Pushback against the 4% withdrawal rule

From Retirement Now Newsletter November 11th, 2021

One of the most popular rules of thumb in the retirement planning world is the 4% safe withdrawal rule.

I would say that it’s like one of the ten commandments written in stone.

Only that it’s not… at least from most advisors perspectives.

However, from a DIY perspective (i.e. going at it alone with your retirement planning) I would guess this rule is much more sacrosanct. Over the decades since it originated it has gotten a lot of media publicity.

Yet even the man whose research established this rule of thumb (William Bengen) doesn’t necessarily believe everyone should use it. The study was an exercise to show how portfolio withdrawals lasted through different historical periods over a 30 year timespan. It was not designed to account for human behavior, such as all humans not being sure how long they will live, so they have to be prepared to live beyond 30 years instead of assuming a specific end date to their retirement and being comfortable withdrawing their last penny on that day, assuming they be called to the choir invisible the next day.

The results of the groundbreaking work that Bengen did are not always being applied in real life properly.

So I came across an article titled “How the 4% Rule Undermines Advisors and Clients,” and it gives 3 primary reasons why the 4% rule is misguided.

The first is lifespan. Longer planning timespans have higher risk of depleting a portfolio. So a younger person, say 65, is probably going to need a lower withdrawal rate than an 80 year old. Which also means as you get older you have greater ability to take larger percentage withdrawals without fully depleting the portfolio.

The second is the 4% rule overlooks spending trends. The 4% rule assumes people will need the same purchasing power throughout retirement. But many studies have shown that spending goes down over time during retirement as people slow down. Providing for higher spending needs in earlier retirement without depriving retirees of the spending they need later in retirement requires some flexibility that the 4% rule does not provide.

And the last point is there are non-portfolio income sources that can add complexity to the issue. Some people may need to take higher than 4% withdrawals from their portfolio temporarily because they are delaying their Social Security. Or waiting for a pension to kick in. Or they may need lower portfolio withdrawals because they are temporarily working part-time. Due to how these non-portfolio income sources can change over time, keeping a static 4% withdrawal strategy can be almost impossible.

All good points made in the article.

Another point I’d add is that assuming a steady increase in spending needs is not a bad idea even if the studies show people’s spending declines over time.

It’s a conservative planning approach. And other medical expenses may pop up later in life due to possible health issues. If your plan is already able to handle higher living expenses it is better prepared if significant medical expenses occur later in life.

That’s it for today.

If you have questions about your retirement, maybe you haven’t got a set portfolio withdrawal strategy that you are comfortable with and need some help with, you are invited to click here and pick a time on my calendar for us to have a phone chat.

I’ll point you in the right direction.