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This floated across my screen a couple of days ago.
Bill Bengen introduced the 4% rule in 1994. It suggested that a one may safely withdraw 4% from a portfolio in the first year of retirement and it would be likely that portfolio would last for 30 years.
Bengen is publishing a new book A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More
In it he updates the rule but also provides a 55/45 model portfolio. This is my understanding:
Bengen states that slightly overweighting small-cap and microcap stocks could “increase [the safe withdrawal rate] maybe a quarter of a percent, which is worth it.” He acknowledges that small- and microcap-stocks are very volatile classes and should be used in moderation. My portfolio includes small caps, and I’ve always wondered what an appropriate allocation would be. With Bengen’s allocation I have more info on this.
The new initial safe withdrawal rate has been increased to 4.7%. In practice the SWR could be increased by the rate of inflation each year. In the article I read he also suggested that a reasonable starting point for withdrawals today would be between 5.25% and 5.5%. This is lower than the historical average withdrawal rate of nearly 7%. Bengen acknowledged that “you’re giving up a lot, but those are the circumstances we face.”
He was quoted “The 4.7% is still a ‘once-in-a-century worst-case scenario’ number,” he said, and retirees “should probably be more optimistic than that.” He considers current inflation to be moderate and stock market valuations are “very high.”
Bengen uses the Shiller CAPE ratio (Cyclically Adjusted Price-to-Earnings ratio) to measure valuations. He noted that while the historical average is about 17, today’s CAPE is nearly double that, in the mid-30s. “I think if you get much above the low 20s, the risk starts to build,” Bengen said, warning that historically, high CAPE ratios have not lasted long and typically preceded sharp declines.
Here’s a brief synopsis of the book over at Amazon:
I know this question isn’t about the 4% article but, I do have a retirement income question.
We’ve always invested our retirement monies into Index ETF’s.
We have entered retirement with enough income from two SS accounts and three pensions to cover all of our expenses.
If I pass away first my wife will lose my pension and might need some form of extra income. She isn’t very interested in finances. Would it be easier for her to make a monthly sale if funds to provide it or for me to consider putting about seventy five percent of our retirement accounts into dividend ETF’s,Reit’s,etc reinvesting the dividends until a time when she could start collecting the dividends if they are needed.
I know most of us HD readers are indexers but I am asking it is curiosity
There’s a bunch of ways to create income from index ETFs. You’ll need to figure out what makes the most sense for you and your wife. The best thing would be for her to get up to speed on your investments so she can make this decision if you die first. Sounds like you’ve done great so far. Good luck!
Thank you for commenting, Ben.
I can’t imagine being comfortable spending 5% of my portfolio/year in the first few years. What if you retire into a down market? That money is gone. I plan on 2 – 3%. I have about 65% in stocks, the rest in near cash investments – very, very little in bonds.