During high school, I was involved with a service organization called Junior Civitan. We raised money doing car washes and other projects for charitable causes. One fall weekend, one of my good friends and I drove 22 miles to the next town over (in east Tennessee) and filled my Mom’s Buick station wagon with 350 dozen warm Krispy Kreme donuts. There was not a Krispy Kreme store in our town (Johnson City), so I thought there would be high demand for these delicious donuts. We sold the donuts for $1 per dozen and more than doubled our money. The good news is we made about $200 for our charitable giving. The bad news is that my friend and I finished a dozen each causing us to feel sick for the rest of the weekend!
Every time I drive past a Krispy Kreme donut shop, I revisit that fundraising endeavor from decades ago and the consequences of eating a dozen donuts! And as I revisit my past, I thought it helpful to revisit the “old” 4% rule.
What is the 4% rule?
If you are retired or retiring soon, you probably have heard of the 4% rule. This well-known retirement asset withdrawal rate has historically been the standard for financial planning. The 4% rule helps you understand how much income can be safely withdrawn from an investment portfolio during retirement without the fear of running out of money.
History of the 4% rule
Nearly 30 years ago, a financial advisor named William Bengen conceived the so-called 4% rule as a suggestion for retirement budgeting. Bengen concluded that the maximum distribution rate over a 30-year period historically had ranged between 4.1% and 4.58% depending on the type and percentage of the stocks owned in the portfolio. Given his research, he suggested that retirees could safely withdraw 4% of their financial assets every year and also increase their distribution rate periodically for inflation. Based on his historical data, he wrote a paper sharing his research that retirees could weather bad periods in the financial markets and have a high degree of confidence that they would never run out of money.
Does the 4% rule still work?
Good question! The devil is in the details, and it depends on who you ask. As the price of stocks and bonds have increased over the past decade, the income produced by a balanced portfolio (combination of stocks and bonds) has declined on a per-dollar basis. Importantly, Bengen’s research was done at a time when interest rates were much higher.
Is 3% the new 4%?
Here at The Price Group, we feel that the 4% rule is a useful guideline when used with minor modifications and also an understanding that circumstances could dictate changes to the “rule.” One could make a compelling argument that 3% is indeed the new 4% since interest rates are lower and stock market returns could be more muted over the next 10 years when compared to the past 10 years. Another major factor to consider with your distribution rate in retirement is your age at retirement and how long you expect to live. Thus, the “safe” distribution rate for a 75-year-old is higher than it is for a 55-year-old.
Retirement Planning 2.0
While the 4% rule can be helpful, we are of the opinion that Monte Carlo forecasting (showing you and your family retiring 1,000+ times) offers a much more reliable means to help you make cashflow decisions for your retirement. Here at The Price Group, we incorporate this Monte Carlo forecasting into your financial plan – your Live Well Plan as we refer to it. In our humble opinion, having a Live Well Plan along with an investment process that focuses on dividend-paying stocks is a great step toward making retirement a financial success for your family.
About The Author
Randy Price serves as a Partner and an Executive Managing Director for The Price Group of Steward Partners. He resides in Houston with his wife, Lindy, and the family golden retriever. Lindy and Randy are recent empty nesters as their five children have all moved out of the house. Over the past 30+ years, Randy has helped families find comfort, confidence, and clarity regarding their wealth and their legacy. Randy firmly believes that everyone needs a wealth coach!
The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.
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