about the modified Guyton & klinger. Our WR will be around 3.2 to 3.3 %. We also won't need to adjust for inflation every year. Our pervious spending didn't require it. Perhaps every 3 to 5 years we will have to adjust.
Here are some posts where I have discussed G&K and how I am applying it. Hopefully that will add clarity.

Your Retirement W/D method and why?
viewtopic.php?f=10&t=270480&p=4336633&h ... n#p4336633

Nearing early retirement, how to adjust planned withdrawal rate if market corrects?
viewtopic.php?f=1&t=204546&p=3137731&hi ... n#p3137731

How many of you use the "4% rule" during retirement?
viewtopic.php?f=10&t=241608&p=3790811&h ... n#p3790811
Thank you.
marcopolo
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Joined: Sat Dec 03, 2016 10:22 am

Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by marcopolo »

JBTX wrote: Sun Oct 18, 2020 1:33 pm Interesting thread. It just reaffirms my belief that theory and history can only take you so far. It is one thing knowing what worked in history, it is another thing to be at one of those low points, or in a protracted multi year downturn, and pulling out a larger than comfortable withdrawal rate, hoping that the market goes up in time, as it historically has (in the US) to bail you out.

It's like having a front end car crash sensor. Maybe it keeps you from crashing into a wall. But it will probably be a harrowing and uncomfortable experience, and it isn't something you want to repeat, because the sensor could fail. So you decide to drive more defensively.

We are approaching retirement - maybe 5 years out for spouse give or take. Our goal would be to use a flexible withdrawal rate not to exceed 3.0%, and probably adapt if the market goes down a lot. Id expect we would be somewhere between 60/40 and 40/60. I can't imagine going to 15%. We are currently at 60/40. Unlike some others to we want to have some leftover for children.

It's all relative.
You think the 4% ia too risky, and that 3% going forward is prudent. There have been many threads suggesting 3% was also too risky given current valuations, low bond yields, etc., etc.

Since you mentioned a car analogy, let me try one.

The discussions on this forum about what is prudent reminds me of the quote about driving speeds.

"Anyone driving slower than me is an idiot, anyone driving faster than me is a maniac."
Once in a while you get shown the light, in the strangest of places if you look at it right.
marcopolo
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by marcopolo »

MikeG62 wrote: Thu Oct 15, 2020 6:35 am
Leesbro63 wrote: Thu Oct 15, 2020 6:01 am Here’s my recent thread on Kitces & Bengen:

viewtopic.php?f=10&t=326680

If you read it, you’ll see that Bengen panic-sold in 2008-9. He very well may be a (not so closet) market timer.

His SWR work is the gold standard; his credibility as an investment advisor isn’t quite as clear.
The question in my mind is how much he believes in his own research when he does not follow it himself. Not for his clients and not for himself.

There is the old adage, don’t do as I say, but do as I do. What are we who follow his recommendation (or some variant of it) to make of this?
In all fairness to Bengen, I doubt many people at large follow his research either. The SWR research is a reasonable guidepost to determine what might be "enough", but I do not think it is a realistic withdrawal method. I am not even sure he intended his research to be used that way.
Once in a while you get shown the light, in the strangest of places if you look at it right.
JBTX
Posts: 7127
Joined: Wed Jul 26, 2017 12:46 pm

Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by JBTX »

marcopolo wrote: Sun Oct 18, 2020 3:11 pm
JBTX wrote: Sun Oct 18, 2020 1:33 pm Interesting thread. It just reaffirms my belief that theory and history can only take you so far. It is one thing knowing what worked in history, it is another thing to be at one of those low points, or in a protracted multi year downturn, and pulling out a larger than comfortable withdrawal rate, hoping that the market goes up in time, as it historically has (in the US) to bail you out.

It's like having a front end car crash sensor. Maybe it keeps you from crashing into a wall. But it will probably be a harrowing and uncomfortable experience, and it isn't something you want to repeat, because the sensor could fail. So you decide to drive more defensively.

We are approaching retirement - maybe 5 years out for spouse give or take. Our goal would be to use a flexible withdrawal rate not to exceed 3.0%, and probably adapt if the market goes down a lot. Id expect we would be somewhere between 60/40 and 40/60. I can't imagine going to 15%. We are currently at 60/40. Unlike some others to we want to have some leftover for children.

It's all relative.
You think the 4% ia too risky, and that 3% going forward is prudent. There have been many threads suggesting 3% was also too risky given current valuations, low bond yields, etc., etc.

Since you mentioned a car analogy, let me try one.

The discussions on this forum about what is prudent reminds me of the quote about driving speeds.

"Anyone driving slower than me is an idiot, anyone driving faster than me is a maniac."
Channeling George Carlin I see!

I say 3.0%. But it is just an estimate, and whatever we use won't be fixed. If the market were to tank, that would likely be taken into consideration

Most likely what we would spend would be social security plus RMDS, give or take, and mostly leave Roth alone. Roth currently being a little less than half of tax advantaged, but hopefully we can sneak some conversions in along the way.
kd2008
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by kd2008 »

I do not understand "if market were to tank" craziness. What happened to stay the course?

Most sane people keep a year's worth of cash in retirement, some more than that.

These market tanking episodes are fairly regular. Why let that affect your life?
heyyou
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by heyyou »

Now that we have drifted a little, my suggestion for accommodating stock market reductions during retirement, is to use a spending method of some percentage of the ending portfolio balance of each previous year. The RMD percentage for my age is my preferred withdrawal number, with the emphasis on annually adapting the spending as retirement proceeds, not about whether those particular annual percentages are optimal. The research shows to add the spending of both the annual interest (a slight inflation adjustment) and the dividends. Thus, the retiree can often see in advance whether next year will have a little more or a little less spending. Delaying SS (to use its flexible start date) is another buffer for new retirees to then reduce necessary portfolio withdrawals during sustained poor stock periods in the earliest years of retirement.

It is common to have a stock price depression early in your retirement since the stock run-up has prospective retirees reaching their magic numbers, said the early retiree from 2005 who then encountered 2008. I still watch my monthly balance in the bond portfolio (sized at 10 years of portfolio spending) due to that crash, but the crash did help me to choose to delay SS to boost our inflation-buffered, future non-portfolio fixed income.
JustinR
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by JustinR »

Just accept the general concept of 4% SWR and ignore anything else he says.

I'm pretty sure 99% of Bogleheads will go for 3% instead. It's just in our nature. I can't imagine very many Bogleheads will stop at 4% and be fine with that.
Northern Flicker
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by Northern Flicker »

MikeG62 wrote: 1) I did not realize Bengen was such an active manager of his clients portfolios. Twice he entirely exited his clients from equities (once in or around 2000 and a second time in Sept of 2008). In the earlier case, he claimed to have gotten them back in at much lower levels. In the latter case, he admits to not having gotten them fully back in. Said he only began to get them back into equities around 2010. Said it was one of his biggest regrets. Attributes his mistake to under-appreciating the impact of QE.
This is the wrong attribution. The correct attribution is that nobody has ever demonstrated that they reliably can time the equity markets.
Risk is not a guarantor of return.
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by Leesbro63 »

Northern Flicker wrote: Mon Oct 19, 2020 1:10 am
MikeG62 wrote: 1) I did not realize Bengen was such an active manager of his clients portfolios. Twice he entirely exited his clients from equities (once in or around 2000 and a second time in Sept of 2008). In the earlier case, he claimed to have gotten them back in at much lower levels. In the latter case, he admits to not having gotten them fully back in. Said he only began to get them back into equities around 2010. Said it was one of his biggest regrets. Attributes his mistake to under-appreciating the impact of QE.
This is the wrong attribution. The correct attribution is that nobody has ever demonstrated that they reliably can time the equity markets.
+100
dknightd
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by dknightd »

Interesting read, thanks for sharing.

My take on this is that every investor is different. The research he did that showed 4% was safe for any historical 30 year period was very useful. Of course we do not know if history will repeat itself. We might have a worse 30 year period in the future. Or, we might never have a 30 year period that was that bad. We don't know. I guess time will tell. I wonder if I, or Bogleheads.org, will be around to see. . . Both podcast participants recognize the irony that recommended safe withdrawal rates are based on history, but historical returns can not predict the future.

Both he and others have extended that original research. If you expect to live more than 30 years after retiring you should take less out if you want to be safe. If you have a luckily diversified portfolio you can probably take a little bit more. For a 30 year expected lifetime 4% is still a useful guideline IMO. I agree with his assessment that inflation is just as important as portfolio return when deciding how much is "safe" to withdraw. Some people say you should take out less than 4% since valuations are high, and interest is low. But I would suggest that since inflation is also low, you can stick with the inflation adjusted 4% withdrawal since next years inflation adjusted withdrawal will not be much different than this years.

Somebody asked how retirees are using the information. I used it to inform me on how much I could take out my first year of retirement. I retired last year at 61, planned to live for 30 more years. This will be my first year of living on my savings. I'm now 62. So not yet FRA, but, not really an early retirement. I took out 6% this year. I do not currently plan give myself an inflation adjustment next year. I felt comfortable about taking 6% since I expect to have SS income in the future (probably when I turn 70). We had planned to travel this year, but the virus cancelled those plans. So instead we payed more on our mortgage. It was originally scheduled to be paid off when I was 68, at the current rate it will be paid when I'm 64.

I plan to do a reassessment every year as long as I am capable of it. For the next few years I will assume I have 30 years left. I do not expect to have to decrease our spending in nominal dollars. For me worse case is we go a few years without inflation adjustments (we survived those when I was working).

There are many potential dangers to my plan. Some of them are:
Inflation bigger than 3% for a long period of time
Future SS benefits getting cut back
An extended (10 years) period of bad returns from stock investments.
I feel I can adjust to them if required. I hope I do not have to try.
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds.
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willthrill81
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by willthrill81 »

marcopolo wrote: Sun Oct 18, 2020 3:18 pm
MikeG62 wrote: Thu Oct 15, 2020 6:35 am
Leesbro63 wrote: Thu Oct 15, 2020 6:01 am Here’s my recent thread on Kitces & Bengen:

viewtopic.php?f=10&t=326680

If you read it, you’ll see that Bengen panic-sold in 2008-9. He very well may be a (not so closet) market timer.

His SWR work is the gold standard; his credibility as an investment advisor isn’t quite as clear.
The question in my mind is how much he believes in his own research when he does not follow it himself. Not for his clients and not for himself.

There is the old adage, don’t do as I say, but do as I do. What are we who follow his recommendation (or some variant of it) to make of this?
In all fairness to Bengen, I doubt many people at large follow his research either. The SWR research is a reasonable guidepost to determine what might be "enough", but I do not think it is a realistic withdrawal method. I am not even sure he intended his research to be used that way.
I agree. The big point of Bengen's research was that the SWR wasn't the 7% being tossed around all the time. People apparently weren't explicitly aware of sequence of returns risk. Bengen was definitely the 'conservative' voice when his work was published in 1994, even though many now claim that 4% is too high. And yes, I don't recall that Bengen ever said in his initial paper at least that retirees should withdraw no more but no less than 4%.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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willthrill81
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by willthrill81 »

JustinR wrote: Mon Oct 19, 2020 1:03 am I'm pretty sure 99% of Bogleheads will go for 3% instead. It's just in our nature. I can't imagine very many Bogleheads will stop at 4% and be fine with that.
Actually, I know of several posters here who are planning on or actually withdrawing at least 4% of their portfolio balance, though I don't know of anyone who is planning on using the purely fixed withdrawals that Bengen tested (but did not explicitly advocate anyone actually use) in his 1994 paper. Human beings innately and rightly understand that deciding on day 1 of retirement how much they will withdraw in inflation-adjusted dollars every year for the next 30 years is not wise, to put it mildly.

Depending on many factors, I would be very comfortable with a 4% initial withdrawal rate when I retire at 52 because 75% of our estimated SS benefits at age 70 would cover at least 50% of our anticipated spending. But at the same time, we plan to be flexible with our withdrawals and cut them by as much as half if needed.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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MikeG62
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Re: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement

Post by MikeG62 »

willthrill81 wrote: Mon Oct 19, 2020 9:01 am
marcopolo wrote: Sun Oct 18, 2020 3:18 pm
MikeG62 wrote: Thu Oct 15, 2020 6:35 am
Leesbro63 wrote: Thu Oct 15, 2020 6:01 am Here’s my recent thread on Kitces & Bengen:

viewtopic.php?f=10&t=326680

If you read it, you’ll see that Bengen panic-sold in 2008-9. He very well may be a (not so closet) market timer.

His SWR work is the gold standard; his credibility as an investment advisor isn’t quite as clear.
The question in my mind is how much he believes in his own research when he does not follow it himself. Not for his clients and not for himself.

There is the old adage, don’t do as I say, but do as I do. What are we who follow his recommendation (or some variant of it) to make of this?
In all fairness to Bengen, I doubt many people at large follow his research either. The SWR research is a reasonable guidepost to determine what might be "enough", but I do not think it is a realistic withdrawal method. I am not even sure he intended his research to be used that way.
I agree. The big point of Bengen's research was that the SWR wasn't the 7% being tossed around all the time. People apparently weren't explicitly aware of sequence of returns risk. Bengen was definitely the 'conservative' voice when his work was published in 1994, even though many now claim that 4% is too high. And yes, I don't recall that Bengen ever said in his initial paper at least that retirees should withdraw no more but no less than 4%.
True, but he also did not suggest advisors should move their clients in and out of equities during retirement. If I am wrong about this, please correct me.

A few quotes from his book, Conserving Client Portfolios During Retirement:

Chapter 2, SAFEMAX: The 4 percent Solution, "I frequently recommend a fixed stock allocation of 65% for all but my most conservative clients. I am not averse to recommending stock allocations as high as 75% because little is conceded in the SAFEMAX and the possibilities of wealth accumulations are enhanced." (page 23)

Chapter 9, Reducing Equity Allocation During Retirement: Help or Hindrance, "I believe...that unless a client's life expectancy is unalterably shortened by disease of other circumstances, it is not beneficial to intentionally reduce equity allocation during retirement. As a consequence of such a reduction in equities, the client must endure lower income during retirement, and receives no commensurate benefit in capital preservation."

So despite what "he frequently recommends and believes" (his words not mine), this is not the way he managed his own clients portfolio's (or his own). This is the disconnect which I find puzzling.
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