Why the 4% Rule (Probably) Isn't Broken

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Why the 4% Rule Probably Isn't Broken:
The 4% Rule is a rule of thumb popularized by retired financial adviser William Bengen and for the last 30 years it has been the standard bearer for retirement planning conversations. However, some have recently begun to call its validity into question given the current economic environment. Will the 4% rule hold up in an era of high valuations, high inflation, and low (but rising) interest rates?
Well nobody can truly predict the future, least of all me… but if history is anything to go by I would say that the 4% rule is (probably) going to be just fine. After all, it was built to handle situations just like the ones we face today, if not worse.
Let’s talk about why the 4% rule (probably) isn’t dead yet.
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Опубликовано:

4 сен 2022

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Комментарии : 59

@OnCashFlow Год назад

Great video! I still believe the 4% rule is just fine, especially because the stated inflation rate usually does not affect most retirees like it does non-retirees! (i.e they drive less (less gas), they are more flexible with travel (hotels, rental cars, flights, etc.), they can shop for food on sale (more flexible when they shop), and so much more.

@NextLevelLife Год назад

Totally agree with your point about the correlation of the inflation rate to the spending of a retired and non-retired person! There's a lot that we can do when we have the free time/flexibility to focus on/take advantage of money saving opportunities more and our lifestyle no longer requires that daily commute (among other things). Though, obviously, there's still things we can do while working as well :)

@sprinkle61 Год назад

Of course we all know that healthcare is rarely a large part of inflation, its not like some mass disease tearing through society is going to drive up costs across the board...

@bridgettetraveler658 Год назад

2010 to 2020 was great 👍! Hopefully it will come back. We also may need to watch our spending a bit closer. One thing I learned yrs ago is keep your weight down so u won't have to clothes shop much! Take care of what GOD Bless us with & appreciate what we have. Remember the little bit we have could be taken away in a minute! Others may have less & learn to make ends meet!!!

@2023Red Год назад

@Next Level. Can you clarify the growth and the bond symbols from the study? I am thinking DIA or SPY. And, TLT or HYG. Thanks!

@pensacola321 Год назад

The 4% rule is at best a "rule of thumb" for planning purposes. It may be fun to look at going into and in very early retirement. But once you hit your stride, you know what you will have to do. You will find very few retirees staying with such a program.....Good content...

@luisoncpp Год назад

There is a problem with the argument presented here: the 4% rule only accounts for retiring periods that started more than 30 years ago, but it's pretty possible that someone who retired in 2000 following the 4% rule will exhaust their money before 2030.

@TheFirstRealChewy Год назад

If the market is doing terrible for a long period of time that it breaks the 4% rule, we'll just have to get more creative. Maybe get some roommates so collectively we can make it. We intend to keep an aggressive investment portfolio all the way into retirement and beyond because we started late and need it to grow as much as possible. To hedge against a crash, I'm thinking of two options. The first is to have some money in savings. This will reduce the amount we have to sell to pay the bills. The other option is real estate. We currently haven't done this, but having some rental income should help. This is going to be harder for us to get into since we need money to start and we are starting late. Time is money has never been more real.

@davidfolts5893 Год назад

When you talk about terminal value of your portfolio using the four percent rule, is that number adjusted for the time value of money.? Thanks for the great content!

@NextLevelLife Год назад

The ending net worth figures were adjusted for inflation, yes. Glad you are enjoying the content!

@davidfolts5893 Год назад

@@NextLevelLife Thank you.

@howellwong11 Год назад

Yes, I heard of the 4% rule and I have nothing against it. My rule is the 0% rule. My main goal was to retire when my pension and SS were enough to cover my expenses. They did and I am comfortably retired without touching my investments except for one RMD.

@rockystaatz521 Год назад

Actually the best way because it shouldn’t run out

@joechang8696 Год назад

technically, the value of your pension should count as part of your nest egg - whatever the cost of an annuity to match your pension amount

@howellwong11 Год назад

@@situated4 Pension didn't come free. You gotta plan and work for it.

@donaldlyons17 Год назад

@@howellwong11 You have to have an employer that offers it!!!! The vast majority of employers don't offer it as far as I am aware.

@howellwong11 Год назад

@@donaldlyons17 I don't think that a defined retirement (pension) plan is offered nowadays. It went out in the Eighties, but many were grandfathered. My pension plan went on in the Nineties, and I retired in 2000. 401k's are the new pensions.

@neilcook1652 Год назад

4% is USA based with S&P portfolio, UK based should work on 3.1% according to ‘beyond the 4% rule’

@favjr Год назад

Excellent video. You have to really question the motivations of people who tout that this "doesn't work". Beyond the uninformed, they all appear to be selling products or trying to attract clicks and eyeballs with overly pessimistic hysteria and poorly constructed analyses. (Yeah, Morningstar tops that list and was raked over the coals by Kitces, Bengen and others for it.) Almost nobody in real life, and certainly no informed person, uses the assumptions of the 4% rule as the basis for drawing down on their portfolio in retirement. But its still a great conservative way to calculate how much one needs for the reasons stated in the video. After that, you just manage to expenses, which will already account for your actual rate of inflation. If you are a sentient being, your actual rate of inflation should be less than reported figures just by doing things like having a fixed mortgage or paid off house. The spending smile is real and should be the base-line assumption in any analysis, NOT the unreal increasing expenses at the rate of CPI inflation. The only thing really missing here is you failed to expand the portfolio discussion near the end to show that other simple portfolios beyond the standard 60/40 and total market (which you've discussed in other videos) have higher historical safe withdrawal rates and could be another form of "insurance." Then could have linked to other videos in your series -- wink, wink, nudge, nudge . . .

@NextLevelLife Год назад

An excellent point on using an asset allocation that's built to sustain higher withdrawal amounts to lower your risk of outliving your savings! Additionally, you could also implement techniques like cash buffers, financial guardrails, flexible spending budgets, spending ceilings, etc. to give an extra boost to the chances of making through retirement without running out of money. As you pointed out there are a lot of options at our disposal to make the most of our money. Also, I saw that Morningstar article... pretty pessimistic indeed. Thanks for the comment :)

@zacharris6299 Год назад

I would love to hear your thoughts on a leveraged diversified portfolio, like Hedgefundie's excellent adventure or the leveraged Ray Dalio.

@guitarguync Год назад

If you were to keep your portfolio in growth oriented funds, but withdraw 4% of the acct. value for every given year (ex: the market drops 50%, your acct. balance drops to 500k, so you only withdraw 20k that year), could your acct. balance and annual withdrawl reliably increase over time? Ex: Your acct. grows to 3mil. over decades, so you can now withdraw 120k/year?

@NextLevelLife Год назад

It can (if we use the term "reliably" somewhat loosely as the volatility of investments would lead to income levels that are up and down in the short-term quite regularly, even if the long-term trend is up and to the right), assuming you're using a well-diversified and broad-based set of investments with a long track record. However, that level of income growth is certainly not guaranteed and even "outperformance" in terms of income-generation does depend on what you're comparing it to (i.e. the traditional 4% rule when withdrawals are adjusted for inflation but nothing more, or some other withdrawal strategy that's more explicitly income-focused). Thanks for the comment!

@TheFirstRealChewy Год назад

If you reduce the amount you withdraw when the market drops, you greatly improve your odds of success. The reason is that the 4% rule is based on the principle that you need to spend 4% and don't have any wiggle room to cut spending (its critical expenses only). So if your 4% spending accounts for leisure spending that you can reduce when things get rough, you are in a good position. One thing to note is that the 4% is calculated in the first year and adjusted for inflation only, not market returns. To further improve your odds of success, determine where the market is in the first year, then offset your balance based on that. So if you retire in a bull market, but want to account for a 30% drop, just reduce your investment balance by 30% then calculate your 4% based on that. If the market happens to drop then you are fine. You can re-evaluate your 4% withdrawl rate every few years. If each year you only take 4% of the balance of your investments, then you will never go to $0 because you are essentially restarting the 4% rule each year.

@amyx231 Год назад

My life expectancy is 64. My tentatively planned FIRE age is 45. I can take out 5% from a savings account and be fine. The numbers aren’t the same for everyone. And that’s ok.

@NextLevelLife Год назад

Very true! Personal finance, is above all, a personal field. The numbers aren't going to be the same for everyone across the board. That's why its always a good idea to focus on the concepts behind the examples (instead of just taking the numbers at face value) and thing about how they might apply to our specific situation :) Thanks for the comment!

@MANLETofPEACE Год назад

Why is it 64? Are you ok? I hope you are.

@amyx231 Год назад

@@MANLETofPEACE I’m not the healthiest. And family history. Basically, if I meet 50, I’ll meet 75/80. It’s a flip of the coin.

@saulgoodman980 Год назад

I would still say plan for 75. Maybe you'll live longer. If not you'll leave something for your loved ones / society. Plus the buffer should help you sleep better at night.

@amyx231 Год назад

@@saulgoodman980 medical costs will eat away any savings I have before I die. If I do leave anything, it’ll go to my school. I had a nice big scholarship and it’d be nice to help new kids afford school.

@jaket5267 8 месяцев назад

What is your definition of a "precedented" return from a diversified equity portfolio? The equity premium puzzle clearly states that past returns in the market in the past several decades are what is unprecedented. I'm more worried about actually precedented returns making the 4% rule irrelevant and not conservative enough.

@louisnguyen2865 Год назад

I need help understanding the withdrawal amount on inflation adjusted rate (please someone explain the video starting at 9:15 through 10:00). Please please please explain with a clear example (like I'm only 5 years old). THANK YOU FOR ANYONE WHO CAN SIMPLIFY The content creator's explanation.

@2023Red Год назад

I think one would use the initial withdrawal amount such as $40,000 and adjust for inflation accordingly. I assume an annual rate rather than a quarterly to match the once a year withdrawal. Even though the current CPI might be 8% for the quarter, the annual rate as seen in January for the prior year might be 4%. (average of the four quarters during the year) Thus the new annual withdrawal would be $40,000 plus 4% more which is $40,000 plus $1600. Net withdrawal of $41,600. If CPI for the following year is also 4%, then that next annual withdrawal would be $43,264. I have studied the various models and this 4% rule is as good as the others. There will always be 'what if' events that could happen. In my own mind, I would only take a withdrawal on an up year where the market is up. (I define an up year is where the market under symbol SPY is at least a dollar higher than the previous year price.) And the first would be a double amount and let the excess payment just sit in my savings account. That way, I would have hedged my retirement against the big down year that will always come up sometime. During the down year, I take no distribution. And I would always protect the protect the portfolio by using what is called a STOP. My stop is 4%. And your brokerage person knows what a stop is and can place it for you.

@TheFirstRealChewy Год назад

In your first year you calculate 4% if your investments and you withdraw that amount. In the following year you take the dollar amount you withdrew in the previous year and adjust it for inflation, then withdraw that amount. You keep repeating this every year. Year 1 = 4% of investments Year 2 = Year 1 x (1 + inflation rate) Year 3 = Year 2 x (1 + inflation rate) Year 4 = Year 3 x (1 + inflation rate) ... Also don't withdraw all of the money at once. Withdraw it monthly or every two weeks. Essentially that's dollar cost averaging on the withdrawl.

@ggr1847 Год назад

How should the 4% rule be adjusted for retirements lasting over 30 years?

@TheFirstRealChewy Год назад

The easiest, rough answer is to divide 100 by the anticipated number of years. So if you want to estimate 40 years, then 100 / 40 = 2.5%. However, closer to retirement you'll want to assess how far 2.5% is from the latest inflation-adjusted return rate to see if you need to be that aggressive. Also keep in mind that the difference between 2.5% and 3.5% is bigger than the difference between 3.5% and 4.5%. If you can live on 2.5% you are doing very well.

@alansach8437 Год назад

You can always withdraw zero. Your money is guaranteed to outlast you that way.

@pensacola321 Год назад

RMDs might get you....

@TheFirstRealChewy Год назад

Just withdraw a percentage of the balance each year. It will also outlast you.

@ericjuli6576 Год назад

Something I think is very overlooked with the 4% rule is the effect of fees. The rule says you can use 4% each year, if you’re paying an advisor 1% AUM… now you’re living on 3% withdrawl

@TheFirstRealChewy Год назад

We are currently trying to live on a fixed income until we get to retirement.

@joelcorley3478 Год назад

Actually the 4% rule fails about 1 out of every 20 historical scenarios. In fact that stock market crash at the start of the Great Depression is one of those scenarios. Had you retired using the 4% rule just before that crash, you would have run out of money in less than 30 years. The one saving grace of the Great Depression was that inflation went negative, so less money would buy you more things. This is why retiring a little before the crash or a little after the crash would have been survivable. Indeed, it was the high inflation of the early 70s that made it at least as difficult to survive as the market losses from the Great Depression...

@TheFirstRealChewy Год назад

When you want to do is plan for the crash. If you think the market will crash, then set a target. Is it a 20%, 30%, 50% crash? Can you survive with 4% of 50%? If not then consider putting in any additional contingencies. For example, having some money in cash or CDs that can last a few years might hold you over. It's similar to saving an emergency fund today. When things recover you replenish the emergency fund. If things don't recover, I'll be the guy in aisle 5 checking out people at the grocery store. Can't plan for everything.

@joelcorley3478 Год назад

@@TheFirstRealChewy - There's no point to trying to over complicate this. Your proposal sounds suspiciously like timing the market. If you're worried about that 5% risk on a 4% withdrawal rate, just lower your withdrawal rate to 3.5% or 3.2%. By 3.2% there are no historical scenarios that would have failed for any amount of time. Sticking to a reasonable asset allocation and a low initial withdrawal rate should see you through pretty much anything.

@rockystaatz521 Год назад

I’ve never understood why people think they have to sell investment and not just use the dividends but then people pay others to spend their money 💰 & hopefully they get to retire

@TheFirstRealChewy Год назад

It depends on the investment. If the investment makes enough in dividends then sure, live off the dividends. If not, you'll have to sell. Many would love to have enough invested that they can live off the dividends. That's technically what real estate investing is when doing rental properties.

@tr3vorb438 Год назад

The 4% rule doesn’t help million dollar seniors that need to go into nursing homes tho.

@arh1234 Год назад

Yes, it does. It lets them know about how much they can spend, in addition to Social Security, if they think they have 30 years to live and have at least 40% in stocks. There are tables in which you can see the percent withdrawal for

@johngill2853 Год назад

It was never meant to. And it's not a rule 4% plus inflation historically is the safest highest withdrawal rate. It's nothing more nothing less. Everybody tries to make it something it's not. Historical data is all it is

@TheFirstRealChewy Год назад

It does, but partially or fully depending on how you planned for retirement. You'll want to plan for long term care. Just like planning for a retirement age, plan for a long term care age. First determine if you are combining retirement and long term care into your 4% rule. If you want to treat them separately, the estimate your long term care age and how much you'll need for those years. They subtract the amount that is covered by your 4% calculation. Once you know that target amount, invest money for when the time comes and consider that money as separate from your regular retirement investment. You'll now be ready if things end up as planned, and if you end up not needing long term care, you'll be in an even better position.

@tr3vorb438 Год назад

@@TheFirstRealChewy Thanks

@evilzzzability Год назад

4% rule will fail this cycle. You’ve never had a starting point of -6% real interest rates and stocks and real estate priced according.

@TheFirstRealChewy Год назад

Just offset your investment balance and calculate 4% of that. If you can live on that you'll be more than fine. So if you have $1 million and expect a 40% market crash, calculate 4% of $600K (60% of your investment). If the market then drops it won't matter to you since you already planned for it, and when it rebounds you will have the biggest smile.