This week on The Money with Katie Show, I had the distinct pleasure of interviewing a legend in the financial planning world, Bill Bengen. He established the “historical safe withdrawal rate,” better known as the 4% rule, on which the majority of traditional financial planning is now based.
He is my Regina George, and his original paper on the 4% safe withdrawal rate is the equivalent of army pants and flip-flops: a classic. And while I don’t want to spoil too much of the interview, one piece of our conversation stuck out to me most. I asked Bill how our current economic environment compares to the “worst case” scenario he examined in the historical data; i.e., “On a scale of 1 to totally f***ed, where do you think we land right now?” (I’m paraphrasing, of course.)
I expected him to tell me about some period far before my time that I couldn’t possibly remember because my mom wasn’t even born yet, how disastrous and hopeless it seemed to the people living through it, and how what’s happening right now is a rainbow-sprinkled donut by comparison.
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“I think a lot of what happens will rely upon how quickly inflation is tamed.”
His answer surprised me.
He told me—candidly—that we haven’t seen a specific mix of metrics like our current state of affairs before (that is: a high Shiller PE ratio, low bond yields, and raging inflation). Immediately, I felt vindicated, as I came to a similar conclusion in this graphical hodgepodge piece a few months ago.
Still, Bill invoked the “buzzsaw” that a retiree in 1968 ran into (talk about a painful analogy): “I use 4.8% now as the worst case scenario. It’s based on an individual who retired in October 1968…they hit two terrible bear markets back to back, and then they had years of inflation, which forced them to raise withdrawals. They got hit from both sides. Terrible portfolio returns, very high withdrawals…that’s why their money ran out so early.”
*whispers* Terrible returns. High inflation. Does this sound…familiar?
He continued: “I think a lot of what happens will rely upon how quickly inflation is tamed. If the Fed can do it in a few years, we may have a chance of having the so-called 4% or 4.8% rule(s) survive. But if inflation continues or gets worse, we may be headed for a new worst case…we don’t know where it’s going. We may be in a whole new regime.”
This was everyone on my production team after he said that:
Not exactly comforting coming from the godfather of safe withdrawal rates, right?
2022 and 2023 (so far) have served to remind us of a harsh reality: Historical performance is not indicative of future returns, especially if we don’t have “historical precedent” for our uncharted waters.
Ugh, I miss when times were precedented.
But let’s talk about the concept of “historical precedent”
Because as with Bill’s 4% rule research, much of our financial planning relies not on the future, but on the past: past stock market returns, past inflationary patterns, past bond yields, and, generally speaking, a sequence of events over the 20th century that was also “unprecedented” at the time.
When we discuss historical events (like a horrible war, a terrorist attack, or a financial meltdown), we can summarize the main points in a sentence or two. We have a cognitive, detached understanding of the events, but for those who lived through them, they weren’t a two-sentence recap with a tidy ending, sanitized by the Clorox bleach of history. It was their day-to-day life; in many cases, for years.
It’s the difference between flying over New York City and seeing the dispassionate bird’s eye view of the city that never sleeps, and standing on the corner of Times Square in the summer as taxis whizz past you, street performers get too close for comfort, and the olfactory overwhelm of July in Manhattan mows you over.
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“It’s no wonder we search for solace in historical precedent—we want the street corner to feel like the window seat.”
One is brief window seat entertainment between drink services; sterilized, removed, academic.
The other is certain to stir an emotional reaction in you, and maybe even light up your fight-or-flight response. It’s messy and all-consuming.
When we examine history, we do so from the window seat at 35,000 feet above the Chaotic Apple. When we live history, we do it from the street corner, shoulder to shoulder with other sweaty New Yorkers, overstimulated and emotionally invested.
It’s no wonder we search for solace in historical precedent—we want the street corner to feel like the window seat.
So let’s zoom out—like, way out
Usually when we talk about “zooming out,” we’re referring to the last 100 years of market returns—an eternity for an American mortal with an average lifespan of 77 years.
But as Tim Urban reminds us in his newest book, What’s Our Problem?: A Self-Help Book for Societies, if the story of the human race were told in a 1,000-page book with 250 years of history represented on each page, nothing interesting would happen until about page 960. And then, on page 999, the story would radically change.
Life on the 1,000th page would be completely unrecognizable from life on the previous 999 pages. The entirety of “page 1,000” has been “unprecedented,” in the grand scheme of things.
The United States wouldn’t come into existence until about the second line on the 1,000th page, and the New York Stock Exchange would follow a few lines later. The establishment of the S&P 500 would appear about 75% of the way down the 1,000th page.
Everything we’re doing is so relatively new that even our commonly referenced “historical precedent” deserves a footnote. It represents one half of one page of our book—a mere speck in time. It’s less than .1% of the story.
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“Nothing about life today is precedented.”
Unfortunately, it’s also the only thing we have to rely on for meaningful interpretations of the world around us, and the future ahead of us.
Sometimes, I find this reminder of utter cosmic insignificance—my relative obscurity, and by extension, that of my worries—to be a relief. All the problems that loom so large (“What if the new safe withdrawal rate moving forward is only 2.5%?” “Is my nest egg large enough?” “Have I done enough?”) are consequential, to be sure; I wouldn’t publish weekly blog posts on Money with Katie if I didn’t believe that.
But the quiet, powerful truth that underlies all of our best projections, research, and well-laid plans is that—if you’re alive today, in the Year of Our Lady Taylor Swift 2023, reading this article on your pocket supercomputer and contemplating the allocation of your resource digits on a screen—in some ways, you’ve already defied the odds a billion to one. Nothing about life today is precedented.
Technology has rapidly accelerated the rate of growth, which means we’re racing through our wins, mistakes, and learnings at warp speed.
If you think about it for too long, it’s enough to make anyone want to retreat to a cold, dark room armed with Hot Cheetos and a Netflix account and never reemerge—but all we have is the experience on the street corner, the messy uncertainty where you’re only able to determine your next move based on the information available to you in the moment.
So how are you going to navigate the uncertainty; the complexity that accompanies being alive in a truly unprecedented time?
How is your ancient brain hardware going to process the rapidly changing software of the world around you? How are you going to navigate real life on the street corner, when all you really know about the past is a window seat flyover?
The more important question is: How will you live your life outside of the spreadsheet? (Whenever I find myself spiraling about finances, I hear my friend Jack’s voice in my head: “Katie, go touch grass.”)
Because if I had to bet money on how our current situation will shake out economically (and I suppose I am placing this bet, since 98% of my net worth is still invested in the stock market), I’d wager that 20 or 30 years from now, we’ll look back on this blip the same way we’ve looked back on the other blips in the last 250 years—as a variation on the same themes that felt different in the moment (and maybe even were different!), but ultimately, found their way back into the same general pattern of the relentless climb of human progress.
That’s a calculated risk, of course—I’m looking at the decades ahead of me and the information I know to be true about “page 1,000” life so far, and wagering with the majority of my chips that some asset class somewhere is going to do well.
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“I’m hedging my bets by spreading them across the globe.”
I own the S&P 500. I own Small Cap Value. I own Emerging Markets. I own Developed Markets. I’m hedging my bets by spreading them across the globe. Some people react to these rapid changes by quickly adopting new technologies, like Bitcoin or other cryptocurrencies, but I don’t personally believe Bitcoin to be the future of money—so I’ve made the decision not to adopt it into my strategy. (Like I said, we’re all making sense of the street corner the best we can.)
If I were retiring next year and imminently needed my investments to support me, I’d probably take a fair amount of risk off the table, because I no longer have decades. Bill, who’s 76 years old, told me in the interview that the majority of his net worth is in CDs right now (the current going rate is a 5% yield, which is—obviously—enough to support his 4% withdrawals).
But if I’m wrong? If it just so happens that everything goes to a steaming pile of shit during our lifetimes, never to rebound again as we descend into The Last of Us-style cordyceps madness?
Well, rest assured that your portfolio will be the least of your worries.