Bengen says 4.5% is the new 4%

[bizlady]

https://www.barrons.com/articles/th...he-says-it-now-could-be-up-to-4-5-51611410402

 

[GenXguy]

https://www.barrons.com/articles/th...he-says-it-now-could-be-up-to-4-5-51611410402

LOL They are 14 to 15 years behind with the news.

He said it was now the 4.5% rule back in 2006 IIRC and even said 5% just last year. I mentioned this in the past. Let me find some links and post back to this thread.

Edit:

https://www.early-retirement.org/forums/f44/s-and-p-500-vs-the-market-98465.html#post2258927

https://www.marketwatch.com/story/the-inventor-of-the-4-rule-just-changed-it-11603380557

Someone retiring then would still have been OK for 30 years if they withdrew no more than 4% (actually, in 2006 he raised that calculation to 4.5%), Bengen says.

Bengen says based on the current environment he thinks a new retiree should be safe if they start with a withdrawal rate of…no more than 5%.“That’s what I use myself,” Bengen told me when we spoke by phone.OK, so it’s not an earth-shattering change from 4%. It’s even less of a change from the updated “worst case scenario” rule of 4.5%. But the 4% rule is now a 5% rule, if you like.

 

[YVRRocketSurgery]

Doesn't hurt to hear it from the horse's mouth.
Here's a great recent interview with Bill Bengen on the Rational Reminder podcast. Benjamin Felix and Cameron Passmore do a great job covering the original research by Bill Bengen, his more recent research, and pragmatic parameters for someone looking to apply the 4% rule.

Here are their notes from the podcast as linked above. For the Youtube video below, the timestamps are off by about 2:20 (add 2m20s to them).

• Introducing today’s guest, financial advisor and 4% rule creator William Bengen. [0:00:15]
• Exploring William’s original 1994 research that led to the 4% rule. [0:03:58]
• Hear why the 4% rule has been so impactful to the world of financial planning. [0:05:06]
• William shares details about the ‘hate mail’ his findings inspired. [0:06:07]
• Why William updated his theory to include small-cap stocks. [0:07:43]
• William’s view that you might be able to get away with withdrawal rates that are higher than 4.5%. [0:08:26]
• Whether young retirees should adhere to the 4% rule. [0:11:48]
• The scenarios that break the 4% rule. [0:13:02]
• How the 4% rule applies in countries outside of Canada and the US. [0:13:55]
• Insights into how much you should be spending in your retirement. [0:15:28]
• What your triggers should be if you want to deviate from the 4% rule. [0:17:45]
• William’s views on dynamic spending. [0:20:09]
• Tips on keeping track of your expenses and William’s throughs on fixed annuities. [0:21:20]
• Whether you should taper your retirement income. [0:22:54]
• The role of bonds versus small-cap stocks in your retirement portfolio. [0:24:04]
• From rocket scientist to financial advisor, hear about William’s extraordinary career. [0:28:29]
• Reasons why financial planning should be fee and not commission-based. [0:32:02]
• Reflecting on the impact that William has made on his client’s lives and in the financial world. [0:32:55]
• Details on William’s current research and what most excites him. [0:34:48]
• How William defines success for himself. [0:37:01]

Rational Reminder Podcast interviewing Bill Bengen

 

[DrRoy]

Short on time now but will watch later.

 

[38Chevy454]

Doesn't hurt to hear it from the horse's mouth.
Here's a great recent interview with Bill Bengen on the Rational Reminder podcast. Benjamin Felix and Cameron Passmore do a great job covering the original research by Bill Bengen, his more recent research, and pragmatic parameters for someone looking to apply the 4% rule.

Thanks for the link, I will also watch it later

 

[Sunset]

That was a great video, and I learned some new things.

Thanks............

 

[walkinwood]

Thanks for sharing the video.


Here's a link to his recent paper linking SAFEMAX to CAPE & inflation:


https://www.fa-mag.com/news/choosin...awal-rate-at-retirement-57731.html?section=40


I like the last question the hosts asked. Bengen says that he asks himself 3 questions each night (I'm paraphrasing here...)
- Did I learn something new or create something today?
- Did I help someone today?
- Did I reflect on the wonder that is life and the universe?
And if he said yes to all three, it was a successful day. And if the preponderance of days were like this, he'd have a successful life.

 

[Bullwinkle]

I liked the bit about "market gives and takes, inflation only takes."

He mentions the usual thing about bond yields going down when interest rates go down, making bonds pretty useless at the moment, where "the moment" is not well defined. I've heard this before but was never totally clear on it, so this seems as good a time as any to ask. I was thinking I should put some more stuff in a less volatile place and the traditional answer is bonds, right?

If I look at https://investor.vanguard.com/mutual-funds/profile/performance/vbtlx, for 1, 3, 5, 10 year yields it has 4.65%, 5.50%, 4.00%, 3.70%. That seems pretty reasonable to me, basically at or sightly above inflation. If I look at the graph it's pretty much up and to the right without the big drops that something like VTSAX has. But looking closer, there's a flat spot from around 2016 to 2019, and then maybe another one starting in 2020, but maybe too early to tell.

So from the yield percents, it seems like bonds are no better or worse than they ever were, which is to say, serve their main purpose of not going down, and the secondary one of going up more or less enough to offset inflation. But from the graph, there's that flat spot where I assume they are not being any better than cash. Is that what people refer to when they say "nowadays" bonds aren't serving their purpose?

And even if they're not, the real question is "what else then?" If there's nothing else, then bonds are still the answer to the cash-esque safety blanket, right?

 

[Out-to-Lunch]

I liked the bit about "market gives and takes, inflation only takes."

He mentions the usual thing about bond yields going down when interest rates go down, making bonds pretty useless at the moment, where "the moment" is not well defined. I've heard this before but was never totally clear on it, so this seems as good a time as any to ask. I was thinking I should put some more stuff in a less volatile place and the traditional answer is bonds, right?

If I look at https://investor.vanguard.com/mutual-funds/profile/performance/vbtlx, for 1, 3, 5, 10 year yields it has 4.65%, 5.50%, 4.00%, 3.70%. That seems pretty reasonable to me, basically at or sightly above inflation. If I look at the graph it's pretty much up and to the right without the big drops that something like VTSAX has. But looking closer, there's a flat spot from around 2016 to 2019, and then maybe another one starting in 2020, but maybe too early to tell.

So from the yield percents, it seems like bonds are no better or worse than they ever were, which is to say, serve their main purpose of not going down, and the secondary one of going up more or less enough to offset inflation. But from the graph, there's that flat spot where I assume they are not being any better than cash. Is that what people refer to when they say "nowadays" bonds aren't serving their purpose?

And even if they're not, the real question is "what else then?" If there's nothing else, then bonds are still the answer to the cash-esque safety blanket, right?

You are looking at the historical return chart, but you must appreciate that much of the "up and to the right" that you referred to was due to falling interest rates. The flat spot you refer to was a period when rates weren't falling. Rates are now essentially zero, so not much more room for "up and to the right" from additional rate cuts.

I think of bonds as ballast -- in both the good and bad senses of the term!

 

[Bullwinkle]

Oh, I hadn't understood that part where the falling movement of the interest rates actually causes the rising value of the bonds. As I understood it, bond returns are simply interest rates, so when they go down then bond returns go down. It's the cost of debt. But this new wrinkle is that the actual movement downwards somehow causes them to have a higher return, so they look good again... but only for as long as the rate can keep going down. Is that accurate?

In that case, there would indeed be reason to believe that the current flat section will last until rates go up again. But I don't know when that is, so unless widely agreed that it'll surely stay this way for an unusually long time, then bonds still don't really seem any worse than they ever were. They go up, even though sometimes they get stuck for a few years. Isn't that what you sign up for with bonds? Maybe in the past they didn't have the flat spots and now he's saying that without the "guaranteed" no flat spots, bonds are no longer working as a hedge against recession so might as well go all-in on stocks?

I guess if inflation gets high then you might need a high return from stocks just to stand still... but even in that case, selling during a low market is still bad, and even money-losing bonds that don't follow the market down are still better than stocks that do. Or rather, we could say that since deflation drags down all strategies equally, it doesn't change your strategy.

 

[Pete10k]

https://www.barrons.com/articles/th...he-says-it-now-could-be-up-to-4-5-51611410402

Thanks for the link. The Barron’s comment section and Bergen’s replies to comments are great too.

 

[Out-to-Lunch]

But this new wrinkle is that the actual movement downwards somehow causes them to have a higher return, so they look good again... but only for as long as the rate can keep going down. Is that accurate?

Yes, pretty much. Let me try and break it out a little. The total return of bonds has two components: the interest it bears, and capital appreciation/depreciation. (And by the way, the term "yield" in bonds generally refers to the interest part only. And I need to also define "coupon rate," which is the interest rate that the bond pays at the time that it is issued.)

Let's say that you bought a bond. If interest rates are unchanging, your return is simply the interest it bears. However, let's say interest rates fall, i.e., new bonds being issued have a lower coupon rate than yours. Your old bond is now more valuable -- its price rises until the yield going forward is the same as new bonds being issued. Thus, you got some immediate return (in the form of capital appreciation). On the other hand, if interest rates rise, the value of your bond will fall. (Why would I want to buy your bond at full price, if I could buy a new one paying a higher coupon rate?)

If you buy a bond at issue and hold it to maturity, these waxes and wanings in the capital value of the bond cancel out, and your total return will be determined by the coupon rate, as promised when you bought the bond.



I would say you are starting to get it, but here is a place to do more reading: https://www.investopedia.com/articles/investing/121015/yield-vs-total-return-how-they-differ-and-how-use-them.asp