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Retirement Withdrawal Strategies: The 4% Rule

Published: July 7, 2021, 10 a.m.

Have you considered what kind of withdrawal strategy you plan to use in retirement? There are more to choose from than you may realize. Over the next 4 episodes, we will focus on different withdrawal strategies and how to choose one that fits your needs.\\xa0

On this episode of Retirement Answer Man, we\\u2019ll cover the most notorious retirement withdrawal strategy: the 4% rule. In week 2 of this series, we\\u2019ll discuss the safety-first strategy. In the 3rd episode of the Retirement Withdrawal Strategies series, we\\u2019ll learn how to utilize matching liabilities to spending, and finally, in the last week of July, you will learn how to create a framework to\\xa0help you decide\\xa0which retirement withdrawal strategy will work best for you.\\xa0

This episode is packed with information and even includes an interview with Jamie Hopkins, author of\\xa0Rewirement. Get ready to buckle down and learn what you need to start the decumulation phase of life.\\xa0

There are 3 big rocks in retirement planning

It can be easy to get sidetracked when planning for retirement. There are so many different areas that you need to consider. You don\\u2019t want to focus on the wrong thing, but how are you supposed to know what the right thing is when there is so much information out there. I believe that you need to focus on the 3 rocks of retirement planning.

Feasibility - This means what is possible given your resources. You\\u2019ll want to figure out how to squeeze the most life out of the assets that you have to create the best life that you can.\\xa0
Resiliency - You don\\u2019t want to get thrown off course by inflation, bad markets, or life. This is where choosing the best withdrawal strategy comes into play.
Optionality - This covers the tools you can use to enhance the journey - tax planning asset allocation etc

What is the 4% rule?

The 4% rule was created by William Bengen in 1994 in a landmark academic article. Mr. Bengen wanted to know if there was a fixed amount of money that you could pull from your assets safely each year and never run out of money. To investigate, Bengen looked at historical data and ran models to search for a percentage rate that one could withdraw safely over a typical lifetime. He learned that 4% is the amount that you could withdraw from a portfolio to stay ahead of inflation yet never run out of money. Over the years the paper has gained momentum until it eventually became a rule of thumb.

What are the advantages and disadvantages of the 4% rule?

As with any withdrawal strategy or general rule, there will be advantages and disadvantages. One advantage of the 4% rule is that it provides you with a safe withdrawal rate. You can be confident that your portfolio is secure and you won\\u2019t run out of money. Another advantage is that this rule is simple.\\xa0

Simplicity is nice because it is easy to follow, however, everyone is different and what works for everyone may not work for you. The 4% rule may be too simplistic and too unbending. The 4% rule also doesn\'t account for changing market conditions, inflation, and life surprises. Another disadvantage is that you are likely to die with more money than you would like to. This could lead to regret.\\xa0

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If you have been enjoying the show, make sure to leave an honest review on your favorite podcast app.\\xa0Reviews\\xa0help to ensure that those who are walking the same path of life can find this podcast easily. If you\\u2019d like the resources that go along with this episode and future episodes, make sure to sign up for the 6 Shot Saturday newsletter.