The first time I suspected Austin might be a financial heretic was in 2004.
Technically, that's not entirely true. I'd first harbored suspicions as he taught me about momentum investing during 2000, my first year under his tutelage. But the evidence for that was so immediately compelling that I was easily converted, and we had gone on to revamp Stock Upgrading in 2001 and develop Sector Rotation together in 2003 utilizing those principles.
But then came the February 2004 incident.
It started innocently enough. Austin had done the bulk of the number crunching and writing for our upcoming February 2004 cover article titled Will Your Retirement Nest Egg Last? When I reached the third page of his draft (an "iron sharpening iron" review process we still employ with each other's writing to this day), my eyes popped out of my head. Austin was suggesting a retirement withdrawal rate of 5%, 6% — even 7% — might be appropriate!
The 4% withdrawal rate gospel
To understand the degree of my shock, we have to go back to 1994, (the same year I graduated with my Finance degree). That year, a financial planner named Bill Bengen had introduced the "4% Rule" in a study published in the Journal of Financial Planning. Simply put, it suggested that a retiree should be able to withdraw 4% of their nest egg during the first year of their retirement, then be able to increase that amount each year by the inflation rate, without running out of money over the course of a 30-year retirement.
This simple rule "solved" one of the thorniest problems for retirees and financial planners alike, so it shouldn't have been surprising that it grabbed hold and quickly became planning gospel. Thus my shock (and mild horror) that Austin was suggesting a not-insignificantly-higher rate might be appropriate instead.
This episode is a good reminder of how stunningly the investing world has changed over the past 20+ years, as that initial analysis was simultaneously way harder to perform and way more primitive than what we would be able to do today with modern computing power and the financial tools available! Austin had created a labyrinth of spreadsheets that traced out the year-by-year progress of dozens of retirement portfolios started each year between 1946-1975, then traced each one through the subsequent 30 years from each starting point, to determine exactly when each would have run out of money. Quite a feat!
What that analysis showed was that higher withdrawal rates were likely quite safe, using a specific set of reasonable investing parameters. (We updated this study with more data eight years later, so I'll quote those 2012 numbers here.) Austin concluded that at no point in the prior 50+ years would a portfolio have run out of money using a 5% withdrawal rate, and that in only one of the 37 hypothetical 30-year periods would a person have run out using a 6% withdrawal rate (and not until the 29th year in that case). It wasn't until a person pushed that withdrawal rate to 7% that it became potentially risky, with the portfolio running out of money within 30 years in roughly one-third of the periods.
Twenty years later, Bengen agrees (sort of)!
This history came flooding back last week when I read an article circling back with the original 4% author, Bill Bengen, regarding his views on the matter. Thirty-one years have passed since his original research was published, and not surprisingly, his views have shifted a bit as he's had the chance to do more research (and write a new book) about the subject.
Bengen now puts the "safety rate" at 4.7% — a little lower than Austin's 5% minimum rate from 20+ years ago, but reasonable given that Bengen is touting this as virtually fail-safe.
But the story gets better:
Bengen calls the 4.7% rule the worst-case scenario that would have allowed a retiree who stopped working in October 1968 — and faced a bear market and high inflation — to not outlive their money for 30 years. Out of almost 400 investors he studied, only that one investor had a safe withdrawal rate as low as 4.7%.
For the rest of them? The average safe withdrawal rate was 7%, Bengen said.
There it is, 20 years later: Austin's conclusions verified by the original 4% rule author — 4.7% for ultra-safe investors, with more "typical" investors safely withdrawing at rates approaching 7%!
No substitute for personalized planning
While financial people love a good rule of thumb, at SMI we've long recognized that there's no substitute for personalized application and planning. That's why in 2017, we jumped at the chance to get the MoneyGuide financial planning tool into the hands of SMI members. You haven't seen us update this type of "one-size-fits-all" retirement withdrawal research since 2012, because advanced computing power and financial tools have provided us with a much better option.
In fact, if some of this sounds vaguely familiar, it's likely because you remember our cover article from last June: Will Your Retirement Nest Egg Last? How to Use MoneyGuide to Find Out. In that article, we took the original planning question that prompted Austin's research nearly 25 years ago, and fed it into the highly advanced financial planning software thousands of SMI members (and tens of thousands of financial planning professionals and advisors) use for specific, personalized planning.
Rather than pigeon-hole one specific investment approach (along with all the other variables of the original study), our update last year walks members through how to look at their personal, specific situation — including their exact investment plan — and determine the probability of hitting their own personal financial goals. Better yet, it allows them to then go in and test their plan with a virtually unlimited number of "what if" questions: What if we saved a little more now, spent a little less later, tweaked our investing mix like so...
If you're not among those already utilizing this powerful financial planning tool, hopefully this will be an encouragement to read the article linked above and strongly consider it. MoneyGuide is incredibly useful, and the arrangement by which SMI Premium members can access it forever for just $50 (one time!) through an arrangement with SMI Advisory Services (a separate, but affiliated business) is one of the biggest benefits of membership.
