A financial planner in El Cajon California, Mr. Bengen addressed the questions a multitude of readers have asked.
"If I cut back on expenses in bad markets and raise them in good markets, can't I withdraw more from my retirement nest-egg?"
"If I withdraw more now with the intention of withdrawing less later, will my nest egg be safe?"
Back in 1994 the same man shocked the financial planning world with a Journal of Financial Planning article showing it wasn't safe to have an initial withdrawal rate much higher than 4 percent, a figure so low it scares many people out of retiring.
Now he has extended his research by examining more complicated spending options. One is to be flexible and go with the ups and downs of your investments, cutting back expenses in bad markets, increasing them in good markets. The other is to recognize the inevitable result of aging. We may not be capable of spending as much money at 80 or 90 as we can spend at 65.
"Yes, the data shows that you can spend more," he said in a recent telephone interview. "But this a sum zero game. If you spend more now, you'll probably have to spend less later."
To test, Mr. Bengen used a "floor and ceiling" method. Withdrawals are allowed to increase up to 25 percent above of the original amount, adjusted for inflation, in bull markets. In Bear markets they are allowed to decrease up to 10 percent below the original amount, adjusted for inflation.
The result: you can be 100 percent certain of remaining solvent for 30 years of retirement with a starting withdrawal rate of 4.58 percent.
He also found that you could raise the withdrawal rate to 5.50 percent and have a 77 percent chance that you won't run out of money. In the worst case, you'd run out of money in 20 years. (These figures are based on the most probable surviving portfolio, which was 63 percent large cap stocks and37 percent intermediate government bonds.)
Not enough, you say?
OK, let's try another route.
Citing Michael K. Steins book, The Prosperous Retirement, Bengen then examined a modern retirement, one that is divided into three distinct periods. The first period is the years of active retirement (arguably to age 75) where expenses rise with inflation. The second is the transition years from 75 to 85 in which spending slowly declines to a more passive life. The third is a passive stage, starting at 85, in which many discretionary items are simply dropped.
To do the analysis, Bengen assumed expenses rising with inflation in the first phase and different combinations that were less than inflation in the second and third stage.
The result? You can raise your spending rate.
Just don't raise it very much.
Bengen's original work showed that a basic balanced portfolio could have an initial withdrawal rate of 4.15 percent. Plan for slower expense growth in the second and third stage of retirement, however, and you can start your withdrawals at about 4.75 percent. Basically, you can finagle your future spending but you still can't raise your starting withdrawal rate over 5.0 percent.
I commented that few readers would be uncorking champagne on this news. I also mentioned that one need only listen to a promoter-paid radio show to be told, repeatedly, that you can safely withdraw at rates of 6, 7, and 8 percent a year.
"Well, they got away with it over the last ten years. But it isn't repeatable and probably won't be possible for the next ten years. I think clients will be glad to have been conservative," he said.
"I think (stock) returns will be much lower in coming years. After all, they've been in the teens since the early eighties but they're 10 to 12 percent historically and the historic returns are closer to the return on equity of corporations. You can't outstrip the economy as a whole. Even now, valuation is still pretty high. There's a lot of denial out there. I'm telling my clients to watch their expenses and not get frisky."
"We've all got to remember that a lot of things will work for short periods of time. But retirement is long term and there is no recovery."
Readers who are grappling with this question can read his complete paper and related tables on the website of the Journal of Financial Planning
You can also find more discussion of the issue on my website
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