Hello, Alex here from the Betterment product team that launched this income solution. Hopefully I can help shed some light on the research we did and how our model works.
I'm having a hard time reading through their sales material to see what they are actually suggesting other than using their product that has a different asset allocation.
@Joel, there are two parts to providing income - 1. managing the allocation of the portfolio. 2. deciding how much is safe to withdraw. This product helps you do both. The first part is customization on top of our current allocation advice that's specific for retirees. The second part is brand new. Both can be tweaked according to however you want to use them.
@Eric, you make a number of good points, it might help if I walk through our thinking and methodology a bit:
The article makes a good point:
Twenty years ago, the yield on a three-month Treasury bill was 6%. So while Bengen’s model called for a 50/50 stock allocation, even those with a more conservative asset allocation could still draw down 4% annually adjusted for inflation, and reasonably expect to preserve their capital. Even in 2002, the 5-year US Treasury yield was still 4.5%. That’s no longer the case—today a three-month Treasury is .04% and a 5-year is around 1.67%.
Which is why it's puzzling that they decided to use a 70% bond allocation to then determine that the 4% rule is "broken". The current low yields in bonds means that you're going to want to be closer to a stock/bond split of 75/25 rather than a 30/70 allocation. And their own system starts with a 56/44 allocation. Again, strange that they're using 30/70 instead of 56/44 to claim an issue with the 4% rule.
Our allocation advice is tailored for our specific portfolio of ETFs. "75/25" can mean lots of things depending on what you put in it. So you can't compare your 75/25 to ours. Our 30% stock / 70% bond allocation has an expected excess return of 2.98% on top of the risk free rate. Our risk free rate assumption starts near 0 like it is today, but increases to a max of 3% over the next 5 years, since we expect rates to rise. This time-varying rate is what is used in our forward looking projections and withdrawal calculations. The risk-free rate max at 3% is admittedly conservative, given history, and we will adjust it based on actual risk free rates. We also assume a 7.78% standard deviation for this allocation. Our allocation advice for retirement income goals is tailored for older retirees who are quite risk adverse, so very high levels of stocks are not desirable. Of course you can always choose an allocation that makes sense for you - we just provide guidance, you make the choice. We auto-rebalance and auto-reinvest according to what you explicitly set.
Regarding the 4% rule using the portfolio of 30% stocks for this post, we did run a number of other fixed-withdrawal scenarios. Here are the other results:
50% stocks: 22.5% failure
70% stocks: 21.8% failure
90% stocks: 22.9% failure
As you and others have pointed out, the reason for this failure is the lack of flexibility in withdrawals. Yes this seems obvious to those who have thought deeply about it. MMM readers are different than the pack. Many people, even advisors, follow the 4% rule blindly. If you adjust, you will get better results. And that is the whole point. Our model simply helps those who need guidance on how much to adjust, and let's them do that very easily, and with automation.
Likewise, a flat withdrawal rate doesn’t take into account personal changes in health or lifestyle that naturally occur with age. Many retirees need more flexibility in their cash flow to handle the inevitable ups and downs of life.
So, have some flexibility again? If your health declines, you can probably allocate that vacation money towards healthcare. Likewise, if you want to pick up a new hobby, figure out a way to pay for it.
Regarding this kind of flexibility, here it is more about liquidity. Some retirement income products limit what you can do with your money in order to provide guaranteed income.
Conversely, if returns are higher than expected in the early phase of retirement, but your withdrawals are static, you run the risk leaving money on the table at the end of your life that could have been used for greater enjoyment in previous years.
Assumes that spending more money leads to more happiness. The retiree can combat this issue by reading more MMM.
I don't think this blindly implies we think 'more money leads to more happiness'. A key part of the MMM philosophy is eliminating waste. A corollary is making the most of what you have. If you end up with more money than you planned for, no one is saying that 'enjoyment' of it doesn't include giving it all to charity, or some other higher-than-material use.
A parting word... if you believe in passive investing, and are able to stick to the plan and avoid behavioral biases that derail so many individual investors, you can do it yourself or use a service like Betterment. It all comes down to how you value your time. Someone with 500k may be thrilled to pay $62.50 a month to not have to worry about investing it. Others feel that's way too much, so they do it themselves and effectively earn $62.50/month.