Going Infinite Doesn’t Say What People Want to Hear Right Now

Michael Lewis’ latest book Going Infinite: The Rise and Fall of a New Tycoon is an entertaining account of the journey of Sam Bankman-Fried and his cryptocurrency trading firm FTX.  Lewis’ many critics wanted the story to be a deep dive into Sam’s criminal activity and fraud within the cryptocurrency industry, but that’s not the story Lewis is telling.

Relative to social and business norms, Sam is an outlier of huge proportions.  So much so, that his meteoric rise in the cryptocurrency business world would have seemed impossible in advance.  This is the story Lewis told. However, Sam is currently on trial for (allegedly) swindling billions from traders and investors.  Those most interested in this story wanted to learn more details of the swindling.

Some critics accuse Lewis of having been taken in by Sam.  I didn’t get this from the book.  Lewis did discuss Sam’s seeming transgressions, he just didn’t dwell on them because they weren’t central to the story he was telling.  One example of the discussion of a potential crime is “FTX had simply loaned Alameda all of the high-frequency traders’ deposits … for free!”

In another example, Lewis at one point had done some simple accounting and had concluded that billions of dollars were missing.  He tried to press Sam about it, but “Either he didn’t know where the money had gone or he didn’t want to say.”  Note that not knowing where the money had gone is not the same as not knowing it had been taken in the first place.

Readers who don’t care much about cryptocurrencies or Sam’s guilt or innocence will likely find this story entertaining.  Lewis displays his usual skill at evoking vivid and funny images.  At a big media event “Sam emerged, looking as if he had fallen out of a dumpster.”

Going to a meeting with Mitch McConnell, Sam “carried what appeared to be a small pile of old laundry” which turned out to be a suit.  “[Sam] walked up the steps of the private plane and plopped the suit ball onto a spare seat.”  McConnell liked to be addressed as “Leader”, and Sam needed to practice to avoid saying “Dear Leader.”

“He tossed popcorn in his mouth, in a herky-jerky motion that resembled a clumsy layup.  He was shooting around 60 percent, and the popcorn was flying everywhere.”

After reading the book, I was left with the impression that Sam would very likely be convicted of financial crimes.  But the story was really about Sam Bankman-Fried and a cast of other implausible characters doing things that didn’t seem like they should have been possible.  However, it’s understandable if people who lost their life savings in FTX don’t want to hear about Sam’s interesting quirks.

What Experts Get Wrong About the 4% Rule

The origin of the so-called 4% rule is WIlliam Bengen’s 1994 journal paper Determining Withdrawal Rates Using Historical Data.  Experts often criticize this paper saying it doesn’t make sense to keep your retirement withdrawals the same in the face of a portfolio that is either running out of money or is growing wildly.  However, Bengen never said that retirees shouldn’t adjust their withdrawals.  In fact, Bengen discussed the conditions under which it made sense to increase or decrease withdrawals.

Bengen imagined a retiree who withdrew some percentage of their portfolio in the first year of retirement, and adjusted this dollar amount by inflation for withdrawals in future years (ignoring the growth or decline of the portfolio).  He used this approach to find a safe starting percentage for the first year’s withdrawal, but he made it clear that real retirees should adjust their withdrawal amounts in some circumstances.

In his thought experiment, Bengen had 51 retirees, one retiring each year from 1926 to 1976.  He chose a percentage withdrawal for the first year, and calculated how long each retiree’s money lasted based on some fixed asset allocation in U.S. stocks and bonds.  If none of the 51 retirees ran out of money for the desired length of retirement, he called the starting withdrawal percentage safe.

For the specific case of 30-year retirements and stock allocations between 50% and 75%, he found that a starting withdrawal rate of 4% was safe.  This is where we got the “4% rule.”  It’s true that this rule came from a scenario where retirees make no spending adjustments in the face of depleted portfolios or wildly-growing portfolios.  So, he advocated choosing a starting withdrawal percentage where the retiree is unlikely to have to cut withdrawals, but he was clear that retirees should reduce withdrawals in the face of poor investment outcomes.

We can see Benegen’s thinking in two quotes from his paper.  When a portfolio is depleting too fast, a retiree has the “option to improve the situation for the long term, and that is to reduce—even if temporarily—his level of withdrawals.”  When a portfolio’s growth exceeds expectations, “Some increase in withdrawals are probably inevitable.”

So, when experts think they are criticizing Bengen when they say the 4% rule is too inflexible, they are mischaracterizing his paper.  I’m not aware of any serious advocate for blindly following a fixed spending plan in retirement that ignores portfolio growth or decline.

Bengen’s paper has its faults, though.  Here are several articles I’ve written about the 4% rule:

Adjusting the 4% Rule for Portfolio Fees

Revisiting the 4% Rule

A Quiz on the 4% Rule

4% Rule Based on Longevity Statistics