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The 4% rule, born in the ’80s, has long been a staple in retirement planning. But is it still relevant today? We break it down, discussing how it might not be the best approach for your retirement dreams.
Discover why relying solely on the 4% rule could mean scrimping in retirement. With inflation on the rise and market fluctuations, there’s a lot at stake.
Join us for an eye-opening discussion on how our Risk-Off Retirement Income Strategy can provide you with peace of mind, allowing you to enjoy your golden years without financial worries.
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Is the 4% Rule a Retirement Disaster?
The 4% rule has long been touted as a reliable guideline for retirees to determine how much they can safely withdraw from their retirement savings each year without running out of money. However, with changing economic conditions and shifting retirement landscapes, many experts are now questioning whether the 4% rule is still a viable strategy for ensuring financial security in retirement.
The 4% rule was first introduced in the early 1990s by financial planner William Bengen. He found that if retirees withdrew 4% of their portfolio’s value in the first year of retirement and then adjusted that amount for inflation each year thereafter, their savings would likely last for at least 30 years. This rule was based on historical market returns and was considered a conservative approach to retirement income planning.
However, in today’s economic environment, the 4% rule may no longer be as reliable as it once was. With lower bond yields and the possibility of lower stock market returns in the future, retirees may need to reconsider their withdrawal strategies to avoid outliving their savings.
Furthermore, the 4% rule does not account for unexpected expenses, such as healthcare costs or long-term care needs, which can significantly impact a retiree’s financial situation. Additionally, retirees are living longer than ever before, which means their savings need to support them for a longer period of time.
In response to these concerns, some financial advisors are suggesting alternative approaches to retirement income planning. One popular strategy is the “dynamic withdrawal” method, which involves adjusting annual withdrawals based on changes in the market and a retiree’s financial situation. This approach allows for more flexibility and can help ensure that retirees do not deplete their savings too quickly.
Another alternative is to consider a more diversified investment portfolio that includes a mix of stocks, bonds, and other income-generating assets. By diversifying their investments, retirees can potentially reduce their reliance on the 4% withdrawal rate and mitigate the impact of market fluctuations on their retirement income.
Ultimately, the 4% rule may not be a one-size-fits-all solution for retirees. It is important for individuals to carefully consider their personal financial goals and circumstances when planning for retirement. Consulting with a qualified financial advisor can help retirees navigate the complexities of retirement income planning and develop a strategy that best suits their individual needs.
In conclusion, while the 4% rule has long been considered a reliable guideline for retirees, it may no longer be a foolproof strategy in today’s economic environment. Retirees should carefully evaluate their options and consider alternative approaches to retirement income planning to ensure their financial security in their later years. With careful planning and the guidance of a financial professional, retirees can create a sustainable income strategy that will support them throughout their retirement.
Imagine being a customer of yours. Why would you do a video of something you don’t even understand??
You need to factor in social security payments.
OMG! You guys are a couple of duffus’s.
At least do the bare bones of research and get a minimal grasp of the 4% withdrawal principal before presenting yourselves as professional financial advisors!
I will invest in my kids during my life and leave them some seed money in the end.
Also our vacations and memory making experiences are same as a lot of Europeans less the airline, hotel, rental cars, restaurants, lines, ect. We hop in a car, drive to US national parks and forests, sleep in a tent, hike pristine wildernesses that many will only see on their screensavers.
Learn to live a lean happy quality life of abundance before you retire.
4% is a good baseline, if you don’t need the 4% on a good year don’t take it, you’ll pay less taxes and grow your base.
A good budgeter in working life will be a good budgeter in retirement.
You guys need to go back and study Bill Bengens 4% rule. You are so wrong on so many points. It never says you don't eat into you r principal, it says you won't run out of money over 30 years. It also should adjust your withdrawal rate up by inflation every year in retirement. What good does a $1,000,000 portfolio when you die, other than leave to your heirs. If you are talking these mistakes to your clients, they should look for new advisors.
Funny, as of 2023 about 10% of Americans will have saved $1 million for retirement. The way I see it, if the couple or individual who have made a ton of money during their working years and only have $1 million saved for their retirement, I do not think they are going to be happy campers during their golden years. What will save them is their healthy social security checks and pensions. If there are no pensions, they might have to touch their savings, this will be up to them on how to manage this, if done right, they will do fine. But if they continue to burn up their money like the way they did in their working years, things will get rough soon.
For the folks who made a lot less money but saved and invested properly and have $1 million for retirement, they are going to be fine with no worries because they are smarter. They will enjoy their golden years and still be able to make their money grow as they age.
The 4% rule is just for starters, to give an idea of how your money might last. The smart investor will have no problem adjusting their buckets to keep them going and keep enjoying life.
not hard to see why so many financial planners end up broke… they all spout the same old tired goop hoping to get a piece of your pie because they have convinced you they can do something you cannot which is absolute dogshit. The time value of compound interest is your superpower and don't give away a piece of it to youtube clowns.
Guys, is this for real? I have never heard such a mangled misread of the study. Its hard to take anyone seriously if they dont even understand what they are arguing against.
Shows a total lack of understanding of the '4% rule'. The theory is that the INITIAL drawdown rate is 4% of the retirement portfolio (eg. $40K if the retirement portfoliio was worth $1MM). Thereafter, the rule specifies increasing that initial $40K drawdown by the inflation rate (eg 2%, 5% 7% or whatever). It does NOT say to adjust the drawdown each year to be 4% of the current retirement portfolio balance. So it does NOT say to decrease the drawdown from $40K to $20K if the market had a 50% decline in year 1 of retirement (although that would likely put you into the 5% or so 'probability of failure' that the 4% rule has over the assumed 30 year drawdown period. The 4% is also NOT intended to leave the $1MM initial retirement portfolio 'untouched' and keep its $1MM value indefinitely — on average, it is supposed to mean that you would be close to $0MM left in the retirement portfolio at the end of the 30 year timeframe only about 5% of the time. So you might end up with a lot less than $1MM residual, or more than $1MM. It all depends on how the market performs, your exact portfolio asset allocation, rebalancing strategy and frequency, sequence of returns, etc. Not to mention your actual lifespan (the whole '4% rule' is based on a very rough 'estimate' of how long retirement will last — ie. something close to 'average' lifespan.
ps. If you want certainty in retirement, just save up a LOT more than the bare minimum 'calculated' amount, invest a lump sum to provide an inflation adjusted lifetime annuity of the amount of retirement income need, then leave all your other NW invested in whatever asset allocation suits your risk tolerance, and don't worry too much about what the end value of your estate might be when your retirement terminates.
pps. Saving up a LOT more than you need is quite easy if you spend your entire working life spending a lot less than you earn — this means that you save more and end up with a larger retirement portfolio as a multiple of your pre-retirement income, AND that you are used to a fairly frugal lifestyle, so your required retirement budget won't be so high.
Wow. You guys need to do some homework. Read Bengens paper. You have some facts incorrect. 1. His name is Bengan 2. Bengens study showed you can withdraw 4% for any 30 year period (not forever), and increase the withdrawal by inflation every year, without running out of money for the 30 year period-. This was with a 50/50 portfolio. The 4% study did include sequence of returns risk (years where stocks and/or bonds were down early in the 30 years). In the study spending was not adjusted down. it was actually increased by inflation every year.
You are the first guys I have watched where I completely agree with your philosophy. I’m spending my money with spending more in the first 10 to 15 years and slowing as I age. The kids get the house I spend everything else.
You guys did a poor job in explaining the 4% rule
Assuming you have $1,000,000
Year1 in retirement you withdrawal 4% of your funds or $40,000
Every year after that you take $40,000 plus a cost of living adjustment.
So you will never lose your buying power because of inflation.
If year 2 the market drops and you have only $800,000 you still take out the $40,000 plus inflation.
The study assumes you have a 60/40 stock/bond split.
Based on historical data your retirement money will last 30 years and you will not run our of money.
Inflation has a greater impact on people's cost of living than a crashing stock or housing market,
resulting in an immediate and tangible effect. This explains the current high level of negative market
sentiment, and our need for assistance in surviving this challenging economy. The financial markets have
underperformed due to fears of inflation, causing stock and bond prices to plummet. Despite sounding basic,
consulting a financial advisor has enabled me to outperform the market and achieve a profit of $850,000
since June 2022, making it the ideal approach to enter the financial markets today.
Clarifications:
0:43: It's not that you needed to generate 4% returns. Your average returns need to be higher than 4%. William Bengen wrote a paper in 1994 about it.
2:20: Yes, Bengen did "give leeway to…if things go bad in the year". It was a Monte Carlo model which accounted for up and down years of the market.
4:13: "And not you're resetting your 4% off of 850k": No. The 4% is adjusted for inflation every year, not the amount in your account.
5:50: "you never go below that principal": Incorrect. Bengen accounted for principal balances to fall. At 4% his numbers showed it often does.
9:03: "when you factor in inflation": Bengen did factor in inflation. In his plan, you start by taking out 4%, then increase (or decrease) the withdrawal amount to track inflation.
12:55: "that just ensures that 100% of your life savings…is passed on to your kids". Incorrect. The goal of the 4% rule is to not run out of money during your retirement. You will have spent some, maybe all, of your principal.