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Brett Arends’s ROI: Why retiring this year could be a ‘worst-case’ scenario


This is an urgent update for anyone who has recently retired, or who is hoping to retire shortly, and who was expecting to follow one of those simple, time-tested rules for spending down their money during their golden years.

Watch out. And, if possible, err on the side of caution, tighten your belt, and spend a little less than planned for the next couple of years.

So warns Bill Bengen, the financial adviser credited with discovering the so-called “4% rule” (actually the 4.7% rule) decades ago.

This year’s plunge in the stock market, unprecedented crash in the bond market, and surging inflation threaten new retirees in ways not seen before, he says.

“The Jan. 1, 2022 retiree is retiring under conditions which have no certain precedent in the historical records I have used for my research,” Bengen tells MarketWatch. If the recent surge in inflation isn’t brought under control, he says, “we may witness history being made, and the first decline in the ‘safe’ withdrawal rate in more than 50 years.”

His advice: If possible, take out a little less from your retirement account for the time being — at least until we get a clearer picture on where stocks, bonds and inflation are headed.

I contacted Bengen as the Federal Reserve hiked interest rates a three-quarter point to try to rein in inflation, which surged in May to an annual level of 8.6%.

Bengen is the author of the famous 1994 paper that created, or discovered, the so-called 4% rule. This was the principle that a new retiree with a diversified portfolio should be able to make their savings last for another 30 years if they start out by withdrawing 4% or less in their first year, and then raise the amount each year in line with inflation. Bengen’s calculations were based on looking at the performance of U.S. stocks, bonds and inflation over all 30 year periods going back to the 1920s.

(His calculations were based on a portfolio of 55% U.S. stocks and 45% U.S. bonds. Since writing the paper he has raised the ceiling of safe initial withdrawals to 4.7%.)

Until recently, he says, the retirees who got hosed the worst were those who retired in October 1968. “Up until now, the individual who retired (in) 1968 represented the ‘worst-case’ scenario,” Bengen says. “They were faced with high stock market valuations…and persistent high inflation in the early years of retirement.” It was inflation that was the real killer, he says. Consumer prices tripled between 1967 and 1982, when Fed Chairman Paul Volcker finally brought inflation under control.

May’s 8.6% official inflation reading has shocked stock and bond markets and has stampeded the Federal Reserve into the first three-quarter point rate hike since 1994. And the data may understate the recent rate of price rises, too. Consumer prices since the start of the year have risen at an annualized rate of 10%, according to official data, while prices between April and May jumped at an annualized rate of more than 12%.

“Much depends on how quickly inflation yields to the tightened monetary conditions being imposed by central banks,” Bengen says. “If inflation is tamed in a year or two, the 4.7% rule may prevail… Unfortunately, we won’t know for sure for many years. However, I recommend that new retirees hedge their bets and withdraw at a slightly lower level — perhaps 4.5% — until we achieve some clarity.”

Bengen says today’s retirees face some issues that are even more challenging than the 1968 generation. Both U.S. large-company stocks and U.S. bonds began this year much more expensive than they did 1968. (The benchmark U.S. 10 Year Treasury yields 3.5%, up from 1.5% in December. In late 1968 it yielded about 5.5%.)

He doesn’t mention it, but there is another difference. Many workers in the late 1960s retired on defined benefit or final salary company pension plans that were guaranteed to pay them incomes for life. 

Today most have to survive on their 401(k), which has just fallen 15%, as well as Social Security, which people in Congress want to cut.

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