To Overcome Sequence of Returns Risk, Follow This Sustainable Withdrawal Strategy, Says William Bengen

How should retirement assets be withdrawn to ensure funds are not exhausted and last until the end of one's life? William Bengen, the creator of the 4% Rule—a core element of retirement planning—has presented specific solutions regarding retirement asset withdrawal strategies.

In an interview reported by Mirae Asset Investment and Pension TV, Bengen identified "risk management" and "sequence of returns risk" as the key factors that determine the success or failure of retirement asset management. He particularly emphasized that market downturns encountered during the early stages of retirement have a decisive impact on the lifespan of assets throughout the entire retirement period. This is because if high rates of decline are experienced early in retirement due to the order of returns, the risk of assets being depleted prematurely increases.

"Do Not Touch Asset Proportions During a Bear Market"... Why Doing nothing Is the Best Policy

When retirees must sell assets to cover living expenses, what choice should they make if the market is plunging? Bengen advised that in general bear market situations, "Doing nothing" can actually be the most successful strategy. This is because the market will eventually recover, and if left as planned, the portfolio is likely to return to the correct trajectory on its own. The video mentioned that because the market will eventually recover, Doing nothing is the most successful strategy.

He warned that arbitrarily changing asset allocation can be dangerous. This means that for individual investors to frequently adjust asset proportions based on market conditions without professional help can be counterproductive. Bengen explained, "Asset allocation should be carried out in terms of 'rebalancing,' which returns the portfolio to its originally set proportions." In other words, minimal adjustments are needed to maintain set proportions rather than frequent trading. Assuming all withdrawals are made from a cash account, he suggested continuously replenishing cash by depositing dividends from stock and bond funds into the cash account. He added a specific operational method where, instead of selling assets very frequently, one only needs to sell as much as necessary when rebalancing approximately once a year.

However, it is necessary to prepare for extreme situations where asset values plunge by nearly 60%, such as the 2000 dot-com bubble or the 2008 financial crisis. Bengen added that if the proportion of stocks is reduced to defend against losses during such crises, more "powder" (capacity) can be secured to provide withdrawal funds when the market recovers in the future. He explained, "If you can reduce losses by decreasing the stock allocation during a stock bear market, you will have more capacity to cover withdrawal funds after retirement."

Increasing Stock Proportions as One Ages? A 'Contrarian Strategy' That Flips Conventional Wisdom

Traditional asset allocation principles suggest reducing the proportion of risky assets like stocks and increasing the proportion of bonds as one ages. However, Bengen proposed a somewhat unusual strategy to increase the sustainability of retirement assets: starting with a low proportion of stocks in the early stages of retirement and gradually increasing the stock proportion over time.

He explained, "As the retirement period lengthens, the return on assets for income becomes more important, and assets capable of generating returns at the 10–11% level must be included in the portfolio to maintain retirement life until the end." For example, starting with a low stock proportion of around 35–40% to protect assets from bear markets and gradually increasing the stock proportion as the market recovers is advantageous for defending against sequence of returns risk in early retirement while securing long-term returns. He stated that this approach was also very effective in early research that used a 55% stock proportion, allowing for significantly higher withdrawal rates.

This approach contrasts with existing stereotypes, such as the "Bogle's Rule" (implied context of reducing stocks with age), which suggests reducing stock proportions as one ages. It is a strategic choice to minimize the impact of bear markets experienced in early retirement while maintaining purchasing power in the later stages of retirement. However, this strategy is predicated on avoiding sequence of returns risk in the early stages of retirement.

"Recommend Passive Investment Over Active Funds"... Practical Advice for Individuals

Regarding the selection of investment products, Bengen sided with "passive investment." This is because observations over recent years show that it is extremely rare for active managers to outperform the returns of passive funds, such as index funds. This means that rather than attempting to beat the market, utilizing low-cost index funds may be a more rational choice for retirees.

He emphasized that one must keep in mind that a retirement plan cannot be maintained exactly as once established for 30 to 40 years. Plans must be constantly modified according to market conditions and individual financial status, requiring a customized plan that comprehensively considers "eight elements," including asset allocation, withdrawal methods, and account types. Bengen stated that he is currently preparing a revised book based on these research results. He aims for publication in the first half of 2028, and the revised edition will include new research results on what actually works and what does not.

Bengen explained that asset allocation, withdrawal methods, and account types must be considered for customized planning, and he even presented a table that can find the appropriate withdrawal rate for current stock market valuations using the "Shiller CAPE" index, which is easily available on the internet. He urged Korean retirees to maintain continuous management. For individual investors who find it difficult to respond to every market fluctuation, utilizing funds with well-diversified global asset allocation or large index funds can be a realistic alternative to streamline asset management.

Source: original video (YouTube)