It’s been more than 25 years since Bill Bengen, a financial adviser in southern California, created the so-called “4% rule.” That’s the concept that if you want to be sure your retirement nest egg lasts at least as long as you do, pay careful attention to spend no more than 4% of the balance in the first year, and then adjust the withdrawals according to the inflation rates each year. He called his rule ‘Safemax’ which he believed was the amount you could withdraw each year and be ‘safe’ as far as running out of money.

Since his article stated his conclusions in the Journal of Financial Planning in 1994 it’s been touted as heresy by some and absolute truth by others. Still the rule has stuck, and it’s been a useful guide. We actually used it as a guideline in our retirement workshops beginning in the 80’s. However- Bengen (who has sold his practice and moved to Arizona) has recently updated his numbers. He says now that the 4% number was a ‘worst-case scenario’ that was based on someone retiring at just the wrong time and holding a balanced* portfolio. Note- he actually raised it to 4.5% in 2006. But now he comments that, at other points in our history, a historically safe rate might be about 7%! Of course, retirees wouldn’t know whether that worked until the end of their retirement. Today in his own work he uses a 5% number as his ‘safe’ withdrawal rate.

How much of a difference does that make? Well suppose that you have accumulated a nest egg of $1,000,000. Under the early rules a 4% distribution meant your starting ‘safe’ withdrawal rate was $40,000 a year. Suppose you opt to use the number he is now actually using personally. In that case your first-year withdrawal becomes $50,000! You’ve just gotten a 20% raise in your retirement income!

As always, we suggest you run your individual specific situation by a qualified retirement planner- but you can tell them that you’re aware that Bill Bengen has raised the magic number!
*His calculations, incidentally, are all based on a conservative retirement portfolio where you keep 30% of your money in the S&P 500 SPX, +0.52%, 20% in U.S. small-caps such as the S&P 600 SML, +1.51%, and 50% in intermediate U.S. Treasury bonds TMUBMUSD07Y, 0.613%.

Ron’s Market Minute – When is the Right Time to Invest?

I heard on one of those financial talk shows this week that bank figures show that there is currently between 3.5 and 4 Trillion dollars sitting in money market or savings accounts. Most likely, a good percentage of those people are waiting for the right time to invest it.

The hard truth is that there will ALWAYS be something that’ll make you feel uncertain and uncomfortable about putting money into the stock market. If we could go back 30 years and somehow know all of the market shattering events that would occur (starting with black Monday 33 years ago this week) the chances are good you’d think twice about the ‘safety’ of a bank account compared to the craziness of markets.

The third of a century since Black Monday in October 1987—when Global Finance launched—has been punctuated by numerous stock market crashes, financial crises and recessions. The savings and loan crisis in the US was followed by the implosion of the Japanese bubble, a banking crisis in Sweden that in many respects presaged the global crisis of 2008, and the dot-com and tech bubble in 2000: when the world suddenly realized that although the Internet may have changed everything, it had not negated the need to have a successful business model. And of course, today we have the unprecedented event of our country shutting itself down to promote safe health.

So, if you’ve been waiting for ‘certainty’ to put your money into the stock market, then you’ve probably missed most of the last 100 years of gains.
By the way, although a dollar buys a lot less today than it did 25 years ago, according to the average yearly returns we’ve seen mentioned as the returns of the Dow Industrials over this time period of 9.05%, $100 invested 25 years ago would be worth about $872 today, something like eight times the initial value.
And one further note- according to Jeffrey Hirsh (stock trader’s Almanac) October 27 through January 18th is the very strongest period on average, in US market returns.

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk


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*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.
Ron Denk is a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.
Mr. Denk is also an Advisory Representative offering services through Denk Strategic Wealth Partners, a Registered Investment Advisor. Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation.
Please see Denk Strategic Wealth Partners’ Client Relationship Summary here for succinct information about the relationships and services DSWP offers to retail investors, related fees and costs, specified conflicts of interest, standards of conduct, and disciplinary history, among other matters.
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Past performance is not a guarantee of future returns.