Bill Bengen: The Man Who Changed Retirement Planning

I had the honour of meeting legendary Bill Bengen of the Safe Withdrawal Rate fame last week.

Our meeting took place near his home in Palm Springs, California. Given his accomplishments, he struck me as a very humble and down-to-earth person, a rare virtue in financial services!

After the pleasantries, we sat down and ordered a drink. I asked Bill if he had any idea when he wrote his first paper in 1994, that his methodology was going to become something of a gospel on retirement planning. “Not at all. I started the research in 1993 and wrote my first paper in 1994. I was really doing the research for my clients.’
Bengen went to recount how it took him hundreds, if not thousands of hours in front of his computer to come up with what we’ve come to know as the ‘4% rule’. You have to remember the limited computer power back in 1993. That was before Windows 95 was released 2 years later! And he would have been doing his modelling on Excel version 5!

While Bill’s first paper is widely read and referenced, he’s written at least 7 others. And when I told him I’ve read every paper he’s written, he replied ‘you stayed awake through all those boring papers?’ Those papers are anything but boring. They are gold dust, to me at least! I believe everyone of these 8 papers is a must-read for every financial planner but I’ve provided a summary below. (see a list of his papers below).

[bctt tweet=”This short summary of 8 papers written by Bill Bengen is a must-read for every financial planner!” username=”AbrahamOnMoney”]

Bengen is perhaps the most cited authors in retirement planning. A search for ‘Bengen’ in the Journal of Financial Planning alone returned over 120 results! His work has been critiqued and praised by financial planners, academics and economists. He told me how, bizarrely, he got death threats in the early days from people who didn’t like his research. There’s no way to tell if any of those threats were from annuity providers and salespeople but he said ‘I had a really hard time selling my clients on annuities.’  He had to come up with a robust frameowork to ensure income lasts a lifetime.

Bill will be presenting at the Science of Retirement Conference next week. I was pleased to hear that our 120 registered delegates are in for a treat. He’s got some interesting new findings to share…


Want hear Bill Bengen speak at at the Science of Retirement Conference on the 1st of March, 2017?




Bill Bengen’s Papers

  • Determining Withdrawal Rates Using Historical DataBengen’s first and most cited work was first published in Journal of Financial Planning (JFP) in1993. This article uses historical data as a rational basis for determining the safe withdrawal rate as a percentage of initial portfolio value and asset allocations that is optimal for retirement portfolios.
  • Asset Allocation for a Lifetime: This paper was published in the August 1996 edition of the JFP. In the paper, Bengen set out a simple yet coherent approach to deciding the asset allocation glidepath based on the client’s age, risk tolerance and required income. He also addressed the impact of taxes of withdrawal rates. Incredible, Bengen managed to present this in form of a dialogue between himself and clients!
  • Conserving Client Portfolios During Retirement (Part III): In December 1997, Bengen published his third paper. He used quarterly historical returns for the analysis, as opposed to yearly returns which he used in previous papers. In this paper, he identified that including small cap equities increased withdrawal rates significantly and cautioned against excessive allocation to cash in a retirement portfolio ‘Small amounts of cash (as represented by Treasury bills) can replace intermediate-term government bonds in the portfolios without any serious effects on withdrawal rates. At higher replacement rates, withdrawal rates suffer. Replacing stocks with Treasury bills, even if relatively small amounts, results in deleterious effects on withdrawal rates, and should not be done for clients seeking to maximize their withdrawals.’ He noted.
  • Conserving Client Portfolios During Retirement (Part IV)In the May 2001 edition of the JFP, Bengen presented his studies on what we now know as variable withdrawal strategies. While his original withdrawal strategy assumed that withdrawal will be adjusted for inflation each year through out retirement, Bengen acknowledged that actual spending in retirement tends to decline in real terms. Accordingly, he presented alternative withdrawal strategies (1) a “Prosperous Retirement” model—larger withdrawals early in retirement—and (2) a performance-based model— relating withdrawals to portfolio performance.
  • Baking a Withdrawal Plan Layer Cake for Your Retirement Clients: This is Bengen’s 4th paper published in the JFP in 2006. Here Bengen lays out the various factors to consider in determining the sustainable withdrawal rate for each client. He likens the process to baking a layer cake, with factors that enhance withdrawal ratesseen as adding to the layers while factors that reduce withdrawal rates akin to reducing the layers. The foundation of the cake is the withdrawal strategy and Bengen proposed 4 strategies in this paper. He also give sample scenarios of how each strategy might be applied, together with other factors such as time horizon, risk tolerance, asset allocation and re-balancing.
  •  How Much Is Enough? In May 2012, Bill wrote an article for Financial Adviser magazine where he examined how retirees adopting the 4% rule have fared 11 years into their retirement and compared this to the previous worst-case. Since returns in the first decade of retirement is more important that returns in the later part of retirement, it turns out than retirees who started out just before the ‘Dotcom Bubble’ fairing well under Bengen’s frameowork. This article was effectively written nearly 20 years after his original research and it was comfortable to see the framework holding up even in such stressful market condition.
  • Is 4.5% Still Safe? In this article published in the Financial Adviser magazine in June 2016, Bengen critiqued his own research by noting that there is nothing sacred about safe withdrawal rate.
    safe withdrawal rates have changed over time, and in fact have declined substantially from the late 1920s. This suggests that at some future time, they could decline again. The current 4.5% rule has been in effect for almost 50 years, the longest period of applicability yet seen. Are we perhaps ripe for a change?’
    He went on to examine how the framework would have fared for people who started their retirement in some of the most severe market conditions since he proposed it. He considered retirees starting out in 2000 and 2008, and compared their portfolio values to the previous historical worst-case – someone who retired in 1969. He noted that both hypothetical retirees of 2000 and 2008 are out of the danger zone but he emphasized the importance of keepimg their plans under review.
  • Small-Cap Withdrawal Magic Published in September 2016, Bengen was a lot more bullish about the role of small cap equities in improving withdrawal rates. Some of the findings in this article go against conventional wisdom on asset allocation and role of diversification in retirement portfolios. For instance, he noted that in seeking to maximize sustainable withdrawal rates, bonds rarely proved useful and small cap equities were more effective than large cap. While Bengen cautioned against going ‘all in’ on small cap equities, he noted that this research would hopeful permit advisers to ‘use some of the hidden potential in small cap equities to enrich client retirements. Perhaps it involves a slightly unbalanced allocation, tilted toward small-cap stocks but not wallowing in them.
Abraham Okusanya
Abraham is the founder of FinalytiQ, a research consultancy for platforms, asset managers, and advisory firms. Recognised as one of the country’s leading experts in retirement income, platforms and investment propositions, Abraham has authored several papers on these subjects and delivered talks to the Personal Finance Society, The FCA and several conferences across the country.
He holds a Master’s degree from Coventry University and an alphabet soup of qualifications, including the Investment Management Certificate, Chartered Financial Planner, CFP and Chartered Wealth Manager designations. He was one of 5 finalists for the Professional Advisers Personality of Year Award 2015 but the award went to a more deserving winner, obviously!

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