On yesterday's Faith & Finance program, SMI's Mark Biller joined host Rob West to discuss retirement withdrawal strategies and the limitations of the widely known "4% rule" for withdrawals.
Mark and Rob also talked about the recent performance of gold and Bitcoin and answered listener questions.
To listen, click the play button below. Scroll down to read the transcript.
Faith & Finance airs weekday mornings on American Family Radio. A different version airs weekday afternoons on Moody Radio.
(More radio appearances by members of the SMI team are posted on our Resources page.)
Transcript
Rob West:
How much can you safely spend in retirement without running out of money? Hi, I'm Rob West. It's one of the biggest questions retirees face, and for years, many have looked to the 4% rule for answers. But what if that rule isn't as simple or as reliable as it seems?
Today, Mark Biller joins us to revisit this widely used guideline and explore a more flexible, thoughtful approach to retirement withdrawals. Then it's onto your calls at 800-525-7000.
This is Faith & Finance on American Family Radio — biblical wisdom for your financial decisions. (theme music ends)
Well, our guest today is Mark Biller, our good friend, executive editor, and senior portfolio manager at Sound Mind Investing, a faithful underwriter of this program. Mark will be with us for the entire program today, and therefore, it's a great time for you to call with questions "on topic" today related to retirement. How much do you need, and what should your portfolio look like?
Any of those investing and economy-related questions and more today for Mark Biller, 800-525-7000. We'll dive into those questions in the next segment, but now is the time to call 800-525-7000. Mark, great to have you back with us.
Mark Biller:
Thanks, Rob. Good to be back with you.
Rob West:
Mark, I'm excited about this. This is, of course, really a key number for retirees, this 4% rule. And you dive into that in an article you wrote for the latest newsletter called Revisiting the 4% Rule. And it gets to the heart of a question many people face in retirement. How much can I safely withdraw from my savings? What's the core issue you're hoping readers think through here?
Mark Biller:
Yeah, Rob, well, that really is it. We're trying to answer the question. How much can you withdraw for your living expenses and your other retirement spending without depleting your retirement savings too soon? As people approach retirement, it catches a lot of them off guard that figuring out how to withdraw their money from their nest egg is actually a lot of the time more complicated than saving it was in the first place.
If you think about it, saving for retirement is actually pretty straightforward for most people, especially if they have a good company retirement plan. They just plow money into their 401(k) year after year, maybe make a few little tweaks to their allocations here and there, but it's pretty straightforward.
On the other hand, when they hit retirement, all of a sudden, they're faced with this retirement of an unknowable length, and they've got to grapple for the first time with the question of how long is this money going to last, and how do I make it stretch to last through my entire life?
Rob West:
Yeah, exactly right. And that's where the idea of a "safe withdrawal rate" comes into play, but it's not quite as straightforward as it might seem. For many people, it can quickly start to feel a bit overwhelming.
Mark Biller:
Yeah. It's not really a simple thing, and it definitely does feel overwhelming for a lot of people. Trying to find this formula, a simple rule of thumb for a safe withdrawal rate is one of the biggest brain teasers in financial planning. There are just so many unknowns. You don't know how your investments are going to perform, you don't know what inflation's going to be, interest rates, all these variables. And then, like we mentioned a moment ago, the big one, you don't know how long you're going to live. So how long does the money need to last?
Rob West:
Yeah, that's exactly right. And so I'm glad we're diving into this today. Take us back. I mean, we've talked about this a bit before, but where does this 4% rule originate, and how did it become such a widely accepted guideline?
Mark Biller:
Yeah. Well, it started with a financial planner who's named Bill Bengen. He tackled this problem by looking backward instead of forward. So in the early '90s, he was analyzing decades worth of historical financial data, rate of returns, inflation, interest rates, asset allocations, all these things, starting with retirees from the mid 1920s. And his original research, which came out in 1994, identified a withdrawal rate that would have sustained a retirement portfolio for at least 30 years, even under the very worst of those historical conditions.
Now, a couple of points there, Rob. First of all, this "4% rule" — what Bengen's research actually showed was that if you started with a withdrawal rate of 4.15% and then made annual inflation adjustments, that every single retiree portfolio in his study would have made it through a 30-year retirement. So what we're really saying there, Rob, is this isn't an "ideal percentage" for people to take out. This was a floor that nobody would have crashed their portfolio if they'd taken out that number.
Now, that doesn't mean you couldn't have taken out a larger percentage, but that was the floor that his research showed. Now, the financial media kind of jumped on that. 4.15% doesn't have a nice ring to it, so they simplified that to the "4% rule." That's what everybody grabbed onto.
And an awful lot of people that heard that thought, "Oh, 4%, that's the optimal number for me to take out. " No, that was never the point of his research. The point was that's the lowest common denominator that will keep these portfolios from crashing.
So as you mentioned, about 10 years ago, we took a look at this at SMI, and so our founder, Austin Pryor, went back, looked at similar historical data. We made a few different assumptions than Bengen did, but what we found was that a 5% initial withdrawal rate with annual inflation adjustments would support a 30-year retirement, even under really difficult conditions.
Now, the difference between 4% and 5% may not seem like a lot, but when you compound that over a full retirement, that's a big deal to a lot of retirees.
Rob West:
Yeah, it sure is because this has become such a key part of how so many people think about their retirement. And it may not seem like a big jump here, Mark, but the difference between four and 5% can really matter. Did your research also explore what happens if someone pushes that withdrawal rate even higher than 5%?
Mark Biller:
Yeah, we did look at that. So what we did was we looked at a 6% withdrawal rate, and we found that that actually worked in most cases, although there were a few cases in our research where the money would have run out before a 30-year retirement was up. And then when we pushed that all the way to 7%, that's where we really saw significant risks come into the findings, with a lot of the portfolios running out of money before 30 years.
So, 5% — very safe, 6% — pretty good, beyond 6% — pretty risky.
Rob West:
Yeah, that's helpful. Today, we're talking about the 4% rule, which is really this longstanding quote, safe withdrawal rate that came out in the 90s from work research done by a gentleman named Bengen. As you look at this, I know Bengen recently went back and kind of revised his original research. What did he find in that work?
Mark Biller:
Yeah, he's got a new book out, which is why this is kind of a hot topic. And in that new book, he's identified a different rate. Now he's saying 4.7% is that new floor rate, but he also mentions specifically that most retirees could have withdrawn even more. He points to 5¼% as kind of his cutoff where most of those portfolios would have been successful.
I think, really, Rob, though, what we'd want to leave listeners with is any of these rates of return. They're good rules of thumb, and they're good, they're helpful for certain things. I tend to think of them as being more helpful for like distant projections. So my portfolio is "X" size today. I'm planning to retire in 10 years. I think it's going to grow to this number. And then if I use one of these rules of thumb — 4%, 4½%, 5% — it gives me a rough ballpark idea of what I'll be able to generate an income from that portfolio.
But really, this is not the approach that we would suggest people take when it comes to their real nuts and bolts retirement planning. For that, I really think a personalized approach that's going to drill into each person's specific portfolio, how it's invested, their specific spending patterns, what they need to generate from their portfolio to meet their living expenses, that's a much better approach. And I don't think most financial planners really love the idea of picking a percentage and then just trying to apply an annual inflation adjustment to that.
I think it's much safer, usually a much better approach to have, usually, some kind of a software planning-based system that you can evaluate year by year as you go through retirement, how your planning is going. And if you need to make real-time adjustments along the way. And like I said, usually there are so many variables that the best way to do that is with some sort of planning software. And that's what every advisor is going to do with a client. There are ways through SMI, our members have access to professional-grade retirement planning software. So that really is the better approach in our view, Rob.
Rob West:
Yeah. The bottom line here is, rather than anchoring to a single percentage, you want to take a more holistic view of the financial picture, right?
Mark Biller:
Oh, absolutely. And the other advantage of that is it gives you the potential to test different scenarios. What if I do this differently? What if the market does that differently? And so it gives you a much more robust type of planning than you're going to get from that rule of thumb percentage.
Rob West:
So just in terms of a practical approach, and I know you've already given us some really concrete things to think about, but from a day-to-day standpoint, what should our listeners take away from this?
Mark Biller:
Yeah. I mean, the biggest thing, and it really comes back to how we address these questions when we're on these programs together, Rob. We always start with, "What does your budget look like? What is your exact spending need? What are your exact sources of income?"
When you compare the income coming in from Social Security and other income you have, if you have a good budget and you know what your spending need is, that's going to leave for most people that gap that they need to fill from their portfolio. And that's a much better starting point for your retirement planning than a generic rule of thumb percentage of your portfolio.
And then of course, going through it in real time, you make those adjustments to spend a little less, or maybe you've got a little more available than you thought at the beginning.
Rob West:
For folks listening to this program who want to be generous, and they're concerned about all the possible scenarios that may come their way, and yet they don't want to overaccumulate, and they'd love to get more into God's kingdom now rather than waiting and doing all their giving at death. How do you balance that tension?
Mark Biller:
Yeah, it is hard. And really, that is the goal is to find that balance, avoiding the risk of overspending and running out of money, while also avoiding the tendency to underspend or under give out of fear when you really could be more generous now.
And that I think is one of the biggest benefits of the type of planning that I was talking about a moment ago, because you can put in some of those "what if" scenarios. "What if we did some of this giving that we've always wanted to do, and instead of leaving it in our will? What if we did some of that now?"
And you can plug that in and then see what the implications are five or 10 or 15 years out from doing that.
Rob West:
Let's head to the phones. We'll begin in Virginia today. Tony, go ahead, sir.
Caller:
Yes. Good morning, Rob. Appreciate your show. Was a big fan of [the late financial talk show host] Dan Celia, and now transitioning over to you. It's been a blessing.
So let me just ask you real quick. Converting tax contributions before tax into a Roth after retirement. It was my understanding that after you retire and you don't have earned income, you can't contribute into IRAs or into a Roth, but I thought maybe I'd heard that it was possible. So what's your ideas on that?
Rob West:
Yeah, Mark?
Mark Biller:
So Tony, you're right that you do need to have earned income in order to contribute to an IRA. So I'm not sure what other scenario you may have heard about, but you're correct in that if you don't have earned income, then your ability to contribute to an IRA is pretty much ended. Any nuances there that you're aware of, Rob?
Rob West:
No. I mean, the only thing would just be specifically to get money into a Roth. If you already have money in a traditional [account], you could do a Roth conversion, which does not require the earned income, but that money would already have to be in some form of IRA in order to do that.
Caller:
Okay. So that Roth conversion — that's what I guess I'm trying to get at. That is possible. Is that correct?
Rob West:
Yeah. Mark, any thoughts on kind of how to think through when to convert?
Mark Biller:
Yeah. There's really a "sweet spot" — not that you can't do it outside of this range — but what a lot of retirees find is that early retirement period, which for most people is anywhere from when they retire at 60, 62, 65, whatever, up until they need to start taking those required minimum distributions at 73, that can be a really valuable time to be able to do those Roth conversions.
And part of the reason for that is you don't have to convert the whole IRA all at once. So each year, let's say somebody retires at 62 or 65, the number doesn't really matter. They can look at their income, which typically is relatively low in those early years. Social Security may be a little bit of other income from other sources, and they can see where the tax brackets line up.
So if they've got, say, another $20,000 in a particular tax bracket before their tax rate would jump up, they could do a $20,000 Roth conversion at that lower rate and kind of just plan that glide path of Roth conversions during those early low-income years.
What that does for you is it minimizes those required minimum distributions when you hit age 73, because you don't ever have to take required distributions out of a Roth IRA. And so that helps you really manage your tax bill in the years prior to the RMDs and then in the years after as well, because you've reduced what those required distributions are going to be.
So that's a really sweet window to be thinking about Roth conversions during that pre-73-year-old period.
Rob West:
Yeah. Tony, is that helpful?
Caller:
Yes, that's helpful. And I just had one more question as far as to reallocate my assets now to get into that 60 / 40 allocation, what's the best way to pick the right bonds?
Rob West:
Yeah. Let's tackle that one after this break. If you can stay right there, Tony, we'll get Mark to weigh in on selecting the bond portion of your portfolio.
Questions for Mark Biller today. Lines are open: 800-525-7000. Call right now. We'll be right back.
Rob West:
Before the break, we were talking to Tony about a Roth conversion. Tony had a follow-up conversation for a 60/40 portfolio. He's wondering for that bond portion, how do you pick those bonds? Do you buy individual bonds? Do you buy mutual funds?
Mark, what are your thoughts for the average retiree?
Mark Biller:
Yeah, I think it's actually one of the most important questions that investors should be asking right now is what to do with the bond portion of their portfolio. And the reason that I say that, Rob, is we've had a real sea change in the interest rate environment, the inflation landscape over the last five or six years, really since the COVID response.
And so from 1982 until COVID in 2020, you had interest rates falling in more or less a relatively straight line, and Bond Investing 101 is that when interest rates go down, the value of the bonds goes up. And so this was a great environment for bond investors. And frankly, if all you did was use bond index funds for that almost 40-year period, you did great as a bond investor.
Well, that kind of changed with COVID, and it wasn't just COVID, along with COVID came interest rates just bottoming out very close to zero. The 10-year Treasury yield was yielding one-half of 1% there in the summer of 2020.
Well, the opposite of when bond rates go down, bond prices go up is when bond yields, when the interest rates go up, the bond prices go down. And that's the environment we've been in. Higher inflation causes higher interest rates. And so we've had a really poor bond environment. In fact, most people are stunned to hear that over the last little bit over five years, if we start at the beginning of 2021, the main U.S. Bond Index has a negative total return over that more than five-year period.
So people sitting in bonds and bond index funds, they've had a zero — or actually a slightly negative number — for their bond portion for over five years. So what we've done at SMI is we have reconfigured our Bond Upgrading portfolio. We used to have half of that in bond index funds. Now we don't have any money allocated to bond index funds. We have a four-fund portfolio that we recommend to our members. They're all active funds that we've chosen to work together to give a better chance of success in a more challenging bond and interest rate environment.
Now, the trouble, Rob, is a lot of people don't have access necessarily to a broad range of funds if they're in a 401(k). They may be limited to just index funds. What I would recommend for those folks is probably to keep the maturities of the bonds fairly short.
So if they have options of say short-term, intermediate-term, and long-term bonds in a rising rate environment, which I believe we're in kind of as a secular thing, a longer term rising rate environment, you don't really want to own long-term bonds because those are going to go down the most when interest rates rise.
So I would keep maturities short. I would probably split that between short-term and intermediate-term bonds if all you have access to are the indexes, but I really think that this is an environment where good active management in the bond part of your portfolio can really make a difference right now.
Rob West:
Yeah. Is that helpful to you, Tony?
Caller:
Yeah, that's helpful. I do have a self-directed, at least in my IRA in Schwab. So I guess I'm able to search for particular bonds, and I'll look for those short-term, intermediate, and long-term advantages.
Municipal, state, federal, any advantage of going through or looking for bonds in those particular areas?
Rob West:
Yeah, Mark?
Mark Biller:
Yeah. The main thing there, Tony, is if you're investing through a taxable account, then those can have tax advantages for you. If you're in an IRA, then usually you don't get an advantage. And in fact, often the yields are lower on municipals because you're getting a tax advantage, so they can pay a lower yield and still be attractive. So if you're in an IRA, then generally those are not going to be helpful. But in a taxable account, they can be great if you're comparing your after-tax returns.
Rob West:
Tony, thanks for your call today. Before we head to another call here, Mark, just quickly, are you surprised that we're bumping up against new all-time highs given the backdrop we have of the war and oil and all the uncertainty still swirling?
Mark Biller:
Yeah, I am. And that's not to say that I think it's unwarranted or crazy or anything like that, but the thing that was so surprising, Rob, was just the speed of the rebound. In fact, I've seen a bunch of different numbers in the last couple of weeks, but the market basically went up for 11 straight days there out of the ceasefire announcement, and over those 11 days, that was the fastest 11-day recovery, I believe, on record, if not ever, in a very long time.
And so when you see that kind of just dramatic rebound, it's always surprising. It's a little breathtaking to see the market go up 10% in 10 days! And so you do wonder, is that going to —you can't sustain that pace, obviously. Now, do you get a little bit of a pullback and then things kind of normalize?
But I do think, once again, Rob, it just really reinforces an important long-term lesson for investors — and that is that it takes a steady stream of bad news to make stocks go down. And it's really difficult to maintain that type of steady stream of really bad news.
So even in the face of something as big as this war and the Strait of Hormuz being closed — and I don't know that we've necessarily seen the full effect of that. That could be revisited in the months and quarters ahead as that kind of ripples through the economy. But for now, investors have already turned their attention ahead to the next earnings season that's underway and earnings are starting to come in really, really positive for U.S. companies. They're turning their attention back to another big breakthrough in AI technology and the promise and potential that that holds for a lot of companies. So it's just really hard to sustain a negative falling market.
And that's an important lesson for investors to internalize. Your default posture really does need to be that the market tends to go up over time, except when there's particularly in sustained bad news to keep it down.
Rob West:
For somebody who, just given all the uncertainty in the world, did not stay long term and didn't stay invested, just tweaking their portfolio, but really moved largely to a cash position, just given where we find ourselves in the market, how do you think about reentering this market if you're willing to kind of stick with a rules-based, long-term approach?
Mark Biller:
Yeah. Usually, when you find yourself in a situation where you're asking yourself, "Did I make a mistake doing that? And am I positioned in a way that's a mistake today?" my experience has been that the best approach, Rob, is to rip the band-aid and just get back to what your long-term plan says you should be allocated at.
If you don't have a long-term plan, that's always the starting point. And if you find, as you go through that long-term planning process, that this is the appropriate allocation for me and I don't have that allocation today — again, usually, even though it's painful — the best approach is rip the band-aid, get allocated correctly.
And it's amazing how much financial piece it actually brings a lot of the time to move from a portfolio where you know you're really not allocated correctly, to just make those moves, do your buying or do your selling, whichever the case is and getting on that long-term path brings a lot of relief for a lot of people.
Rob West:
Yeah. Let's go to Alabama. Mark, go ahead, sir.
Caller:
Yes, sir. I'm 65. My wife is 64. We're both self-employed. We have a total of about $200,000. We have it all in either a high-yield savings account, CDs, or a couple of IRAs. The IRAs, they're just — I think they call it SPAXX cash — they're with Fidelity. We don't have anything invested in the market other than a small Roth IRA, and it's with the Timothy plan, but I was just wondering, are we wrong to not be invested? At this age, I'm real averse to losing money if the market goes down, [but] should we have some money in the stock market at this age?
Rob West:
Yeah. Mark, how do you think about that?
Mark Biller:
Well, I think the biggest thing, Mark, is that you have to look at the actuarial trends, and that's just fancy speak for, "How long are you likely to live?" And of course, there's a lot of nuance, a lot of personal family history, those types of things. But the rule of thumb that I always start with with people — that's often surprising to them — is that if a couple hits age 65 in relatively good health, generally speaking, there's a 50/50 chance that at least one of the two of you will live into your 90s.
And that is very surprising to a lot of people. They think more in terms of the 77, average life expectancy, that sort of thing. But when you frame it that way, Mark, what you're looking at is there's basically a coin flip chance that one of the two of you is going to last another 25 to 30 years!
And so when we start with that, then we're left with, are these CDs and high-yield savings accounts going to be enough to outpace inflation over that long of a period? And that's a different type of risk than the market risk, which is a very obvious risk with the stock market. You know that risk, but the risk of inflation outpacing your savings is a much more subtle, slow, long-term risk.
So I would encourage you, Mark, to maybe just think about — you don't necessarily have to put a huge chunk of your portfolio in the market —but I would encourage you to think about whether it would be wise to have at least some market exposure because 100 years, 100-plus years of market history tells us very clearly that the asset that has the best chance of outrunning inflation over the long term has been the stock market.
Rob West:
Thanks for that. Great counsel there. Mark, thanks for your call today. Back with our final segment with Mark Biller after this. Stay with us.
Rob West:
Thanks for joining us today on Faith & Finance here at American Family Radio. My good friend Mark Biller is here today. Mark is executive editor and senior portfolio manager at Sound Mind Mind Investing, you can learn more at soundmindinvesting.org. The SoundMind Investing newsletter helps many, many of our listeners with their investment selections, largely mutual fund selections each month through their digital and print SMI newsletter. And then their Private Client group is available for those that want a hands-off approach, as you delegate to a team that Mark leads.
Two more quick questions. What about gold and how has it behaved during this conflict? Was it as you would expect from the role gold typically plays in our portfolios?
Mark Biller:
It really wasn't. It was a lot more volatile than I think most people would have expected. But I do think we have to put an asterisk there because it had run up so far, so fast going into the conflict that you had a lot of people who probably were not normal long-term gold investors, that when the conflict started, they looked at their profit and loss statement and said, "You know, I'm up 100% on my gold position. I'm going to sell some of this. " You also had the dynamic of countries and central banks actually dipping into their gold holdings as a form of savings.
So we're still very positive on gold. I think that it's been settling down as the conflict [has worn] on. We're starting to see more normal gold behavior again. And I'm very positive. I think that this general trend toward monetary debasement and large government spending around the world, just those are two huge pillars that both scream good things for gold going forward.
Rob West:
And then just quickly, to the extent we think about or did think about crypto as digital gold as a part of that gold allocation, we had some dramatic pullbacks from late last year. Do you think that was just taking out the speculators and we're going to settle back into a normal trading range? Or did that cause you to change your view on Bitcoin entirely?
Mark Biller:
It was very surprising in the period from last fall until the war when gold and other precious metals were going up so rapidly, Bitcoin and other crypto were falling. That was shocking because it really did throw into question that whole Bitcoin as digital gold idea.
I'd say the jury's still out. These are still new asset classes. And so I wouldn't say that we've changed our view entirely or thrown in the towel, but it's worth keeping a wary eye on Bitcoin and if it actually is fulfilling the narratives and the promise that people are attaching to it.
I think it's actually been much more constructive here lately, and it didn't fall nearly as far as it actually has in past Bitcoin bear markets, but that's kind of relative praise for sure.
Rob West:
Yeah. Well, we were very clear to say all along the way it's very volatile, and it's held up to that promise!
Mark Biller's been here today. Folks, if you want to read the article we've been talking about, head to soundmindinvesting.org. You can read about Revisiting the 4% Rule. You can also become a subscriber to the SMI newsletter, where they'll give you your mutual fund recommendations in the newsletter every month, or the Private Client group can take over management for you.
Mark, always appreciate you, my friend!
Mark Biller:
Thanks! Always a pleasure, Rob.
Rob West:
All right — soundmindininvesting.org is the place to go.
Folks, thanks for being with us. Big thanks to my team today: Patty, Sandy, Devin, Taylor, Jim, and everybody here at FaithFi. We'll see you tomorrow. God bless you! (theme music ends)
