Happy FALL! Cooler temperatures are definitely here … so the other day I was enjoying a great hike while listening to a very interesting podcast by Michael Kitces regarding the 4% Rule for income distributions in retirement. On the show Michael had Bill Bengen the father of the 4% rule and the researcher of what we now title as the “safe withdrawal rate.” I wanted to share with you some of the insights I had from the podcast.
The 4% Rule’s Origin…
In the early 1990s Bill set out to really answer a question “What is a “safe” rate of withdrawal for a client to take from their investment assets in retirement that will last them 30 years?” He never set out to establish a rule of thumb but from his research the 4% withdrawal rate actually became a Rule of Thumb used by many financial professionals and clients even today.
How the Rule came about….
Bill arrived at the percentage by experimenting with portfolios of different allocations and market returns. He began taking it down to the percentage that allowed for a safe withdrawal for 30 years. The percentage was 4.15%, which is actually the WORST-case scenario not what worked in the average scenario.
An important thing to note is that when Bill was doing his research in the early 1990s the economy was coming out of double-digit inflation environment and he was also working with only two asset classes.
Is the 4% Rule still applicable…
In today’s investment world we have many investment options and opportunities. In conducting research for his new book in 2005 he actually revised his research and the 4% Percent Rule became the 4.5% Rule.
Here is what stands out most to me…
A Rule of Thumb is a great way to start the conversation and provide some guidance HOWEVER it is not applicable to everyone or every situation. For example, someone might take a withdrawal rate of 3% of their portfolio because their pension does not have an inflation adjustment. This would allow them to have some wiggle room later on to adjust their distributions for inflation. While another individual may take 5-6% because they are not concerned about leaving a legacy or estate planning and they desire to live the life they desire.
I believe that the amount of any distribution from a portfolio depends on many factors including your overall investment goals and risk tolerance. The current market environment and inflation rates. This is why Goal – based financial planning is so important and testing for the “what ifs” in life. I truly believe that in today’s market and economic environment financial planning is more important than ever. If you are ready to start the conversation and begin Planning with Purpose, please contact me.
Michael Kitces #FA Success EP 198: How the Creator of the 4 Percent Rule Applied it for his clients and his own Retirement with Bill Bengen.