I am 79 and been retired for twenty years. We update a spreadsheet with all our financial information every month and monitor and review the long term trend. If it is going up we can spend more, if it starts trending down too fast we would have to cut back, taking into account anything else that might be relevant.
I don't know anyone that would follow the 4% rule to the tee. It's a ball park worst case estimate to not run out of money for a 30 year span, based on historical returns. But it does have it's value in planning for your retirement if you understand it's basis and to set savings goals. No financial advisor worth their fee's would take the set it and forget it approach in retirement.
You'd be surprised at how many advisors (and consumers) take the set it and forget it approach OR build their models off of the 4% rule. Everyone's distribution strategy and actual withdrawal rate will and SHOULD be unique to them.
This was great! Best explanation I’ve seen of the guardrail approach (which we plan on implementing once we retire) but I’ve never heard it explained in such a practical way with practical graphs and numbers.
What can I say. There is absolutely 0% chance that I will die early and regret not spending more money since I will be DEAD. I also don't see the 4% rule as some sort of rigid withdrawal requirement. You can always adjust things up or down. Finally, you should always keep cash on hand to cover unforeseen expenses. I just took my portfolio and ran it out to 30 years using the rate of return I currently have assuming the 4% rule and 3% inflation. I end up with 68% of my starting portfolio. Note that my portfolio consists of 30 year treasuries yielding 4.625% so that is a guaranteed return for the next 30 years. In reality I would likely end up with more that 68% of my starting portfolio since I would only take out what I actually need and that will almost always be less than an inflation adjusted 4%. The reasons for that are: 1) I live on less than my fixed non portfolio income (pensions, social security, non portfolio interest, 403b RMDs). I don't count the 403b in my portfolio. 2) My portfolio is after tax so that simplifies things and I include the tax on portfolio gains in my normal expenses. and 3) I am 25 years into retirement and haven't taken a cent out of my portfolio yet.
Good work Todd. You are fortunate and blessed to have a good blend of guaranteed income sources, great discipline, and good health. Thanks for watching the vid and thanks for the comment sir!
I agree with your comment. No one who is dead can have regrets. But running out of money at an old age and suffering hardship is way worse then having too much. Everything in life is a calculated risk. I ride motorcycle despite knowing it is inherently dangerous but I manage all the safety risks as best I can to where I consider it acceptable risk. The 4% rule is just a guideline. I feel it may not be conservative enough for individuals such as myself planning to retire in next couple years. There are now far too many highly negative events happening in U.S. and world today that are increasing the future financial risk profile. High government debt with interest becoming a major expense in fed. budget , high inflation, aging demographics, SS trust fund depletition, market peak suggesting near-term correction, increasing talks of raising taxes including capital gains tax, etc.
When I retire, my plan was to draw a fixed amount each month from my 401k (i.e $2200/month) until depleted and then move on to my 457b at the same fixed amount ($2200/month) until the 1st RMD at age 75. I'm projecting that the first RMD will be around $27K. At retirement, I'll be getting a monthly pension with an annual COLA plus SS will get an annual COLA whenever I decide to take it (62 or later). That's my rational for a fixed pre-tax withdrawal until RMDs hit. Anybody else doing something similar regarding a fixed withdrawal amount?
Yes this is a method I call "smoothing" out future RMD's by withdrawing a tactical amount from Pre-Tax accounts in years prior to RMD so that you can reduce the RMD size and therefore the tax bracket it will kick you into. Great work!
I agree 1000% with your analysis. There are so many variables that aren’t taken into account. While most of us would love to have such a simple approach to drawing retirement accounts, the reality is that one needs to do their homework in order to maximize overall efficiency, with a high emphasis on taxation. The 4% rule is a dinosaur.
If you had a business, you would monitor it day by day or month by month. We do the same for our health. For our relationships... But for some reason we've been convinced to use static rules like the 4% rule for our finances... We would never use a static rule like that for any other area of import in our lives... Have to ask - how did we get convinced of this and who does it benefit....?
Seems pretty straight forward to me. If you draw to much one year for that surprise home repair, you need to draw out less the next year to balance it out.
Guardrails are far too complicated for most DIY retirees. Whereas the 4 % rule success depends on when you retire both age and decade and market levels. Simply start with 3 to 4 % draw and don't inflate in down market years. Keep an emergency fund for those unexpected spending needs. It's not rocket science and no where as complicated as the financial advisers make it seem.
5-6% rule on up years....3-4% on down. Thabks for coming to my ted talk. If you have a pension and or ss too helps to on down years maybe take out nothing
That is correct. Many of the principles will remain the same. But I will also have videos in the future (and have many in the past on my channel) that address those with below $1mm in retirement funds. Thanks for watching and thank you for the comment!
If you have a financial advisor explaining withdrawal rates, then you probably have more than 1 Million. If you have an account less than $250 K, then you actually don't need to worry about withdrawal rates, because its basically an emergency fund, and you are living off Social Security...
Isn't the four percent rule a guide, because no one can say what the future brings? It's like a base pay that is sustainable. Unexpected events or expenses can come up with any plan. Does one not continue to plan for emergencies in retirement? All plans are unique for those who they are to serve. Having said all of that, you make some very good points. Thank you.
The 4% rule is THE MOST CONSERVATIVE guide. You are completely correct. The equivalent would be to say - if you want the MOST CONSERVATIVE guide for your health - never go outside your house, always wear gloves and a mask, and never expose yourself to germs because it is the most CONSERVATIVE way to avoid illness. It's simply foolish to think that anyone would or does behave that way in other meaningful areas of their lives unless manipulated to out of fear. Most of us don't construct our lives using the most conservative base case because we intuit (mostly correctly in my opinion) that it will bring very little satisfaction.
The rule was developed in the 1990s, but today’s low-interest rates and market volatility make it risky. You might need to withdraw less than 4% during downturns to protect your savings.
Possible but not necessarily true. Each person should do their own due diligence and form their own opinion with the help of a qualified professional in my opinion.
The interest rates are low today? Really? The 4 percent depends largely on the amount of a person's portfolio. If a person has $10 million, a 2 percent annual withdrawal might be far more than enough. If person has $1 million, a 4 percent withdrawal might be very difficult to live on. In my opinion, any person with a reasonable level of financial intelligence has no need for a qualified professional financial advisor. Why waste money doing something you can easily do for yourself?
@@jerrylundegaard2592I agree with you. I have always taken care of my portfolio. Of course I might have been better off early in my career getting some help. 😂 I’ve been a good steady hand for the past decade though. I’m on track to retire when I plan in 3.5 years. I still think that it might not be a bad idea to get a second set of eyes to look over what I’ve done. They, especially a CFP might note or find something I need to consider to ensure I never have to go back to work once I retire. Just a thought.
Peak: What you forget in describing the 4% rule, us that your portfolio is invested 50% in the S&P500 and 50% in intermediate treasuries. That is a very important part of the "rule."
While I agree with most of what you say, I think too many people get hung up on the word "rule" there... I believe it was meant in the concept of the phrase "rule of thumb" and not ever implied to be a strict rule. Bengen's paper was called "Determining Withdrawal Rates Using Historical Data" and not "The 4% rule" and it was just a reaction to the common thought at the time that 5% was considered safe. I'm sure Bengen himself wouldn't have told people to use 4% always and every time... ;-) In fact, he's adjusted it to 4.7% and he called it a SAFEMAX which is more the safe amount under poor conditions. He's also adjusted his recommended his investment distribution percentages since that original. He never intended that paper to be considered a strict never changing rule....
I couldn't agree with you more! The problem is, anecdotally from my experience working 1:1 with people, people do think of it as a RULE. So the challenge is dissuading people from thinking of it as a rule and encouraging them to think of it as more of a "suggestion" or a "guideline". Thanks for watching and thanks for the comment!
I expect the 4% rule to work just fine for me and those of us who don’t rely on our investment portfolio for all our retirement expenses. I retired from the military at 58, I have a decent pension, a substantial savings account, own my own home, have no debt besides the usual monthly bills, and when I take my social security at 63 this year it will ad an additional $2500 per month to my wallet. I plan on leaving my investment portfolio alone for at least the next 5 years to let it grow more before I tap into it, and taking only 4% will be removing the interest on the account and leaving the principle alone. At least that’s what I’ve calculated.
Good video, I like 4% for easy quick pre retirement planning, 1M = 40k easy, but I don't really plan to use a rigid 4% strategy in actual retirement. I'd like to see more videos on where to place the actual rails and how to implement them.
the 4% rule is not a rule. It's a worst-case scenario of 50% bonds and 50% stocks in the last 150 years plus inflation to survive It makes zero sense. This video is a fantastic video for people who have been scarred by the tactics used by many financial analysts and pundits on TV to actually see nothing in investing, just like life, is static. The guardrail strategy is the best to apply in retirement, along with strategic withdrawals from your various retirement accounts for tax purposes, including Social security and pensions if any.
I dislike the 4% rule for many reasons including the one you've mentioned in the above comment. I too favor the guardrail strategy as it is the most connected to portfolio performance and actual human behavior.
I like the concept of guardrails based on portfolio performance. It brings in flexibility to enjoy retirement and yet plan for longevity and the unexpected. I vehemently disagree with the concept of 70 to 90 percent probability of success. Its inherently implies that you will be dependent on your kids or on the street if you have no kids or they don't wish to support you. A 100% percent probability of success is impossible plan for/compute (that would be infinity). 98-99 sounds just right -- with periodic recllibration.
Everyone chooses their level of comfort with probability of success and spending tolerance. If you say 98-99% are what you want, by all means build a plan and live in accordance with it! Thanks for watching the video and thanks for the comment!
I can't imagine a retirement that we would spend the same amount every year. Our spending is going to ebb and flow due to lots of reasons, both planned and unplanned.
When you were working, most got a very steady paycheck year after year. During those decades you had ebb and flow of expenses. No different after retirement. You need an emergency fund before and after retirement.
Or, at the end of the year you take the percentage your portfolio is up. For example, come December your portfolio is up 9% even though you only need 5%. You take that extra 4% and keep it in cash to supplement your income in the years the market is down or flat. Essentially living of the interest.
There are many ways to sequence withdrawals, and portfolio growth is only one of the metrics that matter in this case. Far more important is cash flow, how much you'd like to spend each year, and what other income sources you have. If you NEED $50,000 a year from your portfolio and its a $500,000 portfolio, you have no other income sources, you would be withdrawing 10% per year. Is that sustainable? I'm not saying yes or no, but the whole formula comes down to what you NEED from the portfolio, not what you can scrape out of it at the end of each year. It's no good to be able to scrape 9% out of a $500,000 portfolio ($45k) if you need $60k from it. Conversely, if you only need $25k out of that $500k portfolio, and you have a portfolio return of 9% ($45k), then there could be a strong case for taking some of the additional profits out, or leaving them in to continue compounding. Case by case.
@@ThePeakFP the simplest way is always the best way. Whatever the amount you need in retirement, let SS, pension, real estate, or other sources of income do the heavy lifting. Then supplement that income with your IRA withdrawal at 4, 5, 6%. Take the excess and keep it in cash where you can get 5% on your money without the volatility of the markets. Such a strategy or “scrapping” would limit RMD’s down the road and would work in a similar manner to Roth conversions. Of course you’d have to be mindful of tax brackets and effective tax rates…..
I can make a video in the future addressing this question. In fact it would be quite interesting and fun to do. I'll add that to my list. As a note - the upper and lower guardrail "triggers" can be adjusted based on volatility and risk related metrics to increase or decrease the "risk" of the overall withdrawal amount.
Why do all financial planners try to make this so hard. Why not just have a years worth of expenses in a emergency fund and just withdraw a percentage of what ever your portfolio gained on that year. If you had a 10% gain take out 7% and if you have a down year take out what ever your RMD's are requiring you to take? If you have a crazy year and you gain 15% take out 10%.would that not work?
You can certainly try that. There are many ways to achieve the same objective, and if you find one you are comfortable with, by all means go for it! Best of luck Brian.
Say A retires on a 31-year plan (a 3.96% rule, say), then has a wonderful first year on the stock exchange. B retires a year later on a 4% rule, and on day 1 they have exactly the same investments. Does this mean A should withdraw much less each year than B, because A’s baseline was set when the stock exchange was much lower?
The guardrail system has multiple “rules” to follow as well! If I need $3,500 a month in addition to my fixed income sources (and deducting my “normal” expenses), am I ok with a $300,000 portfolio, I mean the market has done well the past couple of years, or will you impose a “rule” to advise that the upper guardrail is set too high? What “rule” would you set for my lower guardrail? Not really looking for an answer, just pointing out that your system is more based on which way the wind blows, and likely the “center” of your system is around 4% anyway, isn’t it?
I have found that often times the safe first year withdrawal rate when using a dynamic approach such as guardrails is closer to 6.5% of starting portfolio value, and usually able to be maintained at that level for the first 5 years of portfolio withdrawals, obviously assuming other variables cooperate (which is not a very "stable" answer I know :S). The reason I favor guardrails is that the rules are actually much clearer, more easily documented, more dynamic, and in execution quite easy to follow.
4% rule is just a general rule of thumb… just a general idea… I also NEVER hear is the 4% rule is pre or post tax protfolio… a tax of federal and state at about 30% that makes a BIG DIFFERENCE… can u tell me if the retirement portfolio is pre or post tax ?????????
Good question. You could be pulling from a Roth in which case you wouldn’t owe any federal taxes. However, for a normal 401K, you still have to pay taxes and so the withdrawal would be pre-tax.
The actual study that is the basis for the 4% rule did not include taxes or fee's - another problem with the rule - because as you are correct in pointing out, the stable distribution rate will vary widely if someone has all their funds in PRETAX accounts (IRA/401k) - as their largest expense will likely be taxes (the cost/penalty of withdrawing their money). In the model I show in the video the first 5 years of spending come from a POST TAX (brokerage account) and year 5 onwards comes out of a PRETAX (Rollover IRA) account. in the video we are showing what is called a "grossed up" distribution rate where the taxes are included in the spending amount. So if we show $86k of spending, we are really showing something like $72k net spending money bc $14k or so might go to fed and state tax (in the scenario shown).
@@ThePeakFP thanx for the response.. taxes are very important in these numbers… i’m in the fed 24% rate and state 6% rage.. so if any mony is taxable I only get $70 on $100 in my portfolio.. that is HUGE !!!! I wonder what the 4% rule would be just from a 401k which is what many people have.. I’m thinking the 4% rule then is really like the 2% rule...
I reject Modern Portfolio theory and I reject the 4% rule. I've created a dividend portfolio that pays, well, alot. Never have to sell a stock for $$, although I sell stock when the company fails (like GE). Overall, my companies raise dividends so my portfolio keeps pace with inflation. And taxes on divvies is 15%. I've survived, and thrived, during the various market crashes over the past 40 years, which is when I started this portfolio. We been retired for 15 years and have much more $$$ than when we first retired. Oh, this is not for everyone. Every financial advisor I've met (socially) thinks individual stocks are too risky & and I should sell them and move into mutual funds. For most people this is true. Most should buy index funds & use the 4% rule as detailed by OP, who did a great job articulating the pros/cons.
Median inheritance is only ~$69K and the average left after death is only about $300K for individuals 60-90. That would indicate very few retired people are spending too little in retirement. In fact the few that are leaving such significant wealth already had substantial wealth to begin with. Thus, not the average person. Also, consider that much of that residual wealth may be in a home sold by heirs.
I spend only what I need and much lower than my financial advisor told me I could. Each quarter I plan to discuss ehete I am and if I can take extra for a nice vacation or not. I will enjoy myself if the matket allows for it, but will always be conservative enough to never ruin out of money or be caught off guard by something like a HVAC or roof. If I have a lot left no issue my kids win big 😅
Well - its not a rule in the first place and was never intended to be. So not strange it does not work out very well. Also, inflation seems missing here.
Inflation is built into the spreadsheet :) You are correct it is not a rule... But the media has morphed it into one, and plenty of people will make decisions as though it is a rule simply from seeing an authoritative sources on google like New York Life or Forbes (the top 3 results on google)... Thanks for the comment and thanks for watching the video!
In reality most people can actually spend far more than 4% per year in retirement and not run out of money while alive. I recommend reading this Kitces article here for actual research and data that supports this claim: www.kitces.com/blog/consumption-gap-in-retirement-why-most-retirees-will-never-spend-down-their-portfolio/
My case is that it is not a simple rule - it is a bad rule. the 4% rule cannot even provide guidance on the most common of deviations that will undoubtedly occur in nearly everyone's retirement lifespan - "what if i overspend because of an emergency". If the withdrawal method cannot provide clarity or guidance on even the most simple of circumstances, it is a method that is determined to fail.
It's a SIMPLE rule that I don't agree people can follow. It's too limited in its scope and doesn't present solutions to common problems like "what if i overspend one year because of emergency expenses". If the withdrawal method cannot solve for even the smallest deviation, it's a method destined to fail.
So... if someone has less than a million dollars in their portfolio, they should expect to withdraw a poverty level income to ensure that they don't run out of bread crumbs? What's the point in retiring if you still have to keep working "part time jobs" to make ends meet?
I don't think that has to be the case at all. There are ways to live on your desired spending money in a way that does not show up as taxable income on a tax return (as far as the government is concerned). You can use strategic withdrawal sequencing, you can have strategic saving behaviors into AFTER TAX accounts, among other methods in order to prepare for a few years of life with the FUNDS YOU NEED but not in a taxable income format. Hopefully that makes sense.
@@ThePeakFP I'm sure there are several strategies I can use to make my money go further, its just that I'm getting so much conflicting advice that its making this retirement thing terrifying. I didn't want to retire just yet but my health is forcing me to. I'll be 62 in November and I only have half a million in my 401k. I do have a pension and SS will kick in soon, and I'm debt free except for 80k still owed on my mortgage. I'll make it all work out somehow for at least four more years... hopefully the democrats will be out of power soon.
Despite the fact that I exist in the "internet finance" ecosystem - it is really not a great place to get individual advice. What you are feeling makes complete sense - the sense that there is so much conflicting advice that it can make it impossible for one to know what they SHOULD do for themselves. Know that there are likely strategies that can and will work for you - but you should work 1:1 with someone to discover those strategies. I wish you the best of luck sir. Hopefully my videos can be a teeny tiny help :/
Is it better to have too much money at the end but have stayed home eating tuna fish and cat food out of fear of running out of money? I feel strongly that strong savers should actually SPEND the money they have worked so hard to save, and that there are reliable ways to monitor spending and portfolio balance such that strong savers can spend far more of their wealth then they are led to believe by poor rules and shoddy research like the 4% rule which are fear based and don't do a great job of providing people "adjustment mechanisms".
Most of your points are complete nonsense. The issue with porfolio under performing could be an issue, but the rest isnt that big a concern. The fact that its meant for a specific set up is a GOOD thing. It NOT that hard to execute and/or get the set up right. If you die with extra cash, you won. Being conservative with money in a time when you are not making more actively through a job is a GOOD thing. There is a pt in that if the investments do poorly you might need to back off spending that year, which is why you should reserve some each year to cover the bad ones which will happen over 30. No plan is perfect, having NO plan is worst. And most people are simple minded, and actually having a rigid plan that works in general, and can be adjusted when things might not be according to plan by getting some additional help is going to WAY less problematic in the long term. I think you are being way to pushy about people who end with large amounts left over. I think that if you lived the life you wanted and planned on, and find out at the end that you have a lot left over, then great. Maybe some people would regret, but me, I can think of no greater win than having exactly what I wanted and ending with even MORE!! And I think you are being DANGEROUS when you are suggesting that people be wanting to have a less than 100 percent probability of success...fine, 95%, but do they understand that an 80% percent means there is a 1in 5 chance of FAILURE???? That is a LOT. Its your life. and that failure will occur when you have ZERO options. And NO guardrails can not be LESS rigid and easier to understand. They are more complex by their very nature, require way more active management, and add additional stress overall. They may be worth using to one extend or another but they are not easier to understand or implement. I think one should pick a simple plan, and then at the end of the year, assess if they have more or less, and either bank or plan a cut for the following year. But those are minor adjustments and NOT massive ones that you are advocating for....
Hi there - I appreciate and respect the comment. One thing I will mention is that the probability of success score is actually very misunderstood by many consumers. What the probability of success states is: If you CHANGE NOTHING ABOUT YOUR BEHAVIORS for the rest of your retirement timeline, based on the inputs in the plan, you will not run out of money x% of the time. This is actually extremely misleading because the fact of the matter is that people DO change their behaviors to respond to unfolding events. A 78% probability of success at 65 only says that if this person walks like a zombie through retirement they will have a 22% chance of failure and a 78% chance of leaving a legacy. Fortunately, retiree's don't walk like zombies through retirement and therefore actually increase their odds of success in a material way in a manner that retirement planning tools cannot capture. I actually have 2 videos (a podcast and a video) that will be coming out in the next 3 weeks about this subject because in my opinion people are extremely underserved using these probability of success tools that scare people into not spending their wealth when they responsibly can. At the end of the day everyone should do what makes them happy. If someone has enough wealth to cover all their spending needs and desires AND have a 100% probability of success in the ret planning tools, thats fantastic. Unfortunately, this simply won't be the reality for most people, and that is what I am trying to help viewers see, understand, and hopefully solve. Thanks again for your feedback! Eric
Your $2M example is a poor one. If you cannot retire on 4% 0f $2M you need a new financial planner or you are living like a king spending far too much. You have not considered any pension monies. My wife and I live on a budget of $4000.00 monthly ($48K yearly after taxes.}. We have homes in Canada and Thailand. No debts. You need to examine your spending habits!!!! That is how you achieve a successful retirement and sleep at night. My Canada govt pension pays me $24K per year after taxes. We need only 2% of my funds to sustain our retirement budget. The nest egg never shrinks. It still continues to grow. Beware fast talking financial planners.
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I am 79 and been retired for twenty years. We update a spreadsheet with all our financial information every month and monitor and review the long term trend. If it is going up we can spend more, if it starts trending down too fast we would have to cut back, taking into account anything else that might be relevant.
A beautiful and simple guardrail system of your own creation! Well done.
Thanks for watching the video and the comment!
Perfect! That's a dynamic spending strategy which you adjust based on market fluctuations and portfolio performance. Continued success in retirement!
Simple
If market is down withdraw ONLY 4%
Market up 5-6%
The idea is to enjoy life not to die with the most money
Thanks for watching! Best of luck!
I like your method.
Adjusting your withdrawals based on market performance is crucial to avoid depleting your portfolio too soon.
Hear hear.
I don't know anyone that would follow the 4% rule to the tee. It's a ball park worst case estimate to not run out of money for a 30 year span, based on historical returns. But it does have it's value in planning for your retirement if you understand it's basis and to set savings goals. No financial advisor worth their fee's would take the set it and forget it approach in retirement.
You'd be surprised at how many advisors (and consumers) take the set it and forget it approach OR build their models off of the 4% rule.
Everyone's distribution strategy and actual withdrawal rate will and SHOULD be unique to them.
Agreed, you would think everyone would know this.
This was great! Best explanation I’ve seen of the guardrail approach (which we plan on implementing once we retire) but I’ve never heard it explained in such a practical way with practical graphs and numbers.
Awesome! Thank you so much for the kind words!
Thanks Eric for explaining the alternatives withdrawal strategies to the 4% rule!
You bet! There are others as well, I just happen to like the guardrail approach (and dislike the 4% rule)
What can I say. There is absolutely 0% chance that I will die early and regret not spending more money since I will be DEAD. I also don't see the 4% rule as some sort of rigid withdrawal requirement. You can always adjust things up or down. Finally, you should always keep cash on hand to cover unforeseen expenses.
I just took my portfolio and ran it out to 30 years using the rate of return I currently have assuming the 4% rule and 3% inflation. I end up with 68% of my starting portfolio. Note that my portfolio consists of 30 year treasuries yielding 4.625% so that is a guaranteed return for the next 30 years. In reality I would likely end up with more that 68% of my starting portfolio since I would only take out what I actually need and that will almost always be less than an inflation adjusted 4%. The reasons for that are: 1) I live on less than my fixed non portfolio income (pensions, social security, non portfolio interest, 403b RMDs). I don't count the 403b in my portfolio. 2) My portfolio is after tax so that simplifies things and I include the tax on portfolio gains in my normal expenses. and 3) I am 25 years into retirement and haven't taken a cent out of my portfolio yet.
Good work Todd. You are fortunate and blessed to have a good blend of guaranteed income sources, great discipline, and good health. Thanks for watching the vid and thanks for the comment sir!
I agree with your comment. No one who is dead can have regrets. But running out of money at an old age and suffering hardship is way worse then having too much.
Everything in life is a calculated risk. I ride motorcycle despite knowing it is inherently dangerous but I manage all the safety risks as best I can to where I consider it acceptable risk.
The 4% rule is just a guideline. I feel it may not be conservative enough for individuals such as myself planning to retire in next couple years. There are now far too many highly negative events happening in U.S. and world today that are increasing the future financial risk profile. High government debt with interest becoming a major expense in fed. budget , high inflation, aging demographics, SS trust fund depletition, market peak suggesting near-term correction, increasing talks of raising taxes including capital gains tax, etc.
When I retire, my plan was to draw a fixed amount each month from my 401k (i.e $2200/month) until depleted and then move on to my 457b at the same fixed amount ($2200/month) until the 1st RMD at age 75. I'm projecting that the first RMD will be around $27K. At retirement, I'll be getting a monthly pension with an annual COLA plus SS will get an annual COLA whenever I decide to take it (62 or later). That's my rational for a fixed pre-tax withdrawal until RMDs hit. Anybody else doing something similar regarding a fixed withdrawal amount?
Yes this is a method I call "smoothing" out future RMD's by withdrawing a tactical amount from Pre-Tax accounts in years prior to RMD so that you can reduce the RMD size and therefore the tax bracket it will kick you into.
Great work!
I agree 1000% with your analysis. There are so many variables that aren’t taken into account. While most of us would love to have such a simple approach to drawing retirement accounts, the reality is that one needs to do their homework in order to maximize overall efficiency, with a high emphasis on taxation. The 4% rule is a dinosaur.
If you had a business, you would monitor it day by day or month by month. We do the same for our health. For our relationships... But for some reason we've been convinced to use static rules like the 4% rule for our finances... We would never use a static rule like that for any other area of import in our lives...
Have to ask - how did we get convinced of this and who does it benefit....?
Seems pretty straight forward to me. If you draw to much one year for that surprise home repair, you need to draw out less the next year to balance it out.
Guardrails are far too complicated for most DIY retirees. Whereas the 4 % rule success depends on when you retire both age and decade and market levels. Simply start with 3 to 4 % draw and don't inflate in down market years. Keep an emergency fund for those unexpected spending needs. It's not rocket science and no where as complicated as the financial advisers make it seem.
Thanks for watching! Best of luck!
5-6% rule on up years....3-4% on down. Thabks for coming to my ted talk. If you have a pension and or ss too helps to on down years maybe take out nothing
Less than 10% of retirees have a retirement fund of more than $1M. You referred to a $2.17M fund. That is equivalent to 3% of all retirees.
That is correct.
Many of the principles will remain the same.
But I will also have videos in the future (and have many in the past on my channel) that address those with below $1mm in retirement funds.
Thanks for watching and thank you for the comment!
If you have a financial advisor explaining withdrawal rates, then you probably have more than 1 Million. If you have an account less than $250 K, then you actually don't need to worry about withdrawal rates, because its basically an emergency fund, and you are living off Social Security...
Isn't the four percent rule a guide, because no one can say what the future brings? It's like a base pay that is sustainable. Unexpected events or expenses can come up with any plan. Does one not continue to plan for emergencies in retirement? All plans are unique for those who they are to serve. Having said all of that, you make some very good points. Thank you.
The 4% rule is THE MOST CONSERVATIVE guide. You are completely correct.
The equivalent would be to say - if you want the MOST CONSERVATIVE guide for your health - never go outside your house, always wear gloves and a mask, and never expose yourself to germs because it is the most CONSERVATIVE way to avoid illness.
It's simply foolish to think that anyone would or does behave that way in other meaningful areas of their lives unless manipulated to out of fear.
Most of us don't construct our lives using the most conservative base case because we intuit (mostly correctly in my opinion) that it will bring very little satisfaction.
The rule was developed in the 1990s, but today’s low-interest rates and market volatility make it risky. You might need to withdraw less than 4% during downturns to protect your savings.
Possible but not necessarily true. Each person should do their own due diligence and form their own opinion with the help of a qualified professional in my opinion.
The interest rates are low today? Really?
The 4 percent depends largely on the amount of a person's portfolio. If a person has $10 million, a 2 percent annual withdrawal might be far more than enough. If person has $1 million, a 4 percent withdrawal might be very difficult to live on.
In my opinion, any person with a reasonable level of financial intelligence has no need for a qualified professional financial advisor. Why waste money doing something you can easily do for yourself?
@@jerrylundegaard2592I agree with you. I have always taken care of my portfolio. Of course I might have been better off early in my career getting some help. 😂 I’ve been a good steady hand for the past decade though. I’m on track to retire when I plan in 3.5 years. I still think that it might not be a bad idea to get a second set of eyes to look over what I’ve done. They, especially a CFP might note or find something I need to consider to ensure I never have to go back to work once I retire. Just a thought.
Peak: What you forget in describing the 4% rule, us that your portfolio is invested 50% in the S&P500 and 50% in intermediate treasuries. That is a very important part of the "rule."
That is exactly right.
While I agree with most of what you say, I think too many people get hung up on the word "rule" there...
I believe it was meant in the concept of the phrase "rule of thumb" and not ever implied to be a strict rule.
Bengen's paper was called "Determining Withdrawal Rates Using Historical Data" and not "The 4% rule" and it was just a reaction to the common thought at the time that 5% was considered safe.
I'm sure Bengen himself wouldn't have told people to use 4% always and every time... ;-)
In fact, he's adjusted it to 4.7% and he called it a SAFEMAX which is more the safe amount under poor conditions. He's also adjusted his recommended his investment distribution percentages since that original. He never intended that paper to be considered a strict never changing rule....
I couldn't agree with you more! The problem is, anecdotally from my experience working 1:1 with people, people do think of it as a RULE.
So the challenge is dissuading people from thinking of it as a rule and encouraging them to think of it as more of a "suggestion" or a "guideline".
Thanks for watching and thanks for the comment!
I think most people worry about running out of money not leaving money behind. I can’t imagine worrying about that
Fair point.
I expect the 4% rule to work just fine for me and those of us who don’t rely on our investment portfolio for all our retirement expenses. I retired from the military at 58, I have a decent pension, a substantial savings account, own my own home, have no debt besides the usual monthly bills, and when I take my social security at 63 this year it will ad an additional $2500 per month to my wallet. I plan on leaving my investment portfolio alone for at least the next 5 years to let it grow more before I tap into it, and taking only 4% will be removing the interest on the account and leaving the principle alone. At least that’s what I’ve calculated.
Well done :). The benefit of being a strong saver with some guaranteed sources of income are that you earn a simpler retirement plan.
Good video, I like 4% for easy quick pre retirement planning, 1M = 40k easy, but I don't really plan to use a rigid 4% strategy in actual retirement. I'd like to see more videos on where to place the actual rails and how to implement them.
Thanks for sharing!
Thanks for the outstanding vid, Peak Financial Planning! The problem with rules of thumb is that everyone's thumb is different.
Well said David :)
@@ThePeakFP Thanks.
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the 4% rule is not a rule. It's a worst-case scenario of 50% bonds and 50% stocks in the last 150 years plus inflation to survive It makes zero sense. This video is a fantastic video for people who have been scarred by the tactics used by many financial analysts and pundits on TV to actually see nothing in investing, just like life, is static. The guardrail strategy is the best to apply in retirement, along with strategic withdrawals from your various retirement accounts for tax purposes, including Social security and pensions if any.
I dislike the 4% rule for many reasons including the one you've mentioned in the above comment.
I too favor the guardrail strategy as it is the most connected to portfolio performance and actual human behavior.
I like the concept of guardrails based on portfolio performance. It brings in flexibility to enjoy retirement and yet plan for longevity and the unexpected.
I vehemently disagree with the concept of 70 to 90 percent probability of success. Its inherently implies that you will be dependent on your kids or on the street if you have no kids or they don't wish to support you. A 100% percent probability of success is impossible plan for/compute (that would be infinity). 98-99 sounds just right -- with periodic recllibration.
Everyone chooses their level of comfort with probability of success and spending tolerance. If you say 98-99% are what you want, by all means build a plan and live in accordance with it!
Thanks for watching the video and thanks for the comment!
Excellent vlog and simply explained- thank you 🙏🏼
Glad you enjoyed it!
I can't imagine a retirement that we would spend the same amount every year. Our spending is going to ebb and flow due to lots of reasons, both planned and unplanned.
When you were working, most got a very steady paycheck year after year. During those decades you had ebb and flow of expenses. No different after retirement. You need an emergency fund before and after retirement.
It most certainly will.
Or, at the end of the year you take the percentage your portfolio is up. For example, come December your portfolio is up 9% even though you only need 5%. You take that extra 4% and keep it in cash to supplement your income in the years the market is down or flat. Essentially living of the interest.
You lose compounding when scraping all the growth every period
There are many ways to sequence withdrawals, and portfolio growth is only one of the metrics that matter in this case. Far more important is cash flow, how much you'd like to spend each year, and what other income sources you have.
If you NEED $50,000 a year from your portfolio and its a $500,000 portfolio, you have no other income sources, you would be withdrawing 10% per year. Is that sustainable? I'm not saying yes or no, but the whole formula comes down to what you NEED from the portfolio, not what you can scrape out of it at the end of each year. It's no good to be able to scrape 9% out of a $500,000 portfolio ($45k) if you need $60k from it. Conversely, if you only need $25k out of that $500k portfolio, and you have a portfolio return of 9% ($45k), then there could be a strong case for taking some of the additional profits out, or leaving them in to continue compounding.
Case by case.
@@ThePeakFP the simplest way is always the best way. Whatever the amount you need in retirement, let SS, pension, real estate, or other sources of income do the heavy lifting. Then supplement that income with your IRA withdrawal at 4, 5, 6%. Take the excess and keep it in cash where you can get 5% on your money without the volatility of the markets. Such a strategy or “scrapping” would limit RMD’s down the road and would work in a similar manner to Roth conversions. Of course you’d have to be mindful of tax brackets and effective tax rates…..
Sounds good but how are the three amounts determined: amount per year to spend, low guard rail, high guard rail?
I can make a video in the future addressing this question. In fact it would be quite interesting and fun to do. I'll add that to my list.
As a note - the upper and lower guardrail "triggers" can be adjusted based on volatility and risk related metrics to increase or decrease the "risk" of the overall withdrawal amount.
Why do all financial planners try to make this so hard. Why not just have a years worth of expenses in a emergency fund and just withdraw a percentage of what ever your portfolio gained on that year. If you had a 10% gain take out 7% and if you have a down year take out what ever your RMD's are requiring you to take? If you have a crazy year and you gain 15% take out 10%.would that not work?
You can certainly try that. There are many ways to achieve the same objective, and if you find one you are comfortable with, by all means go for it!
Best of luck Brian.
Say A retires on a 31-year plan (a 3.96% rule, say), then has a wonderful first year on the stock exchange. B retires a year later on a 4% rule, and on day 1 they have exactly the same investments. Does this mean A should withdraw much less each year than B, because A’s baseline was set when the stock exchange was much lower?
Excellent information 😊
Thank you!
Great advice. Is there a sample spreadsheet or website?
The guardrail system has multiple “rules” to follow as well! If I need $3,500 a month in addition to my fixed income sources (and deducting my “normal” expenses), am I ok with a $300,000 portfolio, I mean the market has done well the past couple of years, or will you impose a “rule” to advise that the upper guardrail is set too high? What “rule” would you set for my lower guardrail?
Not really looking for an answer, just pointing out that your system is more based on which way the wind blows, and likely the “center” of your system is around 4% anyway, isn’t it?
I have found that often times the safe first year withdrawal rate when using a dynamic approach such as guardrails is closer to 6.5% of starting portfolio value, and usually able to be maintained at that level for the first 5 years of portfolio withdrawals, obviously assuming other variables cooperate (which is not a very "stable" answer I know :S).
The reason I favor guardrails is that the rules are actually much clearer, more easily documented, more dynamic, and in execution quite easy to follow.
4% rule is just a general rule of thumb… just a general idea… I also NEVER hear is the 4% rule is pre or post tax protfolio… a tax of federal and state at about 30% that makes a BIG DIFFERENCE… can u tell me if the retirement portfolio is pre or post tax ?????????
Good question. You could be pulling from a Roth in which case you wouldn’t owe any federal taxes. However, for a normal 401K, you still have to pay taxes and so the withdrawal would be pre-tax.
The actual study that is the basis for the 4% rule did not include taxes or fee's - another problem with the rule - because as you are correct in pointing out, the stable distribution rate will vary widely if someone has all their funds in PRETAX accounts (IRA/401k) - as their largest expense will likely be taxes (the cost/penalty of withdrawing their money).
In the model I show in the video the first 5 years of spending come from a POST TAX (brokerage account) and year 5 onwards comes out of a PRETAX (Rollover IRA) account.
in the video we are showing what is called a "grossed up" distribution rate where the taxes are included in the spending amount. So if we show $86k of spending, we are really showing something like $72k net spending money bc $14k or so might go to fed and state tax (in the scenario shown).
@@ThePeakFP thanx for the response.. taxes are very important in these numbers… i’m in the fed 24% rate and state 6% rage.. so if any mony is taxable I only get $70 on $100 in my portfolio.. that is HUGE !!!! I wonder what the 4% rule would be just from a 401k which is what many people have.. I’m thinking the 4% rule then is really like the 2% rule...
@@ThePeakFP The "rule" does not account for taxes because those income taxes should be in your annual expense calculation.
I reject Modern Portfolio theory and I reject the 4% rule.
I've created a dividend portfolio that pays, well, alot. Never have to sell a stock for $$, although I sell stock when the company fails (like GE). Overall, my companies raise dividends so my portfolio keeps pace with inflation. And taxes on divvies is 15%.
I've survived, and thrived, during the various market crashes over the past 40 years, which is when I started this portfolio. We been retired for 15 years and have much more $$$ than when we first retired.
Oh, this is not for everyone. Every financial advisor I've met (socially) thinks individual stocks are too risky & and I should sell them and move into mutual funds. For most people this is true. Most should buy index funds & use the 4% rule as detailed by OP, who did a great job articulating the pros/cons.
Very glad this has worked for you.
Thanks for the comment!
Median inheritance is only ~$69K and the average left after death is only about $300K for individuals 60-90. That would indicate very few retired people are spending too little in retirement. In fact the few that are leaving such significant wealth already had substantial wealth to begin with. Thus, not the average person. Also, consider that much of that residual wealth may be in a home sold by heirs.
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I spend only what I need and much lower than my financial advisor told me I could.
Each quarter I plan to discuss ehete I am and if I can take extra for a nice vacation or not.
I will enjoy myself if the matket allows for it, but will always be conservative enough to never ruin out of money or be caught off guard by something like a HVAC or roof.
If I have a lot left no issue my kids win big 😅
Love that!
Great work and thanks for the view / comment :).
Well - its not a rule in the first place and was never intended to be. So not strange it does not work out very well. Also, inflation seems missing here.
Inflation is built into the spreadsheet :)
You are correct it is not a rule... But the media has morphed it into one, and plenty of people will make decisions as though it is a rule simply from seeing an authoritative sources on google like New York Life or Forbes (the top 3 results on google)...
Thanks for the comment and thanks for watching the video!
What about if we change the 4% rule to the 2% rule? Yes, its less money, but just cut your costs.
In reality most people can actually spend far more than 4% per year in retirement and not run out of money while alive. I recommend reading this Kitces article here for actual research and data that supports this claim: www.kitces.com/blog/consumption-gap-in-retirement-why-most-retirees-will-never-spend-down-their-portfolio/
You only showed increased spending. What happens if there is a bad market
With which scenario? The 4% rule or the alternative possible distribution strategies?
4% rule is a "SIMPLE rule" that people can follow; it's NOT meant to be a final guaranteed solution.
My case is that it is not a simple rule - it is a bad rule. the 4% rule cannot even provide guidance on the most common of deviations that will undoubtedly occur in nearly everyone's retirement lifespan - "what if i overspend because of an emergency". If the withdrawal method cannot provide clarity or guidance on even the most simple of circumstances, it is a method that is determined to fail.
It's a SIMPLE rule that I don't agree people can follow. It's too limited in its scope and doesn't present solutions to common problems like "what if i overspend one year because of emergency expenses". If the withdrawal method cannot solve for even the smallest deviation, it's a method destined to fail.
So... if someone has less than a million dollars in their portfolio, they should expect to withdraw a poverty level income to ensure that they don't run out of bread crumbs? What's the point in retiring if you still have to keep working "part time jobs" to make ends meet?
I don't think that has to be the case at all. There are ways to live on your desired spending money in a way that does not show up as taxable income on a tax return (as far as the government is concerned).
You can use strategic withdrawal sequencing, you can have strategic saving behaviors into AFTER TAX accounts, among other methods in order to prepare for a few years of life with the FUNDS YOU NEED but not in a taxable income format.
Hopefully that makes sense.
@@ThePeakFP I'm sure there are several strategies I can use to make my money go further, its just that I'm getting so much conflicting advice that its making this retirement thing terrifying. I didn't want to retire just yet but my health is forcing me to. I'll be 62 in November and I only have half a million in my 401k. I do have a pension and SS will kick in soon, and I'm debt free except for 80k still owed on my mortgage. I'll make it all work out somehow for at least four more years... hopefully the democrats will be out of power soon.
Despite the fact that I exist in the "internet finance" ecosystem - it is really not a great place to get individual advice. What you are feeling makes complete sense - the sense that there is so much conflicting advice that it can make it impossible for one to know what they SHOULD do for themselves.
Know that there are likely strategies that can and will work for you - but you should work 1:1 with someone to discover those strategies. I wish you the best of luck sir. Hopefully my videos can be a teeny tiny help :/
It's better to have too much money left then running out of money...
Is it better to have too much money at the end but have stayed home eating tuna fish and cat food out of fear of running out of money?
I feel strongly that strong savers should actually SPEND the money they have worked so hard to save, and that there are reliable ways to monitor spending and portfolio balance such that strong savers can spend far more of their wealth then they are led to believe by poor rules and shoddy research like the 4% rule which are fear based and don't do a great job of providing people "adjustment mechanisms".
Oh yes, a hypothetical starting portfolio value of over $2,000,000! That should cover the average person.
The principles apply across all ranges of wealth.
Most of your points are complete nonsense. The issue with porfolio under performing could be an issue, but the rest isnt that big a concern. The fact that its meant for a specific set up is a GOOD thing. It NOT that hard to execute and/or get the set up right. If you die with extra cash, you won. Being conservative with money in a time when you are not making more actively through a job is a GOOD thing.
There is a pt in that if the investments do poorly you might need to back off spending that year, which is why you should reserve some each year to cover the bad ones which will happen over 30. No plan is perfect, having NO plan is worst. And most people are simple minded, and actually having a rigid plan that works in general, and can be adjusted when things might not be according to plan by getting some additional help is going to WAY less problematic in the long term.
I think you are being way to pushy about people who end with large amounts left over. I think that if you lived the life you wanted and planned on, and find out at the end that you have a lot left over, then great. Maybe some people would regret, but me, I can think of no greater win than having exactly what I wanted and ending with even MORE!!
And I think you are being DANGEROUS when you are suggesting that people be wanting to have a less than 100 percent probability of success...fine, 95%, but do they understand that an 80% percent means there is a 1in 5 chance of FAILURE???? That is a LOT. Its your life. and that failure will occur when you have ZERO options.
And NO guardrails can not be LESS rigid and easier to understand. They are more complex by their very nature, require way more active management, and add additional stress overall. They may be worth using to one extend or another but they are not easier to understand or implement. I think one should pick a simple plan, and then at the end of the year, assess if they have more or less, and either bank or plan a cut for the following year. But those are minor adjustments and NOT massive ones that you are advocating for....
Hi there -
I appreciate and respect the comment.
One thing I will mention is that the probability of success score is actually very misunderstood by many consumers.
What the probability of success states is: If you CHANGE NOTHING ABOUT YOUR BEHAVIORS for the rest of your retirement timeline, based on the inputs in the plan, you will not run out of money x% of the time.
This is actually extremely misleading because the fact of the matter is that people DO change their behaviors to respond to unfolding events. A 78% probability of success at 65 only says that if this person walks like a zombie through retirement they will have a 22% chance of failure and a 78% chance of leaving a legacy. Fortunately, retiree's don't walk like zombies through retirement and therefore actually increase their odds of success in a material way in a manner that retirement planning tools cannot capture.
I actually have 2 videos (a podcast and a video) that will be coming out in the next 3 weeks about this subject because in my opinion people are extremely underserved using these probability of success tools that scare people into not spending their wealth when they responsibly can.
At the end of the day everyone should do what makes them happy. If someone has enough wealth to cover all their spending needs and desires AND have a 100% probability of success in the ret planning tools, thats fantastic. Unfortunately, this simply won't be the reality for most people, and that is what I am trying to help viewers see, understand, and hopefully solve.
Thanks again for your feedback!
Eric
ehh ... the 4% rule is not a problem you figure you have some unique insight, some unique solutions ?????
Did you watch the video?
Don't get too analytical. The government makes you take the MRD of 4% when you hit 73. You have no choice.
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But you don't have to spend it 😉
Your $2M example is a poor one. If you cannot retire on 4% 0f $2M you need a new financial planner or you are living like a king spending far too much. You have not considered any pension monies.
My wife and I live on a budget of $4000.00 monthly ($48K yearly after taxes.}. We have homes in Canada and Thailand. No debts.
You need to examine your spending habits!!!! That is how you achieve a successful retirement and sleep at night.
My Canada govt pension pays me $24K per year after taxes. We need only 2% of my funds to sustain our retirement budget. The nest egg never shrinks. It still continues to grow.
Beware fast talking financial planners.
Every person has their right to choose how much they would LIKE to spend in retirement.