Retirement planning is second nature to investors. But what happens when you actually get there and want to cash in on your gains?
For years, investors have followed the 4% Rule, which assumes investors withdraw up to 4% of your retirement during the first year and subsequently adjust it for inflation.
But Bill Bengen, author of "A Richer Retirement" and creator of the 4% rule, makes clear from the start that changes are here to stay. Bengen tells Investor's Business Daily's "Investing with IBD" podcast that when he began his research, he focused on just two investments: U.S. bonds and U.S. large company stocks.
He now says the ideal withdrawal is now 4.7%, since his new research takes five other asset classes into considerations like small caps, international stocks, mid-caps, micro-caps and treasuries.
Here are four retirement planning tips from the creator of the 4% rule.
Audio Version Of Podcast
Take The 'Free Lunch'
Never leave money on the table. Bengen says a "free lunch" is a way to increase your withdrawal rate without taking on additional investment risk. This is achieved through diversification, increasing the overall return of a retirement portfolio as different assets peak and trough at different times.
One method of diversification through rebalancing, for instance returning your portfolio to its original allocation ratio between stocks and bonds and reducing risk.
Bengen says another method is to favor small- and microcap stocks, the two highest returning asset classes based on past data.
Don't Make Your Retirement Portfolio Too Broad
Bengen says it's still a good idea to add a variety of asset classes to your retirement portfolio. He points to assets like gold, which have done particularly well recently for investors.
But a diverse portfolio takes careful management to stay profitable. Too many makes the portfolio complicated to manage, ultimately working against the investor. "It's like a chef preparing a sauce," Bengen said. "You put too many ingredients in, you're going to ruin it."
"Put just the right amount and the right type to come out with your best results."
Plan Your Retirement Portfolio For A Longer Life
Like planning for an expedition or even a long trip, always give yourself a bigger margin of safety than you expect. "You can look up your life expectancy on the internet," Bengen said.
"I'd recommend your planning horizon be at least 30% to 40% longer than that, maybe out to 40 years to give yourself a margin of safety, in case you live a lot longer than you figured you would."
For the ambitious who hope to retire early, Bengen says to be aware that the rate of withdrawals will be lower dueto a longer time span — but not by too much. "The decline slows as you get longer and longer horizons, and eventually just about stops," he said. "It'll hit a floor if we're at 4.7% for a 30-year horizon, then a 70-year horizon might be 4.1%."
"Those folks who retire at 25 have something working for them there," he said.
Remember, The 4.7% Rule Is The Worst Case
Bengen says the 4.7% withdrawal rule was developed for a retiree who began collecting in October of 1968, one who was walloped by the 1969-1970 recession and then faced over a decade of very high inflation.
The rule was meant for the worst-case retirement planning scenario.
"We're not in those right now," said Bengen. "We have high stock market valuations, which is half the equation, but inflation is at least for the time being, reasonably moderate."
"I don't think we have to look at anything as low as 4.7% today."
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