Video Posted: February 5, 2025
John: This is John Smallwood, and I am back on the Money Isn’t Podcast. I am joined by Rob Marks, who is a certified financial planner and a wealth adviser here at Smallwood Wealth. Today, we’re going to dive into a topic called the 4% rule. This applies to people who are retired and their withdrawal rate.
Rob: I picked this topic because when we talk about retirement and saving for retirement, people think they did such a great job, have a million dollars in my investment account, and are set. Even at a 6% withdrawal rate, say you saved up a million dollars. 6% is $60,000 a year you could take out to last retirement. The math kind of shows that it’s too heavy of a withdrawal. Even going 6%, I think it lasts until somewhere in your early 80s if you retire at 65. Now, if you did 5%, that’d be $50,000 per year based on that million and it’s lasting just shy of 90. We talked about it in another podcast that for married couples, about half will have at least one person still alive at age 90. So the plan failed, not just at 6%, but at 5% as well.
John: And if the couple were healthier, like non-smokers, it’s like a 73% chance someone is still alive at 90 —it goes a lot longer.
Rob: The reason I picked this slide is because people expect that if they save a million dollars, they’re set and can withdraw whatever. However, when you run different simulations and look at the math, that’s not actually the case.
John: There was a rule—the Bill Bengen rule—that created the 4% rule about 20 years ago or more. I wonder why is it 4%, even despite higher returns, versus 6%?
Rob: You have lifestyle costs, inflation, market returns. You’ve told me from your dad right how drawing down a portfolio is one thing but drawing down in a down mark really sucks, so that 4% versus 6% is just trying to make the money last. Something important to add whenever people do these withdrawal calculations is that they are just saying that there is a dollar left in the plan by that and that is considered plan success. If there’s any alteration such as buying an extra piece of candy at the movies, it’s all over. More seriously when they look at these plans, they’re running through the math, looking at inflation and lifestyle costs, and saying here’s we’ll take this amount out and it’s fine. As we’ve discussed before there are other factors that go into the plan such as changing tax rates, unexpected one-time expenses, and long-term care, which if you’re making it towards the end of retirement and you’re already withdrawing in the portfolio, that portfolio is done.
John: This plan doesn’t even factor that in! Now, let’s assume a 40/60 portfolio: 40% bonds 60% equities. Looking at this graph, there’s a 85% % probability of having money with the 4%. not factoring any of the things that we just talked about like taxes or long-term care. There is only a 66% chance that you have greater than a million, but 34% of the time you don’t. To have over two million, which most people’s spreadsheets are showing, it’s 50/50 odds at the 4% withdrawal. But we know if we push to 5% or 6%, the odds of running out of money go up exponentially.
J.P. Morgan Asset Management: Guide To Retirement
Rob: If you’re taking 4% or $40,000 out of there, your lifestyle costs may not make that adjustment your withdrawal. There’s just a lot more going on with this than just the math that they’re showing here for how long that money can actually last in retirement
John: One of the things that I’ve been trying to do for 35 years is to get people to understand that if you’re just in a portfolio and you’re withdrawing in a down market, the odds of running out of money go up exponentially. You need a series of backups and redundancies that basically create an environment that says when, not if, the portfolio goes down, I cannot withdraw.
This story has burnt into my head. Somebody retired in 1999 with a half a million dollars and they put it all into the S&P 500. They do all the back testing and it’s like a 12.5% return. So, they go to their calculator and say they could pull out a 5% return and it’s going to be successful every time even with volatility adjusted returns and inflation. It all looks good, but then they go through 2000 2001 2002 when the market’s down 57%. They are still pulling out the 25,000 because they need that money because all the money is in the S&P 500. By October 2014, there’s only a $223,000 check that you’re now going to get to redeem the full value of the account and your account is now closed. That’s the S&P. A 4% withdrawal rate would have lasted a little bit longer, but you still ran out of money because you didn’t have backup and redundancy to go pull money from non-correlated sources.
Rob: Yeah and then people talk about social security, that extra payment coming in. They think maybe the portfolio isn’t doing as well but they still have the Social Security payment. If one of you passes you lose the lower of the two benefits and the benefits are 85% taxable. You know they talk about all these different things for legislation on how to keep Social Security alive such as means testing or reducing. Is that what you’re going to rely on to be your back stop to your plan.
John: Also, you’re spending it all anyway so it’s not like you have like you can’t back off your lifestyle. Then, you start looking at the ripples. So many couples on the first death are going to lose a social security or potentially lose pension or half of a pension. They might even lose lifetime health insurance benefits that the spouse has from work. Then if markets are down, I lose all these things and now I have to pay for more benefits; I need more income from the portfolio. It’s not good planning with these variables, right? 4% rule could actually be higher if you have backups and redundancies. It could actually be higher through proper planning. You have to look at things differently than the way you look at it now, right?
You’ve been with me for 5 years in the planning side. The biggest issue that I see is people don’t have enough capital to retire the way they want to. but why do you think that is?
Rob: Often times it was enjoyment and spending out of control. People think their lifestyle costs 5,000 a month, but we’ve seen plans where it’s actually 7,500. Totally different plan, right? By the time that they get to retirement and they’re talking to us about retiring, the math doesn’t support maintaining that lifestyle compared to what they’ve saved up. There was so much enjoyment and so much under saving that when it comes to retirement, they are not going to work and just plan to live off this and Social Security or a pension. It turns out it doesn’t always work in the long term.
John: What I want to end with here today is this 4% rule is kind of depressing. If you work for 40 years and save a million dollars, are you only going to live off of 40K? It’s not that exciting. There are strategies that you can deploy that will get you more, but everything has a pro and a con. You got to explore them, so if you haven’t taken advantage of one of our wealth curve blueprints, it’s a free conversation introductory call it’s free, I urge you to take one of those. Rob is one of the best guys to have that conversation with and you know if you don’t like it, no obligation. I appreciate you being here so before I end today do you want to say anything?
Rob: When we’re looking at this 4% rule and really looking at the portfolio, it’s all relying on that investment account to carry you to where you need to go. Like what John said, it’s more about having different strategies to layer in so that not every dollar that you’re trying to spend is correlated with the market. It’s about layering in those non-correlated assets to make you comfortable that when the market drops, your plan isn’t totally destroyed.
John: It was really good to talk to you. I look forward to having you back to discuss some new topics and we’ll see you again. Thank you!
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