Earlier this month, I detailed a conversation I had with Bill Bengen, the creator of the 4% rule for retirement spending. Bengen had upped his annual spending allowance to at least 4.7% of one’s portfolio, and even said current conditions showed retirees would probably be safe spending well over 5%.
On Wednesday, John Montgomery, the founder and CEO of Bridgeway Capital Management, offered a rebuttal.
Instead of something in the 4% range, retirees should be even more conservative and aim to spend just 2.8%, he said. More specifically, 2.8% of your portfolio’s value, measured from the market’s last major peak.
Now, that sounds like an ultra-conservative approach. And in some ways, it is.
But there’s a catch.
While some retirees may opt for a portfolio that’s 60% stocks and 40% bonds — Bengen’s optimal retirement portfolio is 65% stocks, 30% bonds, and 5% cash — Montgomery prefers a much more aggressive strategy.
Even in retirement, investors should have 90% of their portfolio in stocks, he said, with the other 10% in bonds.
This allows for greater growth, Montgomery said. A 90/10 portfolio will produce 6.5% inflation-adjusted returns, while a 60/40 portfolio will deliver 4.8%.
However, it also exposes investors to more risk, hence the lower withdrawal rate. But Montgomery said this is factored in. The 2.8% withdrawal rate from the last major peak allows investors to continue taking that amount out for five consecutive years without changing their lifestyle, as long as stocks do not lose more than 30% of their value — a historically extreme outcome.
This is where the benefit of Montgomery’s framework comes in, he said. The uber-low withdrawal rate, measured at recent peaks, allows one to keep spending levels unchanged. If you were to spend something like 4% of a 60/40 portfolio every year, your spending power could drop year-to-year if stocks are in the middle of a sell-off.
Another benefit is that you frequently get a “raise,” as stocks advance to new highs in seven out of 10 years, on average, Montgomery said. That applies to the 60/40 approach too, but in Montgomery’s portfolio, you’re more exposed to stocks, and you don’t take on nearly as much downside risk.
Even with risk factored in and aggressive positioning, Montgomery’s approach to spending remains quite conservative. It’s designed to never run out, and over the course of a long retirement, Montgomery said his withdrawal philosophy will allow a portfolio to grow beyond its original balance.
It’s a stark contrast to Bengen’s philosophy. His 4.7% rate is intended as a very conservative starting point, and he warned against constantly fearing running out of money.
“It dominates their philosophy in retirement,” Bengen said of this fear of going broke, “and therefore, they’ll just simply spend a lot less than they could, which to me is a real shame because they spent all these years saving and sacrificing, and I think they should be able to get the maximum possible out of it.”
Bengen’s outlook seems to align more closely with the so-called “Die With Zero” movement, popularized by Bill Perkins’s book of the same name. The philosophy argues it’s a good thing to spend all of the money you saved up for retirement — or give it away — as the purpose of saving it up was to allow you to experience more in life.
But Montgomery pushed back somewhat on this way of thinking. For one, he says that fearing you might outlive your savings is probably healthy, as you don’t know how long you’re going to live.
“I’m 70 years old. On an actuarial table, I’ve got 15 more years,” Montgomery said. “My mom is 103. I could live as long as my mom.”
It also allows one to leave something behind for family or charitable causes, Montgomery said.
“You can’t take it with you, but you can do awesome things by way of causes in the world, too,” he said. “I don’t feel bad about that.”