Thirty years ago, an acquaintance of mine, Bill Bengen, published an article on safe retirement withdrawal rates. Other advisors had posited that a 5% withdrawal rate was a “safe” assumption. He back-tested this thesis with a portfolio of 60% Stocks and 40% Bonds, using 50-years of data, starting with 1926. His conclusion was that 4% was the more realistically “safe” withdrawal rate. It has since come to be known as the 4% Rule.

While I’ve always found 4% to be a good starting point, it’s hardly a “Rule”. It’s more of a “Benchmark.” If life happened in straight lines and smooth curves it might approach Rule status. Sadly, I’ve watched the lives of clients for forty years and I’ve seen that life doesn’t work that way. Life is full of unexpected curve balls that are thrown at each of us when we least expect them. Spouses develop dementia or die, companies fail, divorces happen, children face tough challenges, tornados destroy homes, and communities become more divided. Yet, we expect predictability from our investments. 

Despite these uncertainties, I still see 4% to be a reasonable starting point. If you assume that your portfolio will earn, on average, around 8% and you want to leave half of that in the portfolio to provide a cushion for inflation and uncertainty, that leaves…wait for it…4%! Back in the 80s, 90s and 00s, this was easy. Bond interest rates were significantly higher and between stock dividends and interest, you could fund the 4% easily. Not so today.

The “Rule” isn’t the problem; uncertainty in life is the problem. When I was in my 40s and 50s, I naively thought that things would get simpler as my clients got older and retired. Life has laughingly taught me a lesson. Continuously adjusting one’s perspective is an absolute requirement for navigating retirement years.

Here are my observations having watched clients who have successfully retired:

• Don’t retire until you really need to retire, or you have so large a portfolio that you can never spend it all. Early retirement sounds like fun, but I’ve watched clients “unretire” out of boredom, necessity, or duty to use their hard-developed skills to benefit others. Every year retirement is deferred is a “two-fer.” It adds one year to saving and takes away one year from withdrawing.
• Get your debt retired before you retire. Every dollar of debt service in retirement is a drain on cash flow. A $3,000 house payment reduces your monthly free cash flow by $3,000, I don’t care how low your mortgage rate happens to be! Retirement leverage adds risk at a time when you want security.
• Understand the truth of your spending patterns. The worst thing you can do is to kid yourself about how you spend money – or worse, have no clue how you spend money. Retirement math is brutal. Your resources can only support a given level of outflow. It is critical that you know what that number is and model your spending around that number. Otherwise, moving in with your kids might become a reality.
• Get your large purchases done before you retire. If you’re considering a major renovation on your house or landscape or taking your kids or grandkids on a “big” family vacation, do it while you can fund it out of your earnings. It can blow-up retirement plans if you do it later.
• Add realistic uncertainty to your retirement plans and review regularly. In Business Strategic Planning, it’s important to consider “What Could Go Wrong” and game out how you could address scenarios. The same is true for retirement. We can model virtually any scenario. We just need to know what the realistic scenarios are for you, specifically. Those are the conversations that I hope you have with us. Portfolio reviews are far less important than life reviews and the planning implications.

Having built this firm and my career on the importance of planning, I’m gratified with the direction the financial world is headed with genuine planning. Investments are important, but without planning, one’s financial life is rudderless. We remain here for you. Please email or call if you want to set up a Zoom videoconference meeting or talk by phone.

Rick Adkins, CFP®, ChFC, MBA

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