Key facts
- Bill Bengen, creator of the 4% retirement rule, advises a portfolio allocation of 65% stocks, 30% fixed income (including TIPS), and 5% cash for those nearing retirement.
- Younger investors, more than five years from retirement, should maintain a 100% stock allocation.
- Bengen advocates for equal exposure across five market areas within the stock allocation.
- Rebalancing is crucial to avoid concentration risk and to fund living expenses.
- Cash for spending can be replenished through rebalancing, stock dividends, and bond income.
Bill Bengen, the architect of the widely known 4% rule for retirement withdrawals, has detailed his recommended optimal investment portfolio structure. Bengen, a former financial advisor, suggests that investors more than five years away from retirement should allocate their entire portfolios to stocks, leveraging their higher historical returns and capacity for risk.
As retirement approaches, Bengen advises a gradual shift towards a more conservative allocation. His optimal portfolio for retirees comprises 65% in stocks, 30% in fixed income—specifically intermediate-term bonds including Treasury Inflation-Protected Securities (TIPS)—and 5% held in cash. Within the stock allocation, he recommends equal exposure across five distinct market segments.
Bengen also highlighted the necessity of active portfolio management through rebalancing. This process is crucial for mitigating concentration risk and ensuring the portfolio remains aligned with its target allocations. For instance, if small-cap or international stocks have significantly outperformed, a portion of those holdings should be sold to bring them back to their target percentage. The proceeds from these sales can then be used to fund living expenses or reallocated to other parts of the portfolio.
He noted that income from stock dividends and bond interest should be directed into the cash allocation to ensure it is consistently replenished. This strategy, he explained, can help automate the process of funding expenses through rebalancing and income generation, particularly during periods of market volatility.