This Should Scare You About Your Retirement Planning

You should be planning to spend MORE in retirement than just following the 4% rule.

Why? Because the 4% rule is simply the Maximum SAFE Withdrawal Rate since the dawn of the modern era of investing. This means that if you took 4% out of your 60/40 stock bond portfolio each year, adjusted for inflation, you’d never have run out of money.

Okay, but if you only took 2% a year out of your portfolio you also would have not run out of money without the need to be in 60/40 portfolio.

Is this acceptable? Probably not. So, why do we accept the premise that 4% is okay for retirees when in fact it is literally the WORST CASE SCENARIO!

In fact, as the video shows you , the MEDIAN portfolio distribution amount was 5.6%. which means 40% more income each year than the 4% portfolio And even with “risky” distribution amount, half the time you had money left over when you died.

2/3 of the time you could safely withdraw 5% a year without running out of money. In fact the 4% is such an anomaly in terms of the actual amount of time it even came into being it boggles the mind.

Yes, historically if you only took out 4% a year you’re “safe”. So what??? Why limit yourself if the numbers are so large that you can safely take out more than that in the vast majority, the HUGELY VAST majority of times?

It’s crazy talk. But, as always, I have a hunch why the 4% rule has been glommed on to. The 4% rule doesn’t include advisory fees. So, if an advisor can sell his services via the 4% rule and charge you a 1% fee HE will be safe in HIS earning perpetual money off your account all the while you sacrifice your own spending.

Essentially, with a 1% fee, the 4% rule makes sense. So, I hope you didn’t want that extra $10,000 a year spending money because with your advisory fee you’re paying, if you want to stay ‘safe” you better adhere to the 4% rule.

Or, even better, just fire your advisor, buy some index funds and spend more. Simple as pie.

On a side note, if you never hear from me again, you may know why! 🙂

The old 4% rule is what everyone uses to evaluate the success of one’s retirement plan. Ask anyone how much money they can take out of their portfolio and without hesitation it seems that person will say 4%.

Why? “Well… that’s what everyone says, right?”

Well, because everyone says it does that make it right for you? Everyone also said to eat low fats and high carbs, and look where that got us.

Now, this is not an indictment of Bill Begen’s 4% rule article that came out in the Journal for Financial Planning in 1994. Back then it made perfect sense.

But it’s now 25 years later. Think a change should be considered? After all, are people living longer or shorter than they were in 1994?

What are bond rates now, compared to 1994 and the previous history of the markets in which Bengen based his rule?

What were stocks doing in the years up to the point Bengen did his study? Can we assume the same rates of returns going forward?

I’d be hard-pressed to encourage any of my clients to use ANY model based on past numbers that simply are not achievable today.

10 year Treasury is half of what it historically is.

No one, and I mean, NO ONE, would argue stocks are undervalued relative to historical numbers.

Finally, people are living longer, in case you hadn’t heard.

Thus, if you’re banking on the 4% rule to dictate your retirement success, I highly suggest you think again.

Joe Tomlinson did the grunt work for us in the article I reference in this video. And what you’ll see should shock you out of any complacency you had.

What worked before, won’t work now.

You’ve been warned. Prepare accordingly.

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