Sunday, March 4, 2012

New Bill Bengen Interview

Bill Bengen was recently interviewed by Dave Carpenter of the Associated Press. It is great to see him getting the credit for his contributions to retirement planning, which I summarized recently with my "William Bengen's SAFEMAX" blog entry. This is the fourth interview with him that I've seen since December.

The interview mentions that his safe withdrawal rate is 4.5% instead of 4%. I only reviewed his initial article. He later updated his recommendations to 4.5% by adding small-cap stocks to the portfolio mix.

The interview contains some pretty good advice, though I do worry about the sustainability of 4% in recent years, and I am still not entirely sure what he means about actively managing one's portfolio. It's probably better to stick with one's plans (to rebalance within bands or at calendar dates, or to even follow some pre-decided asset allocation formula based on some market conditions), because it is altogether too easy to start making costly behavioral mistakes when moving your asset allocation around all willy-nilly.

5 comments:

  1. A reader shared with me another interview with Bill Bengen appearing this weekend in the Wall Street Journal:

    http://online.wsj.com/article/SB10001424052970203960804577241143142670660.html

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  2. Honestly, a little disheartened to see this interview. A crucial part of the 4% rule is that the equity portion has to be in the range of 40-80% equities for this 'rule' to apply. surely, it's impossible to sustain that if you have 20% in equities. Added diversification and return from the small-cap will help this, but this isn't even mentioned in the interview. In fact, he stresses to 'be conservative and take a more active approach' with products and actions that are likely to lead to mistakes.
    He has been known to say 'valuations do matter' though in the interview, he expresses that he is potentially concerned for those that have retired in the past ten years, though didn't directly say WHY he is concerned for them. Of course one could say the concern is for 'low future returns', but could also be the 'high valuations in the recent past'. Some would argue these two are tied together, but I found it especailly odd that this wasn't mentioned in the interviews, but only implied.

    Wade, I really appreciate you posting these, as his insight is very valuable. It is encouraging to see interviews for people that have positively influenced our industry - even though I would have asked slightly different questions if I were to interview him.

    Thanks, Marlowe

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  3. Marlowe,

    Thanks. What would you like to ask him?

    Something I would like to return to soon is a further update on how 2000 retirees are burning through their wealth now 12 years after retirement, compared to where retirees were at 12 years later in the worst-case scenarios from the past. One different between now and the 1960s/70s, is that inflation has been much lower recently. Though it seems like this shouldn't matter, since I always use inflation-adjusted data, it may be that it does matter. Though the stock market has not been kind to investors since 2000, it might very well be that conditions have not been bad enough to spoil 4% after all. If we can get through the next few years without another significant market drop, then those 2000 retirees may be far enough along that they will be able to make it. I'm not sure, but it does seem that a lot of leaders in the field are thinking this way, and I would like to explore it some more.

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    1. I have several questions, the first regarding his statement of being more ‘tactical’. There is just so very little evidence that one can reliably predict the direction of the overall market to a point that it provides real value. Even when one has a solid strategy they’re likely to get caught up in emotion, risk-taking, or just getting the timing wrong. Our most recent victim is Bill Gross and the poor performance of his Total Return Fund in 2011. I’d be more interested in using a diversified portfolio of low-correlated index funds to avoid the ‘skill’ needed for market timing.

      Another is his statement to be more conservative. I understand he recommends Annuitizing portions of the portfolio, which I agree does provide value. The safe withdrawal rates in his study (and yours as well) show that this withdrawal rate is only viable with a portfolio 40-75% stocks. I wouldn’t call this approach conservative for a retiree. I understand this is over 15 years old, and a lot has changed since then – including stock valuations and monetary policy, both of which he hinted towards. Reading between the lines, this suggests the reason WHY he has suggested being more conservative.

      Back and forth, he does mention valuations and the fact that they can’t be ignored, though doesn’t say much on them. This is one are where I personally see tremendous value (thanks again for your continued research, Wade) and I’d be intereted in what measures he uses to determine valuations, what caused the high valuations, how we can exploit this as individual investors, and how we can use this prevent financial crisis in the future.

      Regarding the year2000 retirees, I agree that there is tremendous risk to them outliving their money. the trouble is identifying the different components. Influencing factors are the transition from pensions to 401ks, low overall savings, dot-com bubble, high valuations, poor returns following, real-estate/financial crisis, monetary policy, and I'm sure I forgot some. My fear is that the media will 'blame the government' and not identify the actual cause or how to fix/improve the faulty components. I also would be interested in seeing your take on this issue.

      'Spoiling' the 4% rule is a great concern, not only for this generation, but others. I am encouraged that Bengen chose to increase it by adding small cap stocks to the measures. I'd say that this leads to confirming the MPT approach of using a non-correlated assets to improve returns while minimizing risk.

      Thanks, Marlowe


      http://www.bobsfinancialwebsite.com/pdfs/1996_Bengen_15388_1.pdf

      http://www.fpanet.org/docs/assets/A92E35B9-9351-1596-3767A57CD8BB29A1/10Q.pdf

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    2. Thanks Marlowe, all good questions.

      I too share the concern about not panicking and making mistakes. I still think staying the course (however that is pre-defined) is most likely going to be the best bet.

      About becoming more conservative, I'm working on writing a new paper trying to summarize all the different views about retirement income strategies, so I will try to say more about it later. Just switching to bond mutual funds is surely not the answer, but being conservative by building a bond ladder and partially annuitizing could help build a spending floor that will stay relatively safe in the face of stock volatility.

      And I'm a big believer in diversification!

      Mr. Bengen has spoken favorably about my research on valuations. I know you've been talking to someone who thinks that Mr. Bengen must somehow retract his original studies because they do not incorporate valuations. But that isn't how research works. Someone else just comes along later and incorporates new insights to build upon the previous research. It's an organic process and there is a whole lot more to retirement spending than just the issue of safe withdrawal rates from a portfolio of volatile assets. Valuations don't help make safe withdrawal rates more safe, they only help to point out how difficult is to know what the safe withdrawal rate is in the first place.

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