A little over a week ago we looked at William Bengen's bailing on the 4% rule for retirement portfolio withdrawals. Bengen is the person who derived the 4% rule. The takeaway there was that Bengen no longer owned enough equities personally in order for the 4% rule to work. He feels the risks of owning equities has gone way up and so he reduced his exposure.
A friend sent me this interview Bengen did with ThinkAdvisor that provides a lot more detail on his thinking. Bengen also sees a lot of risk in owning bonds now, so he's reduced that exposure for himself too. According to the interview, Bengen walked up what had previously been 4.3% (that's the actual number underlying the 4% rule) to 4.7% and now he is talking about 4.4% or 4.5% so that part of it is not as dramatic as it first appeared. But he personally did lower his allocations to stocks and bonds, his advice is to have “55% of your normal allocation to stocks” and “cutting your bond allocation at least in half.”
Bengen goes out of his way to say he disagrees with Wade Pfau's suggestion of a withdrawal down to 2.4%. Related is that 4 point whatever percent is for a planned 30 year retirement. If you're planning 20 years or 40 years then you need to adjust according but he didn't specifics beyond that. For now, he says to hold more cash which he believes is not about market timing which he says means all in or all out, he believes holding more cash is a matter of risk management.
He weighs in lightly on a couple of related topics but is clear to say he is not an advisor any more, that his "bailiwick" is retirement withdrawals. So Bengen focuses on a couple of different dimensions but there are more than what Bengen's focuses on.
I obviously know nothing specific about Bengen's finances but he is talking in terms of retirement plans relying extensively on portfolio income (and presumably Social Security) and that's it. We spend a lot of time here trying to find ways to be less reliant on an investment portfolio. Is Bengen's caution warranted? I don't know but if you are in your withdrawal phase and you agree with him, what are you going to do? Would you do anything? If you do raise a lot of cash (to be clear, I think it is too late for that), what does that do to your numbers looking out a few years?
While I would not advise raising as much cash as Bengen suggests I think this scenario make a case for slightly tweaking how we think about sequence of return risk which the risk that a large, slow stock market decline starts very close to your retirement date which can jeopardize your entire retirement plan. Maybe regardless of your retirement date, I don't mean people are young and not retiring soon, you should always keep X number of months' worth of expenses in cash or a cash proxy. X equals the time frame you're most comfortable with but I'd think at least 12 months worth.
This market event, and all subsequent market events, will be much easier to endure when you have other streams of income. We talk most commonly here about monetized hobbies, volunteer gigs that you're able to eventually monetize, an Airbnb rental and a few others you might be able to add to this list. Other income streams, reduced reliance on your portfolio and maybe 15 months worth of expected portfolio needs in cash is a bulletproof combination for resilience. All the more bulletproof when you have the physical optionality to do whatever you need to if it gets to that point.
All of these take time to cultivate so don't wait, do your future self a favor and start now if you haven't started already.
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