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Bogleheads® Conference 2024 The History of Safe Withdrawal Rates with William Bengen


Chapters

0:0 Introduction
1:40 What is the 4% rule?
2:55 How has the 4% rule changed?
4:45 Valuations on sustainable spending in retirement
10:48 How fees impact distribution rates
12:55 Historical data vs Monte Carlo simulation
16:36 Sustainable distribution rate by tax treatment of account
18:0 4% rule and early retirees
21:9 The importance of rebalancing
22:41 Inflation and distribution rates
24:15 Sustainable spending rate for someone retiring right now
26:59 Alternative sustainable withdrawal strategies
29:55 Preserving real principal for legacy
31:35 Retiring internationally
32:54 The tax impact of rebalancing
34:4 Case study of 73 year old retiree
35:33 What withdrawal method do you use for your own retirement?
37:15 Today’s higher bond yields on a sustainable distribution rate
38:20 Case study: retiring with ongoing health issues
39:40 Weighing retirement research relevancy by its recency
43:5 The role of dividends on sustainable spending in retirement
44:25 Recently-added asset classes in Bengen’s research

Whisper Transcript | Transcript Only Page

00:00:00.000 | (audience applauding)
00:00:03.160 | - Folks, my name is John Luskin.
00:00:09.360 | You may remember me from such shows as Bogleheads Live
00:00:12.920 | and doing a brief stint on the
00:00:14.520 | Bogleheads on Investing podcast.
00:00:17.220 | Today I am here to once again interview Bill Bangin.
00:00:21.060 | I previously interviewed Bill on episode 35
00:00:23.960 | of the Bogleheads Live show.
00:00:25.600 | If you guys wanna check that out, go to boglecenter.net.
00:00:29.600 | And if you like what you hear,
00:00:30.800 | you can also go to boglecenter.net/donate
00:00:34.100 | where your tax-deductible donation is appreciated.
00:00:36.900 | Let me introduce a man that needs no introduction.
00:00:41.760 | Bill Bangin received his BS from MIT
00:00:46.640 | in aerospace engineering.
00:00:48.860 | He's had four careers,
00:00:50.000 | including his third in fee-only financial planning,
00:00:53.520 | where in the early '90s,
00:00:55.280 | in an attempt to answer questions from clients,
00:00:57.240 | he began his research on sustainable spending in retirement
00:01:00.760 | leading to the 4% rule of thumb that we all know today.
00:01:05.760 | Bill, welcome to the 2024 Bogleheads Conference.
00:01:08.960 | - Yeah, thanks.
00:01:09.800 | I appreciate the invitation.
00:01:11.400 | (audience applauding)
00:01:14.580 | - Folks, I am gonna start asking Bill some questions
00:01:19.800 | that I got beforehand from the Bogleheads communities online
00:01:23.640 | but if you have a question,
00:01:24.720 | go ahead, get a pen, some paper, write it down.
00:01:28.240 | And then Karen is gonna be going around
00:01:31.720 | collecting the questions.
00:01:34.080 | There she is.
00:01:34.920 | Fantastic.
00:01:37.320 | So let's start with the basics.
00:01:40.240 | Tell us about the 4% rule.
00:01:42.080 | What is it?
00:01:43.400 | - I have no idea, quite frankly.
00:01:45.500 | (audience laughing)
00:01:47.480 | We're really talking about something
00:01:49.240 | that technically doesn't exist,
00:01:51.760 | or at least I never created it.
00:01:53.440 | I did a paper in '94, October,
00:01:56.320 | it's almost 30 years ago, next month,
00:01:59.160 | in which I took a very preliminary look
00:02:02.600 | at what kind of withdrawal rate,
00:02:05.040 | safe withdrawal rate retirees
00:02:07.440 | could use under the worst conditions,
00:02:09.480 | worst case conditions.
00:02:12.240 | And that turned out to be 4.15%.
00:02:16.400 | And I just put that paper out there.
00:02:18.960 | And I wrote other papers but they kind of got ignored
00:02:21.880 | and people focused on that first paper
00:02:23.680 | and they approximated the 4.15% to 4%
00:02:28.680 | and then they went further and said,
00:02:30.780 | "Well, that's a rule we can all follow."
00:02:32.780 | Which I never said because my belief as a financial advisor,
00:02:38.120 | every individual, every client
00:02:40.840 | has unique needs in retirement
00:02:43.520 | and the process for getting to a quote number
00:02:47.600 | is a lot more complicated
00:02:49.720 | than using just a simple one size fits all rule.
00:02:53.320 | - Wonderful.
00:02:55.280 | Tell us about some of your more recent research.
00:02:57.400 | What have you found continuing to research this subject?
00:02:59.720 | How has the answer changed?
00:03:02.280 | - Okay, well now we have, I think, the 5% rule, if you will.
00:03:07.080 | I've been, over time,
00:03:08.280 | I've been making my research more sophisticated.
00:03:12.200 | I've been adding ACID classes.
00:03:14.480 | My first paper used only two ACID classes,
00:03:17.940 | which is hardly a diversified portfolio.
00:03:20.460 | When I added small caps in 2006, just one more ACID class,
00:03:26.800 | it went from 4.15% to 4.5, which was a nice jump,
00:03:31.800 | but that's still a long way from a diversified portfolio.
00:03:34.800 | And more recently, I used seven ACID classes,
00:03:39.800 | adding mid caps and international stock, micro caps.
00:03:45.400 | And when I did that, I got up to just about 4.7%.
00:03:49.900 | Once again, this is for the worst case scenario.
00:03:52.540 | Yeah, I studied 400 retirees
00:03:55.820 | retiring on the first date of each quarter,
00:03:58.580 | beginning in January 1st, 1926.
00:04:01.060 | So there's almost 400, 100 years of data there.
00:04:05.040 | And only one of those 400 individuals
00:04:09.540 | was constrained with that low worst case rate.
00:04:14.000 | Everyone else was higher.
00:04:16.260 | Most were quite a bit higher.
00:04:18.020 | The average for all retirees
00:04:20.100 | across that 100-year period is 7%.
00:04:23.700 | If you wanna have a rule, you gotta use a 7% rule, you know?
00:04:27.500 | Although, for the last 25 years,
00:04:30.820 | I've not been able to find a retiree who was average.
00:04:34.380 | It's because of the high valuations in the stock market.
00:04:37.640 | We've been toward the lower end of the spectrum,
00:04:41.220 | but still, you know, above 5%, in my opinion.
00:04:45.340 | - That's a great segue into another question
00:04:47.900 | related to what we had to find from the community.
00:04:51.100 | Given that valuations are high,
00:04:53.100 | what impact do valuations have
00:04:55.100 | on sustainable spending in retirement?
00:04:57.260 | - Okay, that's really an interesting question.
00:05:00.600 | And that leads into the conclusion
00:05:04.400 | I reached early in my research,
00:05:06.140 | which everybody knows,
00:05:07.300 | that if you run into a major bear market in stocks
00:05:12.160 | early in retirement, it damages your portfolio,
00:05:15.500 | and therefore, will reduce your retirement withdrawal rate.
00:05:20.260 | And to get to that point where you have
00:05:25.260 | a major bear market early in retirement,
00:05:30.700 | they almost all occur from periods of high valuation.
00:05:35.060 | With stock markets rarely collapse
00:05:38.060 | when they have a P/E of 10 or 12 or something like that.
00:05:41.220 | Almost all the major bear markets in history
00:05:43.480 | have come from much higher.
00:05:45.020 | And we certainly know that in this century.
00:05:48.940 | And in 2008, a colleague of mine, Michael Kitsies,
00:05:52.460 | who you probably know, a brilliant guy,
00:05:54.380 | published a paper, actually in his newsletter,
00:05:57.740 | and a wonderful chart in which he tracked
00:06:01.180 | stock market valuations year by year since 1926,
00:06:05.500 | even back further, against the withdrawal rate
00:06:08.460 | that would have applied to that particular year.
00:06:10.700 | And it's an amazing chart because it shows
00:06:12.800 | that withdrawal rates and stock market valuation
00:06:16.380 | move in opposite directions, which you'd kind of expect.
00:06:19.260 | In other words, the more expensive the stock market is
00:06:22.220 | early in retirement, the more likely you are
00:06:24.100 | to have a bear market and the lower the withdrawal rate.
00:06:26.900 | However, if you were fortunate enough to retire
00:06:29.140 | at a time of really low stock market valuations,
00:06:33.100 | you would be able to take quite a bit more,
00:06:36.340 | quite a bit above average.
00:06:37.680 | And when I saw that chart, I nearly jumped out of my chair.
00:06:41.940 | I remember the moment, opening that publication,
00:06:44.180 | looking and saying, my gosh, this is the answer.
00:06:46.500 | Because up to that point, what guidance
00:06:49.320 | could I have given my clients to decide
00:06:52.180 | what their withdrawal rate would be?
00:06:53.460 | That was a real issue in the early years.
00:06:57.140 | I could draw a chart, I could count the number of retirees,
00:07:00.880 | let's say, who could retire successfully at 4 1/2%.
00:07:05.140 | That was 100%, let's say, in my earlier research.
00:07:08.500 | And then if I increased the withdrawal rate to 5%,
00:07:11.300 | maybe 95% of the people would have been able
00:07:14.140 | to successfully negotiate retirement.
00:07:15.780 | Then I went to 5 1/2%, maybe it was 90,
00:07:18.660 | and I go through the whole list.
00:07:20.140 | And so I have a chart which basically assigned
00:07:23.700 | to each withdrawal rate, up to 10, 12, 13%,
00:07:27.140 | the probability, based on history,
00:07:29.900 | that you would have been able to successfully withdraw.
00:07:32.740 | The problem is with that, how does an individual choose
00:07:35.780 | what's the appropriate probability for them to use?
00:07:38.540 | What criteria?
00:07:39.380 | I always felt when I gave a client this chart
00:07:41.620 | and said, here it is, you can figure out the probability,
00:07:44.800 | I don't have a clue, it was kind of like
00:07:48.140 | sending them off to Vegas with one of those blackjack charts
00:07:51.500 | where it kind of says hold on 17 and get hit on 16
00:07:56.500 | and split eights and take insurance and do this.
00:08:00.760 | So I felt very uncomfortable with that whole issue.
00:08:05.840 | And really, particularly uncomfortable
00:08:07.380 | because it's at the very beginning of the process.
00:08:09.540 | If you're developing a plan for your withdrawals,
00:08:12.100 | that's one of the first issues you want to take a look at.
00:08:15.100 | And it wasn't until three summers ago,
00:08:18.740 | actually 27 years into my research,
00:08:22.580 | that I found what I call a missing link,
00:08:25.860 | which is inflation.
00:08:26.900 | I knew inflation had to be a factor
00:08:29.460 | 'cause we know stock market, bear markets,
00:08:32.820 | are really powerful determinants of withdrawal rates,
00:08:35.340 | but the correlation is not close enough
00:08:37.900 | to confidently predict what the withdrawal rate should be
00:08:41.420 | based upon the stock market valuation.
00:08:43.340 | There's just too much slosh,
00:08:45.020 | it's maybe only a 75% correlation.
00:08:48.140 | I needed higher and I used to sit and look and think
00:08:52.500 | and drive myself crazy and say,
00:08:53.940 | no, inflation is in there somewhere,
00:08:55.420 | but I keep drawing charts of stock market valuation
00:08:59.180 | and I put down the inflation rates associated with it
00:09:03.420 | and it's a messy chart, I don't see a pattern.
00:09:06.740 | And then I remember one summer morning,
00:09:08.700 | I got up early and I was just thinking about this problem
00:09:11.460 | and I just had this flash.
00:09:13.540 | I said, wow, what if instead of treating withdrawal
00:09:17.900 | of the stock market valuation first,
00:09:20.060 | why don't we make inflation the most important factor?
00:09:23.460 | Very powerful because you have to increase your withdrawal rates,
00:09:27.580 | they're gonna get stuck at this higher level
00:09:29.460 | for the rest of retirement.
00:09:31.260 | So what I did was create six inflation regimes,
00:09:36.260 | three in the inflation side,
00:09:40.260 | moderate, low and high inflation,
00:09:42.500 | three on the deflation side,
00:09:44.100 | moderate, low and high deflation,
00:09:46.300 | and then put the stock market valuation within them
00:09:50.100 | and the chart was beautiful.
00:09:52.620 | So I was able to, from that, create a chart
00:09:56.500 | starting with the inflation regime you think you're in
00:10:00.180 | and within it list the stock market valuations
00:10:02.820 | of Shiller CAPE and that gave me a tool
00:10:07.820 | that's about 85 to 90% correlation.
00:10:12.500 | That gave me the confidence to say,
00:10:15.180 | "I can now, somebody comes to me
00:10:17.780 | "and tells me when they retire,
00:10:19.540 | "the stock market's valued this high
00:10:21.860 | "and on top of it, we have the inflation rate we know,
00:10:26.100 | "I can suggest now a withdrawal rate
00:10:28.500 | "which might not be the worst case.
00:10:30.420 | "It might be five, might be six,
00:10:32.340 | "might be seven, might be 10 if we get lucky
00:10:35.860 | "and we get a low stock market valuation."
00:10:38.340 | So finally that problem for the first time after,
00:10:42.220 | I'm sorry, it took 27 years folks to get that done,
00:10:45.700 | but it looks like I've got a solution to that problem there.
00:10:49.740 | - Wonderful.
00:10:51.140 | Let's geek out a little bit on the numbers
00:10:54.220 | as we're all investment fans here.
00:10:56.700 | Let's talk about some of the data
00:10:58.580 | and some of the approach that you used.
00:11:00.420 | So we got a question here that asks about
00:11:03.980 | how fees show up in a distribution rate.
00:11:08.060 | So certainly if we're using a low cost index fund,
00:11:10.860 | that's gonna be easy 'cause it's gonna have
00:11:12.460 | a very small effect on how much we're spending.
00:11:15.580 | Has your research looked at the different fees
00:11:18.620 | in the various indices that you've used?
00:11:20.900 | For example, small cap funds,
00:11:23.340 | those might be more expensive to trade given illiquidity.
00:11:27.500 | Has that shown up in your research
00:11:28.900 | as well as relatedly a question here about advisor fees?
00:11:33.900 | What work would be done on fees
00:11:36.180 | and how that impacts portfolio distribution rates?
00:11:38.700 | - Yeah, that's a really good question.
00:11:40.820 | In my research, I don't concern myself with fees.
00:11:44.420 | I'm assuming today, at least as far as funds,
00:11:47.860 | using fund investments,
00:11:49.340 | what I assume I'm using in my research,
00:11:51.740 | that there will be none.
00:11:52.820 | And we've practically come to that point.
00:11:54.820 | There are no commissions really on trades anymore.
00:11:57.300 | We're in a commission free environment.
00:11:59.260 | When I first did my research 30 years ago,
00:12:02.380 | if you'd asked me that question,
00:12:03.500 | I might have been a little bit embarrassed
00:12:05.100 | because wow, they were still a factor, but not anymore.
00:12:08.940 | The advisor fees are though, and I had a friend
00:12:11.420 | some years ago did a study of that.
00:12:13.460 | You have advisor fees of 1%, 1.25%.
00:12:16.900 | They're a significant factor.
00:12:19.100 | But I don't take them into consideration
00:12:22.780 | for the simple reason that they vary so much
00:12:25.500 | from individual to individual.
00:12:26.700 | I can't give a consistent result.
00:12:29.380 | And what I suggest is that people,
00:12:31.260 | when you do your budget for retirement,
00:12:32.980 | your expense budget, is that is an expense item
00:12:35.660 | and it's different for everyone.
00:12:37.900 | So, but actually it has to be taken into account.
00:12:40.540 | - All right.
00:12:41.780 | And folks, if you have a question, write it down,
00:12:43.780 | Karen will collect it and then she'll bring it up here
00:12:45.780 | and we can ask Bill Bangor your question.
00:12:48.340 | Let's jump to some other questions we got
00:12:50.500 | from the Bogleheads community beforehand.
00:12:54.020 | This one comes from Fender Strat Guy
00:12:58.900 | from Bogleheads Reddit.
00:12:59.780 | Shout out to Bogleheads Reddit, by the way.
00:13:01.220 | They asked some great questions.
00:13:02.900 | He wants to know what your thoughts are on your research,
00:13:06.260 | which looks at historical data
00:13:08.140 | versus a Monte Carlo simulation.
00:13:10.500 | - Yeah.
00:13:12.980 | Theoretically they should both give similar results
00:13:15.740 | and I think they do.
00:13:17.220 | I'm kind of anomaly.
00:13:19.660 | I don't think too many do the way I'm looking
00:13:22.100 | at it myself right now.
00:13:23.300 | Most people are using Monte Carlo simulations.
00:13:25.820 | They're both legitimate approaches.
00:13:29.780 | I just feel comfortable using historical data
00:13:33.660 | because I kind of enjoy talking to people
00:13:35.980 | about 1947 there, we had an inflation outbreak
00:13:40.420 | and it affected the withdrawal rate or 1962.
00:13:44.980 | Some people can relate, I think, a lot easier
00:13:47.460 | to actual historical periods they may have lived through
00:13:49.780 | to thousands of anonymous trials.
00:13:53.740 | But as a technical tool, it's perfectly valid.
00:13:57.700 | A lot of people do their research, I respect it
00:13:59.900 | and fortunately we come up something fairly close.
00:14:05.620 | - And for those who aren't super investment nerds,
00:14:08.620 | as you may already know,
00:14:10.100 | probably doesn't need much explanation,
00:14:11.900 | Bill's research looks at what has happened in the past,
00:14:14.820 | what could I have spent in the past from my portfolio.
00:14:18.020 | Monte Carlo simulation, we're gonna tell a computer,
00:14:20.820 | "Hey, this is what investment returns were.
00:14:22.860 | "Now I want you to make up what investment returns
00:14:25.220 | "are gonna be in the future."
00:14:26.740 | And then do that maybe 1,000 or 10,000 times.
00:14:29.740 | How many of those times did the particular situation
00:14:33.100 | run out of money or have enough?
00:14:34.620 | And that's gonna be a success rate,
00:14:36.540 | that is a Monte Carlo simulation.
00:14:38.740 | Christine Benz, who we'll get to chat with later,
00:14:41.140 | she used that in doing her research
00:14:43.780 | on sustainable spending in retirement.
00:14:45.620 | - John, can I make just a brief comment?
00:14:47.140 | - Yeah, no, please. - Out of the blue.
00:14:49.620 | I'm just curious, this conference is named
00:14:52.700 | after John Bogle, a great man.
00:14:55.020 | I'm just curious how many out in the audience
00:14:57.260 | might have had a fortune enough
00:14:58.860 | to have met Mr. Bogle at some time?
00:15:02.660 | - Not too many, I just wanna say it's a privilege
00:15:06.260 | to be at a conference named after him.
00:15:07.860 | I did meet him once.
00:15:09.660 | It was in my early years as an advisor,
00:15:13.700 | early '90s, I think, I got asked to join
00:15:18.020 | what Vanguard called their advisory council.
00:15:20.980 | And twice a year, we'd fly out to Valley Forge
00:15:25.260 | and we'd meet with the executives at Vanguard
00:15:27.820 | and we'd talk about items of mutual interest.
00:15:31.340 | And one year, Mr. Bogle came out to talk with us
00:15:35.180 | and Mr. Bogle was my hero and still is a hero for me.
00:15:40.180 | He was an extraordinary individual
00:15:42.780 | and a very imposing individual.
00:15:44.660 | He was big and big boned and he had this magnificent voice.
00:15:49.620 | I mean, he probably could have put James Earl Jones
00:15:53.620 | out of business as Darth Vader if he wanted to.
00:15:56.260 | He was powerful, but he was also a very kind man.
00:15:59.740 | And he answered my ignorant early year questions
00:16:03.820 | as an advisor with great consideration.
00:16:07.580 | And I just think it's wonderful
00:16:09.740 | you've named this organization as a conference after him
00:16:14.740 | because he is deserving, in my opinion,
00:16:16.740 | he was a titan and still is a titan of the financial world.
00:16:21.180 | So privileged to speak at a conference named after him.
00:16:24.300 | - Wonderful.
00:16:28.340 | - Do we have some, okay, great.
00:16:29.900 | Thank you, Karen.
00:16:32.020 | All right, let's jump to another question
00:16:35.980 | from the BogleHeads community that we got from beforehand.
00:16:39.580 | This one is from Man of Clouds from BogleHeads Reddit
00:16:43.020 | and he asks about, I have traditional 401k,
00:16:46.180 | I've got a Roth IRA,
00:16:47.340 | I've got a plain vanilla taxable account.
00:16:49.300 | What should I be thinking about
00:16:50.260 | with respect to distributions for the 4% rule
00:16:53.260 | across these different types of accounts?
00:16:55.860 | - Yeah, that's a good question.
00:16:58.020 | I assume in my research
00:16:59.260 | that you're probably gonna have one primary account
00:17:01.820 | for which you're gonna withdraw during retirement.
00:17:05.860 | And that's very important,
00:17:07.420 | whether it's a taxable or tax deferred
00:17:09.500 | or tax advantage count.
00:17:11.340 | There are different withdrawal rates for each one.
00:17:14.260 | That's one of eight factors I looked at.
00:17:15.940 | I'm just finishing up a book on this whole thing.
00:17:18.700 | We're gonna take my whole 30 years of experience
00:17:20.860 | and put it out for the world to see.
00:17:24.500 | And that's one of the, what I call,
00:17:25.980 | one of the eight important elements
00:17:28.380 | to compute your withdrawal rate
00:17:29.820 | is knowing what type of account you have.
00:17:32.500 | Withdrawal rates for taxable accounts
00:17:34.660 | are obviously less than they are for tax advantage accounts.
00:17:39.660 | But it depends upon the tax rate.
00:17:41.380 | In my book, I use what I call
00:17:42.700 | a computed average tax rate for your account.
00:17:45.020 | Then I'll have a chart
00:17:46.180 | showing you what the withdrawal rate would be.
00:17:48.180 | It could be 10% less, could be 20% less or more
00:17:52.060 | than for a tax deferred account.
00:17:54.980 | - All right, so let's talk about
00:17:58.660 | how does the 4% rule apply to early retirees,
00:18:02.740 | folks who have a long retirement in front of them.
00:18:05.620 | - Sure, this is one of the eight factors in,
00:18:07.380 | which is planning horizon, essentially.
00:18:09.700 | It's a very important issue.
00:18:13.580 | The so-called 4% rule applied to 30 years.
00:18:18.540 | For folks, let's say, who have very short retirements,
00:18:23.660 | let's say 10 years, you could get up to 8% or 9%.
00:18:27.220 | When you get to longer retirements,
00:18:30.980 | which I know a lot of folks are very interested in,
00:18:33.580 | 40 years, 50 years, or more,
00:18:36.140 | the retirement rate, let's say we were at 5%,
00:18:38.980 | starts to decline, but it kind of does so,
00:18:42.460 | somebody would use asymptotically,
00:18:45.580 | where it approaches a level of around 4.3%.
00:18:49.860 | And this is a worst-case scenario.
00:18:51.140 | We're talking, once again,
00:18:52.780 | so that if you get out even 100 years or 150 years,
00:18:56.700 | you're gonna be about 4.3% or so.
00:18:59.620 | I don't know what the exact number is,
00:19:01.860 | but it's pretty close to that.
00:19:04.340 | So that, yes, the withdrawal rate is very sensitive
00:19:07.180 | to the time horizon that you use.
00:19:09.900 | - So what withdrawal rate would you suggest
00:19:11.900 | for someone who has a long timeline in front of them?
00:19:14.740 | - What would I suggest here?
00:19:16.460 | Well, you know, I'd have to look at all the eight factors.
00:19:19.420 | In addition, that's just one of the eight factors.
00:19:21.220 | That's why I'm trying to get away
00:19:23.060 | from the use of the term rule, 4% rule.
00:19:28.060 | Oh, I must admit, I'm a complete hypocrite in that regard,
00:19:31.540 | 'cause I recently changed my Arizona license plate
00:19:35.020 | to read Mr. 4%.
00:19:37.100 | (audience laughing)
00:19:40.140 | And part of the reason is because every time
00:19:41.940 | that I go to a hotel, park my car,
00:19:43.500 | they ask me for the license plate,
00:19:44.900 | which I could never remember.
00:19:45.980 | Now I can remember my license plate when they ask it.
00:19:48.900 | - That's great, that's great.
00:19:51.140 | Thoughts on 3% as a distribution rate for early retirees.
00:19:57.620 | - I'm sorry?
00:19:58.460 | - Oh, what are your thoughts on a 3% distribution rate
00:20:00.740 | for early retirees?
00:20:02.860 | - 3% seems unnecessarily penurous.
00:20:07.860 | I think you're gonna find yourself late in retirement
00:20:15.980 | extremely wealthy with a lot of regret, in my opinion.
00:20:20.060 | If you want to have a decent lifestyle,
00:20:22.740 | I don't know why you would want to necessarily spend it all
00:20:26.460 | unless you're very fearful about something that I'm,
00:20:30.780 | you know, I tend to be an optimist overall.
00:20:32.620 | I think we'll get through our situations,
00:20:35.780 | whatever we're facing, you know.
00:20:37.380 | I think 3% is overdoing it a bit.
00:20:42.780 | I can't, you know, I run models.
00:20:45.780 | When somebody asked me a question, I said,
00:20:47.180 | well, what kind of combination of circumstances
00:20:49.900 | would it take to force somebody into a worst case 3%?
00:20:54.060 | It would take probably 20 years of 10% inflation
00:20:57.660 | and a 70% bear market.
00:21:00.180 | And we haven't seen that coming.
00:21:01.620 | I hope we don't, you know.
00:21:03.260 | But that's kind of the thing it would take
00:21:05.420 | to force this into 3%, in my opinion, yeah.
00:21:09.140 | - So in your research, you looked at,
00:21:11.820 | original research rather, you looked at large cap
00:21:14.940 | and intermediate term treasuries for the portfolio.
00:21:18.940 | This question asks, when you do pay yourself,
00:21:21.100 | when you do make your distributions,
00:21:22.900 | should you sell equally across both stocks and bonds?
00:21:26.380 | - Oh, rebalancing at the end of the year,
00:21:31.340 | which is another important factor.
00:21:33.900 | Generally, you will be selling off the assets
00:21:36.380 | who have outperformed, whether it be stocks or bonds,
00:21:40.020 | and, you know, then buying assets that have underperformed.
00:21:44.740 | And that has a beautiful, rebalancing,
00:21:47.380 | it's just so important in doing that in a portfolio.
00:21:50.020 | I have some illustrations in my book.
00:21:52.620 | If you take a look at the seven asset classes I have
00:21:55.340 | and calculate an expected one-year return,
00:21:58.460 | I think you come out with around 8.5%, something like that.
00:22:02.860 | But if you look at the portfolios run over 50-year periods,
00:22:06.940 | compounding and rebalancing once a year,
00:22:09.780 | they average 10% a year.
00:22:12.300 | That extra return is generated
00:22:14.260 | by the benefits of rebalancing,
00:22:15.740 | where you're naturally selling off assets
00:22:17.620 | that have done well and probably about to do less well,
00:22:21.700 | and buying assets that have probably done less well
00:22:24.660 | on average and about to do better.
00:22:26.420 | And it's amazing.
00:22:27.340 | And if we didn't have that rebalancing effect,
00:22:30.700 | we wouldn't be anywhere near 5%.
00:22:33.140 | It'd probably be 1, 1.5% less.
00:22:35.980 | Then it would make sense to take out 3%, maybe, yeah.
00:22:40.460 | - So here's a good introductory question
00:22:42.220 | that asks a little bit more
00:22:43.540 | about sustainable distributions and retirement,
00:22:45.940 | and that is how inflation is taken into account
00:22:49.100 | into spending from your portfolio.
00:22:50.820 | So maybe since we've sort of skipped over that point,
00:22:53.020 | I'll let you talk a little bit about
00:22:54.620 | how inflation is computed
00:22:56.140 | into the sustainable distribution rate.
00:22:58.300 | - Yeah, in my models, I use the CPI from tables over time.
00:23:03.300 | And we all know that that's a statistic
00:23:09.180 | that's widely available.
00:23:11.580 | But each individual probably has their own inflation rate.
00:23:15.460 | If you really want to get sophisticated,
00:23:17.500 | you might want to do your forecast
00:23:20.020 | and a determination withdrawal rate
00:23:21.500 | based on your personal rate of inflation.
00:23:24.060 | Some people might have lower,
00:23:25.500 | some people might have higher due to a lot of things.
00:23:28.260 | Maybe some people, a mortgage is a big factor,
00:23:30.940 | a fixed mortgage, and it might be lower inflation rate.
00:23:34.180 | Some people might have very high medical costs,
00:23:36.660 | and they're facing high medical insurance rates.
00:23:39.820 | So yeah, inflation is very critical,
00:23:42.980 | and to a certain extent,
00:23:45.540 | it limits the applicability of my research
00:23:47.980 | because I'm using a standard figure
00:23:50.100 | which may not apply to everybody,
00:23:51.580 | but it's a starting point.
00:23:52.900 | - And at the risk of maybe answering this question too,
00:23:56.620 | basically, but I want to make sure that it does get answered,
00:23:59.300 | we are going to assume that inflation
00:24:01.060 | is built into every successive year distribution.
00:24:03.580 | That's to say, if you've got a million dollar portfolio,
00:24:05.980 | let's say you're targeting 4%,
00:24:07.540 | first year you're going to take out 40,000,
00:24:09.180 | next year it's going to be 40,000
00:24:10.740 | plus whatever inflation is for that year.
00:24:13.940 | All right, if I am retiring right now,
00:24:17.700 | what spending percentage do you suggest?
00:24:20.900 | - That's a great question.
00:24:23.020 | Because I have this method
00:24:25.500 | where I use the current stock value evaluation,
00:24:28.660 | which is very high.
00:24:30.540 | By anything I look, whether you use the Shiller CAPE
00:24:33.140 | or you use Warren Buffett's stock market value to GDP.
00:24:38.140 | And inflation is what you would call moderate,
00:24:45.300 | pretty close to the historical average of about 3%.
00:24:49.100 | And quite frankly,
00:24:51.780 | there is nothing in the historical record
00:24:54.340 | that really compares to this current situation.
00:24:58.060 | So I'm kind of on the horns of a dilemma
00:25:00.260 | being a historical researcher.
00:25:02.780 | So my instinct, if I was recommending to a person,
00:25:07.660 | I'd say, I don't think we're in a worst case situation.
00:25:11.380 | I don't think we're anywhere near
00:25:13.060 | what happened in the 1970s where inflation was raging
00:25:16.660 | and stock market valuations were in the '60s were high
00:25:20.100 | and they came down quite a bit.
00:25:21.620 | But I would say if I'm recommending 5%
00:25:27.660 | as being a worst case, maybe 5.5%.
00:25:31.700 | In fact, 5.5% for the one,
00:25:34.500 | the individual retired in July of 2001,
00:25:36.860 | which is not a great time to retire
00:25:38.980 | 'cause he ran into a huge bear market.
00:25:40.780 | You all remember the dot-com bust.
00:25:42.940 | That was, that retiree with 24 years of data,
00:25:47.940 | I think would have been able to withdraw 5.5%
00:25:52.940 | from a tax deferred account.
00:25:54.780 | The 2007 retiree before that 58% monster in 2007,
00:26:00.780 | not 5.25%, so I suspect we're probably in that class
00:26:05.780 | given the valuations we're at
00:26:08.740 | and the inflation level we're at.
00:26:10.660 | Somewhere in the 5.25, 5.5% range would make sense to me.
00:26:15.900 | I don't think you need to go all the way down to five.
00:26:18.340 | - Okay.
00:26:19.460 | Yeah, one thing that really strikes me
00:26:21.180 | about using any sort of valuation metrics
00:26:24.500 | is that you just never know where valuations
00:26:27.100 | are gonna go in the future.
00:26:28.820 | I think about a paper I did on doing dollar cost averaging.
00:26:32.820 | Yes or no, in light of valuations,
00:26:34.380 | the only conclusion I found is that,
00:26:36.540 | yes, you can do that.
00:26:37.460 | You can do a dollar cost averaging or lump sum investing
00:26:40.500 | given what valuations may be at the time,
00:26:43.140 | but there's no guarantee
00:26:44.220 | that high valuations won't go higher.
00:26:47.220 | - That's true.
00:26:48.060 | They've done that in the past.
00:26:49.380 | No question.
00:26:50.820 | - Certainly one wrinkle in investing.
00:26:57.220 | - All right, what are your thoughts
00:27:00.900 | on some alternative withdrawal strategies?
00:27:03.980 | - Yeah, I've studied a number of those.
00:27:06.900 | I've looked at something called
00:27:11.780 | what I call a percentage of portfolio value
00:27:14.860 | where you basically take 5% of whatever your portfolio value
00:27:19.860 | is at the start of the year.
00:27:21.340 | That's a very popular concept
00:27:22.740 | because when I first did my research,
00:27:24.380 | a lot of people thought that was how the 4% rule worked.
00:27:27.140 | You know, you would take 5% of every year
00:27:28.860 | and it took a while to get people understand.
00:27:30.460 | No, we kind of work more like social security,
00:27:33.700 | you know, where we're taking a figure
00:27:36.020 | and then giving ourselves a cola.
00:27:38.060 | But in this method, we're taking a percentage 5%,
00:27:42.700 | let's say the portfolio each year.
00:27:44.980 | That works in some cases,
00:27:46.580 | if you're lucky enough to retire into a big bull market
00:27:49.300 | and it fails miserably in other cases.
00:27:52.000 | It's true, you'll never run out of money
00:27:53.980 | 'cause you're taking a percentage.
00:27:55.980 | But, you know, if your portfolio drops to $1 in value,
00:28:00.260 | you're gonna get 20 cents for your next year withdrawal.
00:28:03.460 | That probably doesn't cut it for most folks,
00:28:05.620 | my understanding.
00:28:06.580 | So that's not an exciting option.
00:28:10.240 | I wouldn't recommend it.
00:28:11.420 | Another option I've studied closely
00:28:13.380 | is what I call the cliff method,
00:28:18.380 | where basically a retiree says,
00:28:21.260 | "Look, for the first 10 years of my retirement,
00:28:24.020 | "I'm gonna do a lot more traveling,
00:28:25.800 | "a lot of other exciting stuff.
00:28:27.080 | "I need more money.
00:28:28.080 | "So I wanna take above the safe withdrawal rate
00:28:30.580 | "in my early years.
00:28:32.460 | "And then I wanna cut back after 10 years.
00:28:34.980 | "I have the discipline to cut back to whatever it takes
00:28:37.800 | "to put me back on the safe path."
00:28:40.100 | And that works just fine.
00:28:41.980 | You just have to recognize that the cliff
00:28:44.460 | going from the beginning, end of the 10th year
00:28:48.140 | into the 11th can be pretty steep.
00:28:50.620 | And the friskier you get with your expenses
00:28:53.220 | early in retirement, if you say,
00:28:54.660 | "I wanna take 15 or 20% more on the safe level,"
00:28:57.880 | the bigger that cliff is, it might be 30, 35% or more.
00:29:01.760 | It can work.
00:29:04.080 | You have to run the numbers
00:29:06.280 | and make sure you understand well ahead of time,
00:29:09.640 | this is what you'll be facing,
00:29:11.500 | and this is how you will have to need to operate
00:29:15.280 | and be realistic with yourself.
00:29:17.340 | But there's no reason that can't work.
00:29:19.660 | I've looked at fixed annuity withdrawal rates
00:29:22.880 | with a little bit over 5%.
00:29:25.060 | And there are other variations.
00:29:27.880 | I'm still, there always seems to be something new,
00:29:29.960 | exciting for me to study.
00:29:31.480 | That's why I'm still doing this after 30 years,
00:29:34.080 | is people come up with ideas,
00:29:35.600 | they come up with a smile kind of a way.
00:29:38.840 | You start with a high level of expenses
00:29:40.820 | and they decline your retirement,
00:29:42.280 | then they actually go up.
00:29:43.440 | I haven't looked at that in detail,
00:29:44.760 | so I can't give you an answer,
00:29:45.940 | but I'll be doing that soon.
00:29:48.040 | - I'm looking forward to it.
00:29:52.000 | - All right, it's an interesting question.
00:29:55.360 | Some folks want to preserve the real value
00:29:58.040 | of their assets for the next generation, right?
00:30:01.260 | So given that, how would that change the withdrawal rate?
00:30:04.400 | What would be a sustainable withdrawal rate
00:30:06.360 | to preserve the real principle of their portfolio?
00:30:09.040 | - Okay, they want to retain 100%
00:30:12.800 | of the real value of their portfolio.
00:30:15.060 | You can do that,
00:30:17.200 | and that's one of the eight factors I looked at,
00:30:19.360 | which is what I call legacy.
00:30:21.300 | Do you want to leave money to your heirs?
00:30:24.520 | Because in my original research,
00:30:26.080 | I assumed that with your last dying breath,
00:30:29.840 | after 30 years, you were going to go to a zero balance.
00:30:33.440 | And most of us don't have that kind of timing,
00:30:35.960 | quite frankly, to figure that good.
00:30:38.580 | I don't know if I will,
00:30:39.420 | but it does sound highly improbable,
00:30:41.280 | which is I recommend people probably
00:30:43.600 | select a time planning horizon
00:30:46.360 | that's at least 10 years longer
00:30:48.280 | than they actually think that lives.
00:30:50.360 | But all the plans that I develop,
00:30:53.160 | eventually end up running to 100% withdrawal rate
00:30:58.160 | at the end with a zero balance.
00:31:01.040 | If you specify that you want to have a balance,
00:31:03.720 | I've looked at those, it'll be in the book,
00:31:05.840 | have a chart showing, depending upon how much value
00:31:09.480 | you want left in your portfolio
00:31:11.360 | at the end of your retirement,
00:31:13.920 | to keep 100% of your portfolio value
00:31:18.160 | really a steep cut in withdrawal rate.
00:31:21.360 | We're looking like going from 5% down
00:31:23.920 | probably into the twos somewhere.
00:31:26.360 | So it's steep.
00:31:27.200 | It can be done once again, you know?
00:31:29.280 | - Yeah, that certainly sounds right.
00:31:31.840 | All right.
00:31:32.680 | All right, if I plan to retire in a country
00:31:38.800 | other than the US, what sort of safe withdrawal rate
00:31:42.080 | should I plan to use?
00:31:44.520 | - Oh, I think you can do 19%, no problem.
00:31:47.320 | (audience laughing)
00:31:50.720 | You know, that's a tough question
00:31:52.320 | 'cause I've been focusing primarily on US investors.
00:31:55.640 | I'm not xenophobic, it's just that
00:31:57.760 | there's so much work just in that area for me.
00:32:00.360 | I know Wade Fowler's done some work in that area
00:32:04.120 | and he's determined that the withdrawal rates
00:32:06.200 | would probably be lesser 'cause we've been fortunate.
00:32:09.640 | You know, United States investors
00:32:11.520 | have had a great stock market
00:32:13.160 | and access to those kinds of investments for a long time.
00:32:17.520 | Not everyone has stock markets that perform as well
00:32:21.120 | or has access to those kinds of investments.
00:32:23.560 | So for me, that's a really tough question to answer.
00:32:26.920 | I'm gonna beg out on that if you don't mind.
00:32:28.840 | I don't know.
00:32:29.680 | - Yeah, no, that's fine.
00:32:31.000 | You know, I think another way I look at this question
00:32:33.320 | isn't necessarily that I'm going to be
00:32:35.560 | investing internationally so much as I'm
00:32:37.960 | perhaps investing domestically but living abroad, right?
00:32:41.000 | And so that's a scenario.
00:32:42.960 | If you look at exchange rates and what the inflation--
00:32:45.880 | - Local tax rates and so forth,
00:32:47.720 | yeah, what kind of account you have, yeah.
00:32:49.560 | - Yeah, what the inflation would be in that other country.
00:32:53.160 | All right.
00:32:54.000 | Isn't it a disadvantage to rebalance
00:32:59.640 | given the recognition of taxes?
00:33:03.020 | - Well, obviously rebalancing,
00:33:08.860 | if you're using a taxable account
00:33:10.600 | and you're selling investments to rebalance,
00:33:13.640 | there'll be some consequence of that.
00:33:16.060 | But the importance of rebalancing is so great.
00:33:21.280 | It adds so much value to the portfolio and your withdrawal rate.
00:33:25.920 | It overwhelms tax considerations in the computations I do.
00:33:29.600 | I look at that once again in the book.
00:33:31.400 | I look at different rebalancing periods.
00:33:34.760 | I found six to 12 as optimal,
00:33:36.920 | but there have been years where you could go 30 years
00:33:41.760 | without rebalancing and end up with a higher withdrawal rate.
00:33:45.160 | It's very, very, it's unique.
00:33:47.020 | There aren't too many situations like that.
00:33:48.960 | They're all over the map.
00:33:50.120 | I just wouldn't count on you retiring
00:33:51.920 | into a period like that.
00:33:53.440 | I think the standard of practice of one year rebalancing
00:33:58.280 | or slightly less, I pretty well agree with based on my data.
00:34:06.120 | - All right, we have another case study question.
00:34:08.200 | If I want to assume inflation is 3%, I'm 73 years old,
00:34:13.200 | what would be a safe withdrawal rate?
00:34:16.240 | - And what's the age?
00:34:18.720 | - 73.
00:34:19.840 | - Okay.
00:34:20.680 | I don't know.
00:34:24.560 | My research doesn't assume
00:34:30.080 | a particular inflation rate will be in the future.
00:34:34.720 | We don't know.
00:34:35.560 | It's based on what's happened historically
00:34:37.640 | with a wide range of inflation rates.
00:34:39.800 | I mean, someone could do a calculation
00:34:44.000 | on a spreadsheet with that,
00:34:46.000 | but it's dangerous because if you're looking
00:34:48.400 | over a 30-year period, who knows what inflation will be?
00:34:52.280 | Who knows what returns will be?
00:34:54.360 | Who knows what the economic environment will be?
00:34:57.920 | We could get an answer to that question
00:34:59.840 | and it'd probably be, you know,
00:35:03.360 | but it'd be using today's inflation regime,
00:35:06.000 | today's stock market valuations
00:35:07.800 | because that we know fairly certainly.
00:35:10.320 | That question really is one for Nostradamus, not for me.
00:35:16.560 | - Yeah, certainly to your point,
00:35:19.960 | at least with respect to assuming living 10 years longer
00:35:23.320 | than you would guess, using 30-year data, 73-year-old,
00:35:29.520 | that could be a relatively conservative way
00:35:32.120 | to look at that.
00:35:33.320 | All right, here's a fun one.
00:35:35.280 | What method of withdrawal you use for your own retirement?
00:35:38.880 | - Oh, that's a good question.
00:35:42.640 | I retired in 2013 and at that time,
00:35:46.760 | four and a half percent was the worst case.
00:35:51.640 | So I said, let's do the worst case, you know,
00:35:54.400 | and I've been fortunate that I retired
00:35:57.720 | into a nice bull market that's gone on for a number of years.
00:36:00.720 | So if you look at my current withdrawal rate,
00:36:02.920 | you can calculate,
00:36:04.360 | it's quite a bit less than four and a half percent now.
00:36:08.160 | So I'm a very happy person, you know,
00:36:11.080 | in that regard, it's worked out nicely.
00:36:14.880 | I still think we got some kind of ugly bear market
00:36:17.160 | lurking somewhere in the not so distant future,
00:36:19.920 | but things have gone well enough here the first 10 years
00:36:23.160 | that, you know, midterm bear markets
00:36:26.720 | are not as devastating as an early bear market, you know.
00:36:30.520 | - Yeah, and given that you've had so much success
00:36:32.400 | investing early on in your retirement
00:36:34.560 | and that's where all the risk is,
00:36:35.920 | it's the beginning of retirement,
00:36:37.080 | it's that sequence risk,
00:36:38.600 | have you adjusted your distribution rate?
00:36:40.400 | Have you increased it given the lucky outset
00:36:44.320 | of your retirement investing experience?
00:36:46.200 | - Well, you know, what I try to do,
00:36:50.320 | I haven't actually made much adjustments,
00:36:53.200 | but I've tried to increase the amount of money
00:36:55.400 | I give my children.
00:36:56.880 | That's why, you know, some people will say
00:36:58.400 | your expenses will go down in retirement.
00:37:00.720 | I haven't seen that because I treat my gifting
00:37:03.160 | to my children as an expense.
00:37:05.360 | And so I keep that up as high as it is.
00:37:08.160 | It keeps my expenses basically growing
00:37:11.880 | pretty much with inflation on a steady basis.
00:37:14.240 | - Now that bond yields are higher,
00:37:17.520 | how has that impacted your research?
00:37:19.840 | What does that mean for sustainable spending
00:37:21.680 | now that bonds are paying higher interest rates?
00:37:25.080 | - Well, I'm glad to see them there.
00:37:26.800 | You know, for years we had the TINA condition.
00:37:30.240 | There are no alternative to stocks,
00:37:32.040 | which was absolutely nuts.
00:37:35.280 | Now there is an alternative,
00:37:37.320 | and we're approaching more closely
00:37:39.960 | to an historically average situation.
00:37:43.360 | So I'd say, since I'm a historical researcher,
00:37:47.680 | it increases my confidence in my current forecast,
00:37:52.080 | you know, using my methodology.
00:37:53.680 | It's good to see.
00:37:54.920 | We'll see what happens, you know,
00:37:57.720 | to bond yields in coming years.
00:37:59.400 | Summer forecast in the 10 year
00:38:00.920 | could go down into the twos again.
00:38:03.840 | I don't know.
00:38:04.680 | Once again, that's not my job to forecast the future.
00:38:08.840 | I have a hard enough time studying the past.
00:38:11.080 | But it's reassuring to get back there
00:38:16.520 | to a more normal situation.
00:38:18.320 | - Absolutely.
00:38:19.160 | Another interesting case study.
00:38:21.720 | What if you're retiring into ongoing health issues?
00:38:26.720 | Any thoughts or recommendations in that situation?
00:38:30.440 | - Okay, I'm sorry.
00:38:31.680 | - Oh, retiring with ongoing health issues.
00:38:34.080 | So I'm assuming lots of high medical expenses.
00:38:37.040 | - Sure.
00:38:37.880 | - How does that impact distribution planning in retirement?
00:38:41.280 | - Well, it means your expenses potentially,
00:38:44.160 | you're going to then,
00:38:45.760 | it's really a budgeting scene more of a drawl issue.
00:38:48.840 | I mean, my job is to figure out the most
00:38:51.920 | you can get out of your retirement accounts safely,
00:38:56.920 | you know, without taking unnecessary risk.
00:39:00.920 | If you have an unusual situation in terms of your expenses,
00:39:05.520 | that's going to have to be dealt pretty much
00:39:07.160 | on the expense side,
00:39:08.320 | because portfolio can only stand so much,
00:39:12.520 | no matter what your physical condition is, you know.
00:39:15.680 | Portfolio doesn't care.
00:39:17.000 | It's going to do what it's going to do.
00:39:19.120 | And hopefully, closely follow historical, you know,
00:39:23.120 | patterns.
00:39:26.000 | - Yeah, it's really an issue of how terminal, right,
00:39:28.720 | the health issue is.
00:39:29.560 | Is it something that's chronic on ongoing?
00:39:32.040 | Am I going to have those expenses for a long time?
00:39:34.280 | Or is it going to be more short-lived and very expensive?
00:39:36.760 | - That's right.
00:39:37.600 | And then it becomes a planning horizon issue.
00:39:39.960 | - This question also from Boglehead's Reddit,
00:39:44.480 | from username Buffanita.
00:39:47.280 | This one asks about if retirement is a long time away
00:39:51.840 | for them in the future,
00:39:54.160 | what sort of thoughts or considerations
00:39:56.240 | should they be giving to the research
00:39:58.560 | that they're coming across now
00:40:00.200 | versus weighing that against future research?
00:40:03.320 | How seriously should they take the 4% rule,
00:40:05.520 | the Trinity study, et cetera,
00:40:07.080 | for something that may come out
00:40:08.920 | when they actually are ready to retire?
00:40:12.000 | - So that's an interesting situation
00:40:13.680 | where people perhaps with 30 years to retirement
00:40:16.600 | are wondering whether or not the research I've done
00:40:20.000 | will still be applicable in the future.
00:40:22.240 | That's really a very tough question to answer.
00:40:27.800 | To a certain extent,
00:40:30.320 | there are a lot of underlying assumptions to my research,
00:40:32.760 | is one is that markets will behave pretty much the same
00:40:37.040 | as they have in the past,
00:40:38.520 | that the U.S. economy will behave
00:40:40.640 | pretty much as it has in the past.
00:40:44.960 | I've seen some people who feel
00:40:46.640 | that the U.S. growth rate, the GDP,
00:40:49.560 | well, there we are, that was not predictable.
00:40:52.400 | (audience laughing)
00:40:54.560 | - I guess that was our five-minute warning.
00:40:56.600 | - As usual, I find myself in the dark,
00:41:01.640 | and that does raise a lot of tough questions
00:41:05.360 | that I don't know how to answer
00:41:09.640 | other than I suspect the United States
00:41:12.240 | will continue to be a powerful engine of growth
00:41:14.800 | for a long time into the future,
00:41:16.640 | and that we may slow down a little bit our growth rate
00:41:21.720 | for demographic reasons or for other considerations,
00:41:24.600 | but I wouldn't necessarily have a pessimistic view
00:41:28.120 | about the future, at least neutral,
00:41:31.120 | and I think it's even happier to be optimistic,
00:41:33.440 | so I'd be an optimist.
00:41:36.120 | - Yeah, I think with respect to considering your research,
00:41:38.360 | looking at what has worked in the past
00:41:40.840 | for spending sustainably in retirement,
00:41:43.280 | that worst case, October '68,
00:41:45.880 | that period of high inflation,
00:41:47.600 | that's where we get that 4% guideline,
00:41:50.200 | so if there is worse performance over the next 30 years,
00:41:53.800 | that was just a lower level of spending than that,
00:41:56.840 | but absent that, 4% would still,
00:41:59.480 | or 4% higher given the additional other asset classes.
00:42:03.600 | - Yeah, and you know, it's possible.
00:42:07.160 | I'm never gonna claim that the current levels,
00:42:10.560 | historical precedents, are gonna last forever,
00:42:13.520 | 'cause we know they haven't,
00:42:14.560 | because they changed in 1968.
00:42:17.400 | Prior to 1968, there was a higher withdrawal rate,
00:42:20.320 | you know, it would've been,
00:42:21.280 | and if you look at the very start,
00:42:22.720 | you know, 1926, it was around 5 3/4, 6%,
00:42:26.520 | and then the Great Depression brought that down,
00:42:28.640 | and then World War II, and things,
00:42:31.880 | and so gradually, we went from like about 6%
00:42:34.640 | down to about 5%, and it could happen.
00:42:38.640 | We could enter a period of history
00:42:40.680 | where some terrible things could happen,
00:42:42.920 | and you'll end up with a new worst case scenario.
00:42:45.600 | I fully admit that, but I had, you know,
00:42:49.280 | this current one's lasted for 50 years,
00:42:51.240 | which is the longest time any withdrawal,
00:42:53.760 | worst case withdrawal rate has lasted in the last 100,
00:42:57.000 | so hopefully we get a few more years out of it, decades.
00:43:00.680 | - Yeah, we'll certainly know 30 years from now.
00:43:02.480 | - Yeah.
00:43:03.800 | - All right.
00:43:06.400 | What role did dividends play in your research?
00:43:10.440 | - I don't specifically isolate dividends.
00:43:15.320 | You know, basically, my research is based
00:43:17.320 | on a total return basis,
00:43:19.600 | where your portfolio earns interest, and dividends,
00:43:22.760 | and capital appreciation, and if it's a taxable portfolio,
00:43:26.640 | you know, we're gonna tax them differently,
00:43:28.240 | but if it's a tax-deferred portfolio,
00:43:30.080 | they're all kind of lumped together,
00:43:32.080 | and just basically grows your portfolio
00:43:36.000 | on a total basis.
00:43:37.360 | I know some folks like high-dividend stocks,
00:43:43.080 | and from the perspective of my research,
00:43:46.800 | it really doesn't make too much difference,
00:43:49.400 | but I can see a positive.
00:43:51.440 | The hardest thing when you establish an investment plan
00:43:55.880 | is sticking with it,
00:43:56.880 | particularly when the big bear market comes,
00:43:59.480 | and if dividend-paying stocks continue
00:44:02.800 | to pay good dividends, they're a bear market,
00:44:04.840 | and give an investor a sense of security,
00:44:08.200 | and less panic, because they're still earning some dividend.
00:44:12.760 | I think that's a plus for that particular strategy.
00:44:16.480 | If it can keep you on your plan, you know, I'd go for it.
00:44:19.800 | - We've got a couple minutes left.
00:44:23.920 | Tell us about some of the newer asset classes
00:44:26.600 | that you've added to your research.
00:44:29.120 | Certainly, we started with the S&P 500,
00:44:31.160 | intermediary from treasuries.
00:44:32.680 | What are those other asset classes that you shunned?
00:44:35.800 | - Yeah, I started out with, of course,
00:44:37.240 | just two asset classes, U.S. large-cap stocks,
00:44:40.400 | and U.S. intermediate-term government bonds,
00:44:42.600 | and I added 2006, I added U.S. small-cap stocks,
00:44:47.000 | and then I added, and recently, several years ago,
00:44:53.000 | I added international stocks,
00:44:55.480 | I added U.S. micro-cap stocks, U.S. mid-cap stocks,
00:44:58.880 | and treasury bills as a cash surrogate.
00:45:02.200 | And I wonder, and those, of course, elevated the portfolio.
00:45:07.200 | I suspect, you know, because I didn't get that large a bump
00:45:14.200 | when I added those four asset classes recently,
00:45:16.640 | they were probably approaching diminishing returns.
00:45:21.240 | There are other asset classes that we could use.
00:45:23.440 | We could use REITs, commodities, we could use gold,
00:45:25.880 | alternatives, I suspect, though,
00:45:28.000 | that the correlations between the assets
00:45:32.000 | are gonna become more difficult to be advantageous
00:45:34.480 | in that you're gonna find that we may get 5.1, 5.2,
00:45:38.240 | but we're probably getting pretty close to the limits
00:45:41.480 | of what we can get with a diversified portfolio.
00:45:45.560 | - Did each of those sub-asset classes
00:45:47.360 | add to the distribution rate?
00:45:49.280 | - I didn't, you know, that's an interesting question.
00:45:50.800 | I didn't try to add them one at a time
00:45:53.200 | and see what the effect was.
00:45:54.280 | I added them as a lump, you know,
00:45:56.080 | 'cause I was trying to replicate
00:45:57.840 | what most investors would use,
00:46:00.280 | a well-diversified portfolio.
00:46:02.520 | - Okay. - Yeah.
00:46:03.360 | - Yeah, I wonder if bills were a little bit of a drag.
00:46:05.520 | - Yeah.
00:46:06.360 | I'll add that to my list, though.
00:46:07.400 | Thank you, John.
00:46:08.440 | One more thing to do.
00:46:09.600 | - Happy to add to your list.
00:46:12.480 | Well, folks, that is gonna be it.
00:46:14.080 | That is the end of our interview with Bill Bang,
00:46:16.040 | and he will be returning in a couple hours
00:46:18.760 | to rumble with Christine Benz and Carson Jeske
00:46:22.160 | for our withdrawal rate rumble in a couple hours.
00:46:26.040 | Back here in the big room when we merge it all together.
00:46:29.000 | We'll see you there soon.
00:46:30.200 | - Knives out.
00:46:31.040 | (audience applauding)
00:46:32.000 | - Thank you all.
00:46:32.840 | (audience applauding)