You have followed the 4% rule for years. You’ve saved diligently and you’ve dreamed about that early retirement. But what if everything you knew about the FIRE movement just changed? Today, we’re joined by Bill Bengen, the Bill Bengen, the original 4% rule study author, and we are going to be talking about the 5% rule. So, what does this mean for your retirement date, your withdrawal strategy, or your entire financial future? That’s what we’ll be discussing today.
Hello, hello, hello and welcome to the BiggerPockets Money podcast. My name is Mindy Jensen and with me as always is my 4% rule enthusiast co-host, Scott Trench.
Thanks, Mindy. Great to be here and I couldn’t be more excited to withdraw some really intense knowledge from the man, the myth, the legend himself, Bill Bengen. BiggerPockets has the goal of creating 1 million millionaires. You’re in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting, and it might be a little sooner than you think.
We are so excited to be once again joined by Bill Bengen today to talk about the 5% rule and his new book that will be released in August, a richer retirement, supercharging the 4% rule to spend more and enjoy more. Bill, welcome back to the BiggerPockets Money podcast.
Pleasure to be back here again. Thanks for having me.
I’m so excited to talk to you, Bill. Huge fan, huge fan of your work. Love your original study and cannot wait to read this new book. Uh, as a refresher for our audience who may not know, when did you create the 4% rule and why?
I wrote an article for the Journal of Financial Planning back in October of 1994, which was the first work I had done on this subject and my goal in writing that was to, uh, find out, very simply, looking back at history, uh, which in, which was the unlucky retiree who was forced to retire with the smallest withdrawal amount?
Uh, somebody who ran into a buzz saw of bad market conditions and high inflation. It turned out that was the, uh, October 1968 retiree. Uh, who, you know, the 70s were a terrible period for investing and it’s reflected in the withdrawal rate. At the time I wrote the article, I only used two investments. I used, uh, large company US stocks, I used five year US government bonds and those two yielded, uh, a withdrawal rate of 4.15% for those individuals. That’s the most they could have taken out to have their money last for 30 years, withdrawing from a tax deferred account.
I actually didn’t call it a rule in that paper. Uh, and I was kind of surprised when, uh, after it started circulating, I saw newspaper articles about the 4% rule or the Bengen rule. I was saying, wait, wait, what is this? But eventually I decided I wasn’t going to fight City Hall, so I’ve adopted that. But it’s really important that people understand that the original 4% rule, which I’ve upgraded now to 4.7%, is really the worst case in history. Uh, my database goes back 100 years. I studied 400 retirees in that period of time, and only one of them was stuck with that awful low rate of 4.7%. All the rest could take out higher, many much higher. So, uh, when you use that rule, make sure that you know what you’re doing. It’s ultra conservative. Uh, and, uh, you probably can do better off with a higher withdrawal rate today.
Bill, what, what, um, remind us what the allocation between stocks and bonds are for this rule?
Fixed allocation during retirement of about 60% overall stocks, about, uh, 35% uh, well, actually in the book I use 55% stocks, 30, 40% uh, bonds, and 5% Treasury bills or cash or money market funds. They’re all, you know, roughly the same thing.
Got it. Okay. So, so this does, this does assume that, that allocation here. And then remind us what the big, you know, we had 4.1%. Could you just give us another layer of depth on what, how, what your, uh, updated research has uncovered that has moved that to an updated 5% or 4.7%, excuse me, uh, rule?
Yeah, nothing’s changed in the outside world. It’s all in the Bill Bengen world, so to speak. I’ve made my research more sophisticated. I’ve increased the number of investments from two to seven. I’ve included international stocks. I’ve included, uh, treasury bills. I’ve included some other classes of US stocks like micro cap stocks, small cap stocks. All these investments increased the diversification of the portfolio and increased the returns. That’s one of the free lunches investors have by using diversification, very, very important, and they bumped up the withdrawal rate.
But it appears to me that the last round of increases I got was really small. I added four, four investments and got only a 2/10ths of 1% bump in the, uh, withdrawal rate. So it probably approaching a natural limit of sorts, beyond which adding additional classes like gold or or, uh, real estate or emerging markets, commodities probably won’t move the needle much.
Got it. What is that new allocation? So we have 55% stocks, 40% bonds, 5% treasury bills for the old 4.1% or 4% rule. And for the new one, what does that allocation look like?
Actually, the original, maybe I misspoke. The original allocation was probably closer to 60 to 65% stocks. The new allocation for the more diversified portfolio actually lets you use a lower allocation of stocks, like 55%. Uh, and that creates a less volatile portfolio, which is an additional benefit.
Interesting. Walk us through maybe some, some other observations on this. one, one would conjecture, does this reduce the volatility reduces the volatility of the portfolio, probably also narrows the range of outcomes at in terms of terminal wealth at the end of the 30 years one would suppose with less of an allocation to to stocks as well in that front. Do you find anything interesting like that as you updated this rule if you use the 4.7% or 5% rule?
Uh, there weren’t too many changes from the, at least not dramatic changes, but I came to the same conclusion that if you go below the ideal allocation, the ideal allocation is somewhere between 45 and 70 some percent stocks. If you stay in that range, you end up with about the same withdrawal rate, 4.7%. It doesn’t matter, which I think is quite interesting. But if you get brave and you use a higher allocation stock, let’s say 80%, you actually penalize yourself. You reduce your withdrawal rate because when you run into a bad bear market, it really choose up the portfolio with a high percentage of stocks. On the other end, if you use a very low percentage of stocks and a high percentage of bonds, the portfolio just doesn’t have enough oomph to generate the returns necessary to get a decent withdrawal rate. So that also, so you kind of think of a chart, it looks like a mesa where it falls off sharply on both sides and you have a nice flat spot in the middle, which is, uh, anywhere in that middle spot, you’re okay.
And, and for that stock portfolio, walk us through what the allocation to US versus international stocks would look like in the updated rule.
Sure. I had, uh, the most recent portfolio I’ve used has five classes of stocks, four from the United States, which includes large company, mid company, micro company, small company stocks, and also an allocation to international stocks and each of those five, uh, asset classes, uh, for the 4.7% rule are allocated, uh, equally. So if you have 55% overall and five stock classes, each one has about 11%. Uh, and then the bonds, uh, get, uh, 40% and cash gets 5%.
Awesome. So super, super simple there. And this is all detailed in the book, of course, for folks who want to really get into the, the theory and understand that those allocations in there and, and really internalize the why behind this. Is that right?
That’s right. And and can I add one more point I wanted to make? Uh, this is another free lunch I’ve identified. There are four free lunches I’ve identified in my research in the book. And one of them is if you, the highest returning asset classes are US small cap stocks and US micro cap stocks around 12% versus let’s say 10% for the other ones. If you slightly tilt your portfolio toward those asset classes, I’m not saying a major shift, maybe go from 11% to 13% and reduce the other stock allocations, uh, asset classes, uh, accordingly. That will give you a worthwhile bump in your, uh, withdrawal rate. They’ll knock you from 4.7 to almost 5%. So there’s another free lunch you can add, uh, higher withdrawal rate without taking any additional risk, which is what I’m always looking for.
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Welcome back to the show.
Okay, Bill, your original research was for traditional aged retirees and had a 30-year retirement timeline. Does your advice change for people who are retiring earlier and have a longer timeline?
Yes. Uh, the timeline, the electric planning horizon is very, very important. The longer the planning horizon, the lower the withdrawal rate, up to a certain point. As it turns out, if you get out to very, very long time horizons, like 50 years or 60 years, let’s say you’re going to retire at age 18 or something like that, you’re an early billionaire. It actually hits a low, a, a floor and it doesn’t go below that. So, it’s 4.7% is for the 30 year for very, very long, uh, horizons, let’s say 60, 70 years, it drops down to about 4.1% and it doesn’t go below that.
Awesome. So the 4% rule is a great floor with this portfolio, right? This assumes that you have this allocation that you’ve allo- that you’ve discussed here for early retirees, the people in the fire community, who are most likely listening to this podcast. That’s awesome. And that’s been, I think, a a major point of debate uh, in the community is how does that work on a perpetual basis? But yeah, the math, the math between 30 year time horizons and infinity is not that different. So I’m not surprised that it’s still, still works within six tenths of a percentage point on your withdrawal rate. Walk us through one, one of the items, um, I think that might be on someone’s mind is, okay, this’s, that’s is awesome, right? I can, I can retire earlier than I thought. But when you think about the, the con- like again, the audience listening to this will be somebody who is trying to retire early, like in their 30s, 40s, 50s. And they have a little bit of a longer time horizon. There’s a temptation to be very aggressive with your portfolio while you’re building towards this number. Right? Let’s say I need two and a half million to retire, um, at this number and and withdraw 4.7 or 5% here. And I want to be all in stocks for as much of that accumulation period as I possibly can because that tends to perform better than bonds on a, uh, on average while I’m building towards this number. How do you think about that flip? When is it time to begin the shift towards this allocation that can actually sustain retirement, um, in there and and, do you think there should be a, should I start from the beginning? Should I flip it a couple years in advance? Should it be at the last moment? How do you, how do you think about that for for folks planning on this?
I like the idea of being heavy in stocks during the accumulation phase when you’re trying to build your wealth, because you want to build it as fast and as large as possible. Uh, I think when you get within five years of retirement, it’s time to reassess where you are. Uh, you want to take a look at the market, you want to take a look at the valuations, what are the likelihood in the next few years of having a major bear market that might, you know, lop half off your portfolio, which, you know, would be very, very painful. Uh, and, uh, perhaps get more conservative, start getting more conservative, starting to approach maybe the ideal, uh, 60/40 or 55/45, uh, portfolio I’ve outlined in my book.
Got it. So five years before, start, start making those moves and get and gradually move in there by the, by the last few, few years.
That’s right. I think that’s, that’s a reasonable time period. You want to get as much as you can in the growth phase, but you’ve got to leave yourself a margin of error. So when you make the transition, you know, you don’t have an accident.
Bill, one of the things that we’ve found in the, in the community is, you know, if we pull our audience, and I think I’m this way too, I’m going to have a lot of trouble actually selling off equity positions, harvesting the principle, spending that on fun and trips here in my 30s or 40s as a, as a early retiree or aspiring early retiree. I’m going to have a lot of trouble doing that. I want to spend a portion of the cash flow generated by my portfolio. And this is apparently a common theme in financial planning for savers, really hard to make that that pivot or switch. Do you have any thoughts into that psychological problem and how to how to bridge that? If I’m, if I understand the 4% rule, I agree with your research, the math is there, the research is there, I trust it, I just can’t bring myself to actually harvest principal. How would that change things for you for as a planner?
Yeah, that’s a fair question. Uh, cause I use what’s called the total return approach where the withdrawals are funded by all the investment, uh, results including capital appreciation. So there are times when you will be selling off a portion of your stocks. Uh, in good years, you may not. You, you may get so much growth in your portfolio, uh, you, uh, you can live off the cash. It’s just a little difficult particularly in this environment to generate, let’s say we want to start out, we get into a more favorable situation where I determined you can take out 6% or 6 and a half% of your portfolio instead of the 4.7. It’s hard to create a portfolio where you can generate on today that kind of income from just dividends and yields and interest. Wouldn’t you agree?
Absolutely. It’s really difficult to do that.
Seems tough today to do that. So you’re going to have to get into the appreciation. Uh, I think what you have to do is trust history, trust what’s happened. You know, I’ve been through this for 30 years and I’ve seen it’s pretty dependable, pretty dependable place. The stock market occasionally has these big, uh, declines, but it gets by them and goes on and builds new wealth. Uh, and, uh, as long as we can trust that process, I think you’re okay. And, uh, I hate to see people enjoy life less than they could by following a philosophy that may be too conservative.
Got it. So that, that the answer is get over that. If that’s a, if that’s a blocker to you is you get that like harvesting principle, I saw a great analysis the other day, I think it was on Reddit or something like that, but it was like, look, the, the, the harvesting the appreciation, a lot of these companies reinvest their cash flows or are not distributing the dividends because it’s tax inefficient on there. That’s still going in to the equity value of a stock portfolio in to a large degree, in fact, the majority of those cash flows are probably being reinvested in a lot of ways into these companies and harvesting that is not actually reducing your wealth. It’s, it’s just, uh, harvesting tiny portions of that cash flow in a, a more tax efficient way, um, was how it was put. And I think that’s what, that’s, that’s kind of what you’re saying, um, that’s another way of putting I think some of the things you’re saying here.
I, I know a lot, a lot of the FIRE folks, you know, have been using that number of 4%, you know, from a tax deferred account for a very, very long time horizon. But in this environment, uh, I for a 30-year horizon, I think 5 and a quarter to 5 and a half percent is reasonably, a reasonable thing to take out based on, you know, inflation and market valuation. So I would think a person, a FIRE person carrying today with let’s say a 60 year horizon could probably do more like 4 and a half to 4.6%. And that, that’s a big increase from four. That’s a significant increase in lifestyle. So I want to make sure they understand that, that it’s, it’s much better today than it was in the 70s.
Now, does that, does that allocation or those rules ever change with market valuations relative to earnings, for example, in the stock market relative to interest yields on debt, like if, if interest yields skyrocketed to 15, 18%, would that change this optimal portfolio that you’re, you’re discussing here for this person in terms of their withdrawal rate?
Something like that would definitely have a bad effect on the stock market, as it did in the 70s through higher interest rates. So you might want to make your portfolio a little bit more toward the conservative end instead of, you know, having a 60%, go down to the 50% or 47% of the stocks. Uh, but it’s really hard to predict for me what will happen in that kind of environment, uh, other than say it would be ugly for people who are trying to keep up with inflation because high interest rates means high inflation and that means increasing withdrawals very rapidly.
I, I don’t think any of us can predict the future. I was just wondering if if if we were in the 70s for example or the 80s and interest rates were that high, would the optimal allocation have changed at that point? Would you be saying, hey, you should be heavy in bonds right now because yields are so high, uh, on this, would that have changed this at all?
Actually, this, uh, 60/40 works well, the best for the, uh, the worst case scenario. And that, if you were lucky enough to retire into a, uh, a raging bull market, let’s say you retired in 1982, you, you could probably put 80, 90% of your money in stocks if you were bold enough to do so and write it through retirement. You know, because you’re, you’re, you’ve got a huge tailwind of returns, uh, it’s, it’s just, it sounds a little risky and it probably is, but if you look at the numbers, that’s what happened. People who retired into a bull market could use more aggressive allocations and those who retired into a bare market of less favorable conditions had to be more conservative in their allocation.
Bill, how frequently would you rebalance your portfolio or recommend someone to rebalance their portfolio? Let’s say they’re in this bear market and they wanted to be 60/40 stocks bonds, but then the stocks just went crazy. Do you rebalance frequently or?
Yeah, I think anywhere between six months to a year. Uh, in my book, I have a whole chapter devoted to that particular topic. It’s, it’s a very interesting topic because overall for retirees, it’s not that big a deal. Believe it or not, rebalancing is not. Uh, except in certain cases, it becomes very, very important, you know? Uh, if you’re, for example, start your retirement in 1982, you don’t want to rebalance for a long time because you got the bull market for 20 years in stocks. You just want to let that run. On the other hand, if you retire, you know, in 1968, you’re just facing two big bear markets back-to-back and you want to rebalance every 15 minutes if you can, you know, seems like that. So in general, I think as a general rule, since we no one is sure what, you know, where we are, six months to a year frequency, I recommend based on the research I’ve done.
Bill, one of the, the problems I think, a challenge that a lot of people have, myself included, is bonds, the bond allocation, because the yields are so low and, you know, uh, for someone who’s not, not, who’s trying to retire early, for example, by definition, you just haven’t had the decades to build up a big portfolio in a tax-advantaged account like a 401k or a Roth. So it’s just simple interest, um, for the portion of that yield that’s paid out in a lot of cases on that. So, you know, if you’re in, if you’re in a reasonably high income tax bracket, especially approaching, um, that, that’s, that’s cutting your yield by 30, 40% depending on, on where you’re at personally or what state you live in.
I also think that, you know, from one of the challenges with bonds for me is they don’t preserve the principal value relative to inflation. So it’s all on the cash flow component and it’s kind of a bet on rates coming down fundamentally, which is a great hedge for the portfolio, you want that in the 1968 portfolio, uh, uh, situation, right, on there. So, or sorry, it’s a bet against bad market conditions. Excuse me.
But real estate, you know, we’re a real estate platform here at BiggerPockets. And I’m a real estate investor. And when I think of a paid off rental property, forget leverage and all this other kind of stuff, just a paid off rental property, I view it as an inflation adjusted store of value and an inflation adjusted income stream that will wax and wane, it’s some work on there. But for me, I’ve replaced bonds, um, to a large degree in my portfolio with this kind of concept and just plan to pay off the properties and let them, let them rip and ride there. Have you done any exploration of real estate? And if, if, if so or if not, do you have any reaction to that, that philosophy that I have?
No, you know, it’s certain, it seems to make sense to me. I, I understand that. I haven’t done any definitive research because I can’t find databases that have, you know, detailed data going back 100 years representing actual returns on that. And you come across something like that, I’d love to because I’d like to integrate that into my research. But yeah, bonds, uh, bonds are, uh, awful until you need them. You know, basically, which is basically in a bare market. Uh, and then you’re very, very happy to have them. I know back in 2008 and 2000 and 73, 74, uh, people, uh, were very, very happy they had their bonds because the, the world was collapsing around them in, in equities, you know? But yeah, uh, when, when it’s not a, when it’s a stock bull market, you just go, wow, why do I have these things?
Yeah, and, and with bond yields are super low, right? Like if we were to go back four or five years ago, would that change your mind as well in terms of the bond allocation if they were, if they were truly basically 0% interest rate environment, uh, in that situation?
That was a really painful period of time, I’m pressing it, you know, so it’s so recent, in fact, that I can’t even make sense out of it from my examination of historical record because we haven’t seen 15, 20 years from that time, what was the impact, you know, on withdrawal rates. So I, I’m hoping I’ll live long enough to get answers to some questions, you know.
Awesome. Well, in that case, I’ll, I’ll also ask, how about Bitcoin?
Uh, I think, you know, just a personal opinion, Bitcoin makes sense as part of a diversified portfolio. You know, I know some people like Charlie Munger didn’t like them at all. But, uh, there are other people whose opinion I respect who think it’s a legitimate investment. Uh, and I, I’ve got, I’ve got a small portion of my, like 1% of my portfolio on Bitcoin.
Love it. You, do you include gold or other, other, um, of those types of things in that cash, like would you put that in like the 5% cash or money market section of the portfolio or how would you think about sprinkling those in?
I, I would just group it in, in your if you figured 60% of the portfolio in growth investments, including stocks and real estate and gold and commodities, things like can fluctuate in value very substantially and don’t necessarily produce any income. Some do, some don’t. Real estate does obviously. But yeah, gold, I think is essential today and we probably will be for a time. I don’t know when we’re going to get out of this deficit spending syndrome around the world with huge, uh, debt, but as long as that remains, I think gold will be very good.
So I guess that’s a question that I would love to follow up with then here is you, you outlined this portfolio of 55% stocks, 40% bonds, 5% T-bills or cash equivalents in there. What does, does your portfolio personally mirror that or do you deviate from that? Because this is, this is a research back portfolio, it may not be the optimal portfolio, right?
Sure. I, I used to be what you call a passive investor, a buy and hold investor. Uh, and then 20 years ago, the Fed, the central banks started playing with monetary supplies and with interest rates and trying to affect equity markets. Uh, and started getting these really large bear markets, you know, 2000, 2008, and gosh knows what the next one will be. And, uh, once I retired, I decided I didn’t want my portfolio to be subject to the kind of declines people saw in 2008 when they’re fully exposed to stocks. So I’ve become, uh, an active manager and I rely on a third-party service to guide me to adjust my equity allocation to their perceived perception of risk in the stock market. And right now the service I use is recommending roughly keep about 50% of what you normally have in the stock market. So if your normal allocation is 60, they’re saying keep 30. And, uh, keep the rest of that allocation, uh, in cash, Treasury bills and so forth.
Uh, and that’s worked pretty well for me. I mean, this recent decline didn’t bother me at all. I think I got like a one and a half percent loss at worst and my portfolios at all time highs right now, even though the market is not. So I think for retirees, you got to protect your nest egg. I would not be a buy and hold investor retirement. It makes sense in the accumulation phase but not during the retirement phase, is just my personal opinion.
I was going to say, does that advice change on based on the age of the retiree? Because a large portion of our listeners are retiring in their 40s and early 50s. Um, would you still consider that to be advice that they should take?
Once you cross the Rubicon, you become a, a full-fledged retiree, yes, it does, because your nest is, is your nest egg. You’re depending upon it to generate a certain level of income, perhaps for many years. You have to protect it. Well, if it drops below a certain threshold, it loses its ability to generate the income you need.
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Back, and we’ll be back with more right after this. Thanks for sticking with us. I guess the question I think, uh, what would be on a lot of people’s minds, it’s certainly on mine here is, and and look, I, I agree with you. I’ve read all the research. I have all this the optimal portfolio allocations. My portfolio currently today, I’ve made this change in February is uh, 30 about 30% real estate, 30% cash, 30 30% stocks, 30 10% bonds. And that’s a big change from having it in 75, 80% stocks, uh, through the end of last year in there with the real estate allocation, um, with the rest with the remaining portion being mostly in real estate. It was very aggressive in my retirement accounts. And I made that that change as well, um, to something more like what you just described. Um, that that seemed like a good move uh, about two months ago and then the market has completely rebounded essentially to where it was in February at the beginning of the year uh, at this point here. But how do you, how do you think about, how do you marry the fact that you are the pioneer of this research? You’ve done all of the work. You have all the historical data sets, you’ve written the rule. You’re cited constantly with these portfolios and yours is different from that from that portfolio that’s in your book.
Well, I explained that in the book. I devote a section to risk management. You know, what I do is not what I consider market timing. I spent a lot of people who poo-poo the whole thing because say that’s market timing never works. Well, market timing for me is trying to sell everything at the bottom and or sell everything at the top and buy at the bottom. No one in God’s creation has been successful doing that over multiple market cycles. To me, it makes a lot more sense to use a third party, you know, who has the expertise and experience and track record of preserving capital. That’s what the name of the game is. That house in in retirement.
Uh, so my original research was based upon buy and hold. It’s the easiest way to analyze because you, it’s very hard to analyze a portfolio if you’re not doing buy and hold because, you know, what are the parameters you’re using for changing the level of stocks. Uh, but, uh, just because I did most of my analysis on that does not mean I preclude advising folks to look at alternative ways of managing a portfolio, uh, to improve the safety, lower the risks that they face in retirement. And that’s really something I take out of the personal campaign, you know, that, uh, buy and hold is, uh, not the best for retirees.
So, we’ve been following your original research and we call it the 4% rule. How should we flip? How should we implement now the 5% rule? Does that mean that we have to save less money or does that mean that we could just spend more?
Uh, I guess both. Uh, in effect, yeah, you you need a smaller nest egg, uh, than I estimated before. Uh, and you’ll take that at a higher rate. Uh, so that, uh, it’s, uh, nice situation, less stress during accumulation and more fun during retirement.
I got an interesting one that you may not have ever gotten before. Maybe you have on this. But let’s use the original 4% rule. We can use the 5% rule uh, as well on this. But but we let’s say we have, I want to I want to walk through some funky math that I’ve observed with respect to retirement and mortgages in here because the mortgage, many people, for example, in our community will have 25 years left on a mortgage. Many of them refinanced in 2020, 2021, uh, in the low interest rate environment. And if you have a low interest rate mortgage, let’s say, you know, 4.5% on a $320,000 loan balance, right? Let’s say you have that remaining. You’re paying 1600 bucks a month. 1600 bucks times 12 is 19,200 bucks. To fund $19,200 bucks at the 4% rule, you’d need, let me do this math here, uh, divided by 0.04.
480, yeah.
You need 480,000, but you have 320,000 left on your mortgage on that front. So, I’ve kind of come to the conclusion that if you’re, if you’re one of these followers of the 4% rule and your research Bill, that you ought to pay off the mortgage in that situation because it will actually accelerate this inflection point that the math shows in your portfolio. And you would change that of course to 4.7 or 5% now with the updated research, but what’s your observe- what’s your reaction to that phenomena and my observation of it?
Yeah, I, it’s not part of my research. I want to let you know, my research focuses so narrow. I’m in a little corner of a very large room, you know, working by myself, where a lot of other folks are looking at other interesting issues like you just raised, but my own, uh, instinct is to agree with you that you probably want to get rid of that mortgage if you can before you get into retirement.
Yeah, and I think it’s just the observation of that that the 4% rule, the research is so exhaustive. It just covers all of these scenarios including the worst cases in history and the mortgage is just a fixed unrelenting obligation that you have to pay every month. And so that’s why even at lower interest rates than the 4% rule, I think that would actually be true at 3% as well, um, you still you actually need a larger asset base than your mortgage balance to uh Of course.
Unless we got into a very inflationary environment, you’ve got a fixed rate mortgage, let’s say at 7% and inflation is at 8 or nine. I don’t know, maybe it’s better off to stay in the mortgage, I don’t know.
I think the paradox is that in most cases, it’d be better to keep that mortgage in place for 30 years and have the larger portfolio. But you just, it wouldn’t comply with the 4% well, you wouldn’t be, you wouldn’t be covering your, your, you wouldn’t be sure or as close to sure as the historical data lets us be that you could sustain your your payments and your lifestyle, um, the way you want.
Well, yeah, debt always introduces element of risk in the portfol- in in the life situation. You have to be aware of that. Debt is not necessarily evil or bad, but it’s risky. And, uh, particularly with retirees.
So I have opted to keep my mortgage even though I could pay it off because my feeling is I can take that chunk of money and put it into the stock market and make more than I would, like I can pay my mortgage based on like that money, I can pay my mortgage and still have stuff left over.
Okay, well, let me ask you a question. What would you estimate would be the prospective returns for US stocks over the next 10 years? Do you have an idea what that might in your mind based on current valuations? Because I see, I see estimates anywhere from plus 2 to minus 5% a year compounded annually for 10 years that usually includes a bear market which distorts things. I’m not sure over the next 10, 12 years that logic will work out for you. I suspect that the returns you were on stocks will be a lot less than the interest you’re paying on your mortgage. In a normal situation, if you had normal stock valuations, yeah, that logic might apply, but you know, we’re, we’re at nosebleed levels right now in valuation.
We also have been trying to have a recession for the last 10 years and nothing sticks. We had a global pandemic and the market, the stock market was like, oh, we’re going to tank. Oh wait, no, we’re not. And they’re back. What was it like a six month, six month, uh, downfall? We just did tariffs and that lasted a month. We’re trying so hard to tank the economy and it’s just not happening.
I guess we’re just not trying hard enough, huh? No, I, I my view of that is that we’re in a very unnatural period of time that the United States government and a lot of other governments are running enormous deficits because you know from economic theory when governments run deficits, that money pours into other sectors of the economy and and inflates corporate profits and rates, growth rates. The problem is how long can we continue to do that? I don’t think, you know, that much longer. I could be wrong, maybe we’re going to do this for another 30 years. I hate to think where we’d be at the end of 30 years. But we’re in a very unnatural and unstable situation with respect to our deficit spending, which is keeping us I think out of recession. So that when that inevitably comes to an end, well, I’m not sure I want to be looking out over the the landscape.
The millennials will bail us out.
Oh yeah. That’s nice. Yeah, they’re good, they’re good folks. We love them.
That’s that’s super interesting here. What what is the driver in your view of those forecasts of two to -5% total stock market returns over the next 10 years? Is it the threat of recession and government spending? Is it price to earnings ratios? What is it that you think is the is driving that?
It’s just a historical relationship between stock market valuation and subsequent returns that’s been well established over many years. When you get to a very- is that stock market valuation in absolute terms or relative to its earnings uh in a given year? It’s a PE ratio. Let’s say you’re familiar with Shiller’s sickly adjusted PE ratio, the cape. That’s a number I use frequently in my research. That’s now at around 36, 37. Historically, it averages around 17. So mark the US stock market from that metric is about double its normal valuation. It is from a lot of others, you know, Warren Buffett’s favorite indicator of the market valuation of the G, GP. Uh, a lot of things have indicated we’re very overvalued and when you look through history when you get to those levels, and there aren’t been too many times we’ve gotten as high, the stock market performs very poorly for the subsequent decade or more afterwards. But I’m not a forecast because I don’t forecast. That’s that’s I’m no good at that.
Yeah, but you but you do move your personal portfolio in relation to these this analysis in there. And I do too. And I think that that’s the, that’s the fascinating thing is is there’s all this research, there’s all this stuff that goes on and you are react, you’re managing your portfolio in relation to some of these these items here in these metrics and and in response to interest rates and price to earnings ratios as they move over time.
Well, I mean, take a look at Warren Buffett’s Berkshire Hathaway portfolio. He’s got 350 billion in cash. That’s the largest balance. It’s still only about 35% or maybe 40% maybe of his overall. So he still has a lot in the stock market and he always will. But, you know, that, that is a lot of buying power, you know. That’s when the time comes, when the market bottoms, that cash is what’s going to pull us back up into a new bull market. You want to be, it’s important to, you know, prepare yourself in a bear market and get conservative, but it’s equally important to take advantage of a new bull market and and get in back in as soon as you can. And that’s why I use that service because my timing was rotten. Theirs is much better than mine. And, uh, they, you know, make it, it takes the emotion out. You got to take the emotion out. It’s so easy to get emotionally involved in the stock market.
Are you friends with Robert Shiller and some of these folks that you’ve mentioned here? Have you met them in your in your career?
No, I never have. I wish I had. I I really admire him and the work he’s done.
I’ve emailed him a couple of times at his Yale email and he has not, uh, has not responded to come on the BiggerPockets Money podcast. So if anyone listening, uh, knows Robert Shiller, he would be a, uh, a dream guest just like Bill here, uh, is on on our show here. Yeah, we’d love to talk to him. I I’ve read his book, uh, Irrational Exuberance, um, uh, earlier this year.
He he’s brilliant. I it’s, uh, I just find his, his Shiller Cape is very, very useful to me in my work, you know. Uh, that was the first, uh, Michael Kitz’s back in 2008 published an article where he tracked the Shiller Cape against annual withdrawal rates, safe withdrawal rates, which he computed for every single retiree. And showed there’s a real strong correlation. The more expensive the Cape got, the more expensive stocks are, the lower your withdrawal rate and vice versa. And, uh, unfortunately it wasn’t enough to predict the Cape, but I had to add inflation. When I added inflation to that about three years ago, I got this breakthrough moment in my office, the same office I’m sitting here right now, same chair and when I put inflation, it increased dramatically the ability to recommend higher withdrawal rates when the time is right. It’s not now, you you can’t do 6% now or say even the old 7% average. They’re just so expensive, you know. And that’s a reflection of probably we’re pretty close to a major bear market.
One of the other um, observations that I have about the 4% rule, because I, I you can tell I’ve gone down the rabbit hole with that stuff on the mortgage versus the the asset balance and all that kind of stuff. But is the simplest observation, and we, we it’s just not stated enough is the more you can reduce your fixed expenses and eliminate them relative to inflation, the better off, the less you need from a portfolio perspective, right? That’s the paid off mortgage, you know, if you can get wild and go into solar panels or these types of things that that reduce your monthly outlay on there, is just so much better of a defense mechanism, um, I believe in terms of long-term financial planning and ability to retire than even the portfolio allocation, um, the the slight tweaks in the portfolio allocation. Obviously, the overall balance and getting that that macro view reasonably close to what is backed by the research is is critical. But that’s the most important thing folks can do. And if you can ensure your lifestyle against those inflationary pressures, it just makes this game so much easier, um, in terms of being able to retire and the lifestyle you want.
That makes a lot of sense to me. I think my philosophy in life is you control the things you can control. There’s not much you can do about inflation, there’s not much you can do about the stock market, but you control what you spend and you control what you have invested in stocks. And, you know, so to a certain extent, your destiny is in your own hands in those regards.
All right, Bill, where can people find a richer retirement supercharging the 4% rule to spend more and enjoy more?
Sure. Uh, it’s not going to be in the bookstores until about August 11th, I think is the latest date. But you can go any online bookseller, go to their website and you can pre-order a copy on Amazon, Barnes and Noble, Books a Million, pals. They all will take pre-orders now. Pre-orders are nice because, uh, from my perspective, I, I didn’t know this, but I learned from my publisher that the more pre-orders you get, the larger the orders that the book sellers will place and, you know, the more copies available for sale and likely more sales. so it’s all kind of like works together.
And I, I will say this, if you’ve ever planned on retiring using the 4% rule or used that as a goal post for measuring your progress or that inspired you or whatever, this man, Bill, just made that happen. And he’s updated that research here. And so one thing you can do to return the favor there is get a copy of the book. Maybe it’ll accelerate your retirement even more. Help him get those pre-orders in place, get those big orders in the book stores and let’s make it a New York Times bestseller if we can out there. That was all those orders, pre-orders count for those first week sales and that’s what you need to get into the a bestseller lists. So go get a, go pick up a copy.
We are not affiliated with Bill. We are just fans of Bill. We have no, we get no nothing out of this. But that’s, that’s a thank you for for all you do for the the community here. and we’ll be, we’ll be picking up the, uh, the copies of the books in addition to the the very nice, uh, uh, PDF that you sent us here.
I would love to be affiliated with Bill. I just placed my order, Bill. I’m super excited to get a copy of your book. I, uh, really appreciate your time today. Thank you so much.
It was my pleasure. I really enjoyed it.
Okay, Scott, that was Bill Bengen. That was the Bill Bengen, and that was so much fun talking to him. He is just so sharp. He could be lying on a beach drinking margaritas, but instead, his fun, his idea of fun is doing research and continuing to look into all of these different financial models, and I just, I’m so excited to talk to him. That was such a great show. What did you think?
Uh, I mean, this guy is the, this guy is the legend. He’s the guy who started it all, right? I mean, he, he wrote the 4% rule research and I told him afterwards, he directly changed my life because, uh, Mr. Money Mustache wrote an article, you know, in 2012 or whatever, that I stumbled across some time around then or thereafter, discussing the math of early retirement and the 4% rule study that was citing Bill Bengen’s research, right? I mean, it’s just a direct cascade to what I do and, and, and to anybody who else has been inspired by the 4% rule early retirement. This is the foundational math that has kind of, uh, spurned like like, spurned that on and got us going. And I just, I love talking to Bill because he’s, he’s got this great philosophy, this great research set that he went back that that he that he’s back tested. It’s his passion in life and he also invests in different ways relative to that portfolio. There isn’t a right answer, but it wasn’t the right answer for him on there. And I think that that’s what’s fascinating about what we do, Mindy, in, in this like, in this world of planning for financial independence, retire early, and figuring out how to, how to get there is there’s no, there’s so many different paths to it. There’s so many different personal preferences that come along. There’s so much research that’s back tested. Everyone can argue about it until they’re blue in the face, and you got to just do what’s, what’s right for you. And I think I’m increasingly coming around to the idea of I can talk to Bill Bengen 10 times and have that privilege of a lifetime with you here. And I’m still probably going to need to build a portfolio. I’m, I’m still going to, to I’ve built a portfolio, will need to depend on just spending less than the cash flow generated by my portfolio to feel comfortable personally.
Well, and I think that’s a good point, Scott. I can talk to him and I still need to do this to feel comfortable. And how many times have we said personal finances personal? If you don’t feel comfortable with spending the money that you’re spending, you’re not going to sleep well at night. You’re going to constantly be second guessing yourself and what that means for you specifically is that you need to build a little bit of a larger portfolio than perhaps I would because I trust Bill implicitly and his four now 5% rule. Um, so it’s just, it’s a personal choice, but it’s, and we call it a rule, it’s a rule of thumb and the of thumb always gets locked off, but it’s a rule of thumb. Scott is a little bit less excited about the 4% rule and wants to do, you know, 3.25 or 3.75, and I’m super cool with it and I’m going to do 7%. We’re in different positions in our life. We’re in different, you know, we have a lot of different, uh, expenses coming up. I’ve got college coming up. You’ve got preK through 12 coming up and then college. So, you know, having a different withdrawal strategy is totally fine. What I want people to do is think about what they’re doing, not just I read it someplace once, so that’s what I’m going to do. And I think that’s, I think that’s what you’re doing. You’ve thought about it and you’re like, well, to make myself comfortable, it’s got to be this instead.
Mindy, are you going to buy Bitcoin now?
No.
Me neither.
I love that Bill Bengen, the the professor of finance, the, the, he’s not a professor, but Bill Bengen says his portfolio is 1% Bitcoin. If you have more than 1% Bitcoin, I hope you’re way wealthier than Bill.
I was surprised by how much he has allocated to Bitcoin. I thought that, I, I read that as an endorsement of Bitcoin from Bill. I saw that, I, I heard that, right? We, we just talked to him here, so you can see I’m a visual thinker but yeah.
I heard him say it’s an interesting thing. I’m going to test it with 1% of my portfolio. and and yeah, 1% is still really, really high. I own 0% of my portfolio in Bitcoin.
I have the same allocation as you, yeah.
Yeah. And that’s okay. That’s what I’m comfortable with. And honestly, I haven’t done that much research into Bitcoin because it’s something I heard, I’m like, I don’t know that I like that so much. I’m another, I’m doing okay. I mean, I’m not, I’m not, uh, hurting because I don’t have money in Bitcoin.
Well, help us out if you’re listening to this, um, let us know what you thought of the episode in the show notes here. And if you get an, if you get an idea for, um, where you can get where we could get a data set that would help kind of supplement the research that Bill has done on stocks and bonds, that with a real estate portfolio, we’d love to get a link to that uh, at some point. That would be really fun to to think through or noodle on or do bang out in an excel spreadsheet or just send to Bill, uh, in case he wants to work on it at some point. Um, that would be really interesting. We’d love to, we’d love to see that. That’s a something that’s been bothering me and, and I asked the question because of that uh, to Bill today on the podcast. So please send that to scott@biggerpocketsmoney.com or mindy@biggerpocketsmoney.com. It’s a little bit of an update. We’ve got bigger pockets money email addresses in addition, of course, you can email us at Scott a bigger pockets or Mindy a bigger pockets.com.
Awesome, Scott. Thank you so much for having such a great conversation with me with Bill.
Thank you, Mindy, for inviting Bill on the podcast.
Should we get out of here?
Let’s do it.
Okay. And our listeners, go check out his book. It’s going to be worth its weight in gold. That that’s not actually true, but it’s, it’s going to be such a great book. I’m so excited for it. All right, that wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench. I am Mindy. Did I just pronounce my name wrong?
You did. Bye Mandy.
That wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench. I am Mindy Jensen saying, farewell Bluebell.
Yeah, Scott Trent and Mandy Jensen. Yep, there you go. Bye everyone.
When you’re ready to start your business, Northwest registered agent helps you do more than just file paperwork. You get all the tools to build a real business identity from day one, a business address, website, phone number, operating agreement, free guides and more at no extra cost. Northwest registered agent has been helping small business owners and entrepreneurs launch and grow businesses for nearly 30 years. They are the largest registered agent and LLC service in the US with over 1500 corporate guides. These are real people who know your local laws and can help you and your business every step of the way. With Northwest, your business is set up to stand on its own from day one. That means your home address, personal email, and phone number stay private. Don’t pay hundreds or thousands of dollars for what you can get from Northwest for free. Visit northwestregisteredagent.com/moneyfree and start using free resources to build something amazing. Get more with Northwest Registered Agent at northwestregisteredagent.com/moneyfree.
