Bogleheads® Conference 2024 Withdrawal Rate Rumble with Bengen, Jeske and Benz

Episode Overview

• The episode features a "Withdrawal Rate Rumble" with experts William Bengen, Karsten Jeske, and Christine Benz, who debate the nuances of creating a sustainable retirement spending plan.
• The discussion emphasizes personalizing withdrawal rates based on individual factors like retirement age, future income streams (e.g., Social Security), and the market environment at retirement.
• Panelists explore the evolution of the 4% rule, with recent research suggesting a 4.0% rate is again viable due to higher bond yields, but caution that high equity valuations remain a risk.
• The conversation covers specific strategies for improving retirement outcomes, including dynamic spending adjustments, strategic asset allocation (like a 75/25 portfolio), and disciplined rebalancing.

Key Concepts

• Personalization of Withdrawal Rates: The traditional 4% rule is a generic starting point. An individual's optimal rate is influenced by their retirement horizon, risk tolerance, and unique cash flows like pensions or Social Security.
• Impact of Market Valuations: Asset valuations at the time of retirement are a critical factor, especially for early retirees who often stop working near market peaks when portfolios are at their largest.
• Dynamic Spending Strategies: Flexible spending plans, which involve reducing withdrawals during market downturns, can support a higher initial withdrawal rate compared to a static, inflation-adjusted approach.
• The Role of Social Security: For early retirees, Social Security should be treated as a significant future cash flow and integrated holistically into the retirement plan, which can justify a higher initial portfolio withdrawal rate.
• Strategies to Enhance Sustainability: The panel discusses several methods to support a potentially higher withdrawal rate, including diversification, disciplined rebalancing, a "reverse glide path" (increasing equity exposure over time), and tilting portfolios toward factors like small-cap value.
• Asset Allocation and Risk Management: A 75% stock and 25% bond allocation is presented as a robust mix for weathering different economic conditions. The importance of shifting from a "buy-and-hold" to a "risk manager" mindset in retirement is also a central theme.

Quotes

• At 2:09 - "By doing your analysis right and looking at your numbers and looking at your plan and kicking the tires... that gives you more confidence to retire and gives you more courage to actually take money out of your account." - Karsten Jeske explaining the psychological benefit of detailed withdrawal rate analysis.
• At 3:57 - "Asset valuations matter a lot, especially for people in the FIRE community because we retire endogenously, and we tend to have the retirement date close to the market peak." - Karsten Jeske on a key risk factor for early retirees.
• At 6:44 - "First year we did this research in 2021, the takeaway was 3.3% would be a good starting withdrawal percentage... In 2023, drum roll, it was 4.0%." - Christine Benz summarizing the evolution of Morningstar's recommended safe withdrawal rate.
• At 20:07 - "Instead of thinking of that as some kind of a bucket and a mental accounting thing where you do everything separately, I think it should be done as one unified, holistic exercise." - Karsten Pfennig arguing for integrating all assets and income streams into a single, comprehensive retirement plan.
• At 24:15 - "I've identified four factors which I call 'free lunches' in retirement investing... another one is rebalancing your account... that can add a significant amount... you need to do that to get to the 5% level." - Bill Bernstein outlining key strategies that he believes can help retirees safely achieve a higher withdrawal rate.
• At 31:38 - "I think 75/25 seems to be a pretty good mix. If you go too far on the bond side, it helps you during the Great Depression, but then it totally kills you during the 1970s and 80s." - Karsten Pfennig explaining that a 75% stock, 25% bond allocation provides a robust balance for different economic scenarios.
• At 40:37 - "I'm of the firm opinion that retirees, especially early in their retirement... should not be buy-and-hold investors necessarily. I think they should be more risk managers." - Bill Bernstein arguing that retirees' primary concern should be preserving capital from a major bear market.

Takeaways

• Move beyond static rules by personalizing your withdrawal rate based on your specific retirement age, lifestyle needs, and future income streams like Social Security.
• Adopt a dynamic spending approach by being willing to adjust withdrawals based on portfolio performance, which can allow for a higher starting rate while mitigating risk.
• Treat future income sources like Social Security as a current asset in your plan; quantify their value to determine how much they can safely increase your initial portfolio withdrawals.
• In early retirement, prioritize risk management over a passive buy-and-hold strategy to protect your capital from sequence of returns risk, especially around your retirement date.