William Bengen, deriver of the 4% rule for sustainable retirement withdrawals, was on the wire this week again making the case that 4% is now too conservative, likely allowing people to get to the end with still too much money unspent.
The way the article reads, Bengen treats the optimal withdrawal rate target as constantly moving. Four percent might be too low for the reason Bengen cites. Backtesting 60% simulated S&P 500/40% simulated 3-7 year treasuries on testfol.io goes back to 1962 and has compounded at 8.8%. That 8.8% includes an unrepeatable 40 year run ending in 2021 where the 3-7 year treasury compounded at 6.79%.
One idea about the sustainability of 4% that I don't think I've seen addressed elsewhere is that it's not just about taking 4% every year, it is about being able to sustain in the face of the occasional, very expensive one-off that has to be paid for. Who budgets for their next roof replacement? We replaced our roof in 2018 or maybe 2019. Maybe that means we have to do so again in the late 2030's or early 2040's. Where one offs play a role, I think a moving target for a withdrawal rate is a bad idea.
You know what you are spending now. Hopefully if you're not retired yet, you have at least some sort of rough outline of what your retirement spending will be. If Social Security (should you use a reduced SS amount?) plus 5% of your portfolio will provide enough money for what you have in mind, great but what is your vulnerability to something like a new roof or any other not enormous surprises? To me, 4% is about expenses and one-offs not just expenses.
Humble Dollar also picked up on the Bengen interview, talking a little more about asset allocation. Bengen assumed a 50/50 mix of stocks and bonds for his study. Humble Dollar talked about a normal (my word not theirs) range for equities between 45% and 75%. A retirement plan with a huge margin for error, like maybe a good sized account with the intention of continuing to work probably doesn't need 75% in equities. A retirement plan where maybe the account is large but the person doesn't want to work or no longer can work probably needs more than 45%.
An allocation mix could come down to some combination of growth and real positive return. Real positive return could mean TIPS of course but if TIPS interest you, buy individual issues, not the funds. I think a lot of the alts we look at here could sub in for TIPS in terms of similar volatility profiles and max drawdowns but with slightly higher growth rates.
For the same period, the Vanguard Short Term TIPS ETF (VTIP) compounded at 3.58% with a volatility of 2.98%. TIP got hit very hard in 2022. Remember from yesterday, BALT is not equities. You might make fun of it as a substitute for TIPS funds, but it is not equities. If not equities, what can it be used for? Some sort of real return, low volatility vehicle? Maybe.
Before digging in, note the green highlight. Testfol.io added Calmar Ratio which divides the growth rate by the max drawdown such that the higher the number the better.
These are all extreme portfolios but sort of inline with being quadrant inspired. If you take out BALT and run similar tests, you can go back to 2017 and back that far, the CAGR is the same as VBAIX but with a lot less volatility. If you just use client holding BKLN, you can go back to early 2011 and in that period, it lagged VBAIX by 210 basis points, 7.08% annually versus 9.18%, but again, much less volatility. And from early 2011, inflation compounded at 2.64% so irrespective of what the benchmark did, the real return and volatility tradeoffs were pretty good.
I've said many times that 25% in gold is too much for me as is mid-teens in alternative strategies but where bonds aren't reliable anymore, it seems better to balance growth (equities) against a combo of holdings that offer low vol/positive real return. I would go a little more diverse than just five funds though.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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