Midlands SC Retirement Planning: Is the 4% Rule Outdated?

One of the biggest advantages of living in the Midlands is the freedom it gives your retirement budget. While the lower cost of living here provides a great head start, successful Midlands SC retirement planning involves more than just picking a local home. It requires a strategy that makes your money last.

Because the cost of living here is lower than in other major hubs, it’s easier to build a plan that actually allows for the travel you want. Whether that’s a week in the mountains or beach or a flight out of CAE to travel the world.

If you've started planning for that transition, you’ve almost certainly heard of the "4% Rule." it is the most famous rule of thumb for figuring out how much money you can safely withdraw from your investments each year. But is it actually safe for today’s retirees, or is it an outdated relic?

1. The Origin of the Rule

The 4% rule wasn't just made up; it came from research in 1994 by financial advisor William Bengen. He analyzed market data going back to the 1920s and found that even in the worst economic scenarios, a retiree with a 50/50 mix of stocks and bonds could withdraw 4% of their portfolio in year one, adjust it for inflation every year after, and have their money last for at least 30 years.

For example, if you have a $3 million portfolio, you would withdraw $120,000 in your first year. If inflation is 2.3%, your year two withdrawal becomes $122,760. While this sounds simple, its biggest flaw is its rigidity. It assumes you will increase your spending every single year by the exact rate of inflation, regardless of what is happening in the markets or your personal life.

2. Why "Rules of Thumb" Fail Real People

I personally don’t like using the 4% rule as a strict retirement plan because it doesn't reflect how people actually experience retirement. It is incredibly rigid. In your "go-go years"—those early years when you are healthy and active—you likely want to travel, play golf, and really enjoy your wealth. You don’t want to be constrained to a static 4% when you have the energy and desire to do more.

Furthermore, the 4% rule barely survived some of the worst years in U.S. history. Those who retired in 1965 only saw their money last 30 years because they were rescued by the massive stock market rally of the 1980s and 90s. Relying on a rule that requires a "rescue" isn't a strategy; it’s a gamble.

3. Smarter Alternatives for a Modern Retirement

Instead of a static rule, we look at more flexible, professional strategies:

• Dynamic Guardrails: This is one of my favorite alternatives. It allows your spending to adjust based on market performance—taking out a little more when the market is up and tightening the belt when it’s down. This ensures you aren't leaving too much unspent wealth behind or running out too early.

• The Staggered Withdrawal: If you retire at 62 but plan to delay Social Security until age 70 to maximize that guaranteed 8% annual increase, the 4% rule fails you. A real plan might involve withdrawing a much larger percentage in those early years to "bridge the gap" before Social Security kicks in.

• The Cash Cushion: Setting aside one to five years of income in safe investments like short-term government bonds or CDs gives you peace of mind. It allows you to let your long-term investments grow without being forced to sell during a market downturn.

Summary

The 4% rule is a decent starting point for back-of-the-napkin math, but your retirement should be tailored to your unique income needs. In a professional plan, we look for a living model that accounts for market volatility and your changing goals as you age.

Next Steps for Your Retirement

Ready to take the next step? I’d love to help you build a retirement plan, investment plan, and tax strategy.

Visit us at CapitalWealthGroupSC.com to see how we work with the 50-to-60 crowd. If you’re ready to dive into your numbers, you can schedule a 30-minute Introductory Call right here.

Let’s make sure you're on the right track for the retirement you want.

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Full Podcast Transcript

What is the 4% Withdrawal Rule & Should You Use It?

Welcome to "Your Retirement Guide podcast! I'm your host, George Jameson, owner of Capital Wealth Group. A Fee Only Advisory Firm. On this podcast, we'll be covering all aspects of retirement planning to help you retire with confidence.

So whether you’re a retiree or a pre-retiree nearing retirement, join me each week as we explore the world of retirement planning and equip you with the knowledge and tools you need for a successful retirement.

Welcome to today's episode! Our topic of discussion is the 4% Rule and various alternatives for determining safe withdrawal amounts in retirement. So, what exactly is the 4% Rule, how does it work, where did it come from and is it something you should consider? 

The 4% rule is a guide to help you determine how much money you can safely withdrawal in retirement. The 4% rule, was created by a financial Advisor, named William Bengen in 1994. 

Mr. Bengen's analysis of market data from 1926 to 1976 showed that, even in the worst-case scenarios, a retiree can withdraw 4% annually adjusted for inflation and the portfolio would last at least 30 years. The portfolio he used was a mix of 50% stocks and 50% bonds. He used developed markets indexes for the stock portion and he used high grade Corporates for the Bond portion.   

Then in 1998 3 Professors from Trinity College in Texas now called the Trinity study updated Mr. Bengens original study. This time the withdrawal rates were tested using historical data from 1926 to 1995. The authors tested all 30-year rolling periods through 1995 and concluded that a 4.0 percent initial withdrawal rate adjusted for inflation had a 95% percent probability of success for all 30-year periods using a similar 50/50 portfolio.  

Then in 2014, Dr. Wade Pfau, updated the Trinity Study using data through the year 2014. Dr Pfau also changed the bond type from Corporate Bonds to Intermediate-term Government Bonds.  

Pfau found a 100% chance of success (instead of 95%) using the same assumptions that created the original 4% Rule. 

In Pfau’s update, every 30-year retiree still had money using a 50/50 stock/bond portfolio while withdrawing 4% of their retirement savings each year adjusted for inflation. 

Even though past history proved the 4% rule does work. Dr Pfau also asks and examines a crucial question in his updated Study: will the future look like the past? That’s the million dollar question.  I will point out that Pfaus time period  included the Great Depression, Stagflation in the 70’s, the Dot Com bubble and the 2008 subprime crisis. So, there were some obvious bad times in study.

What if you wanted to use the 4% Rule. Here’s an example, Let’s assume you plan to retire at age 65 and plan to live to 95, so a 30 year retirement. You have a 50/50 portfolio of $3.0 million. You can withdraw $120,000 which is (4% of your total portfolio) in your first year of retirement. The next year, you would multiple the $120,000 by the rate of inflation.   Let’s say inflation is 2.3%.  Then the equation, would be: $120,000 x 1.023. In year 2, you can withdraw $122,760. You continue to repeat this for each year of retirement. 

Here’s my opinion. Although the 4% Rule may work for some, caution maybe necessary especially if there is a prolonged bear market at the start of your retirement.  

Plus, it's not a one-size-fits-all solution. There are several issues to consider. First, not everyone will have a retirement that lasts exactly 30 years. Some will retire early, and may have a longer retirement, some may retire later and may have a shorter retirement and others may not need to start income at the beginning of retirement. Second, the 4% Rule is very rigid. It assumes that you will increase your spending every year by the rate of inflation without any deviation even during a prolonged market downturn. And Many retirees' expenses can vary significantly from year to year due to unexpected life events. Third, I see many retirees spend more money in the early years of their retirement on things like travel and hobbies and then often reduce spending in their later years. Fourth, the 4% Rule is based on historical market returns, and some projections suggest that future returns may be below long-term averages, which could result in a withdrawal rate that's too high. Fifth, the 4% Rule assumes a portfolio split of 50% stocks and 50% bonds, but not every retiree will be comfortable with this allocation. Sixth, it may be in some retirees best interest to use a staggered withdrawal strategy. For example: If a couple is healthy and planning to retire at 65 with a history of longevity in their families, it may be wise to postpone their Social Security benefits until age 70. This means they will have to withdraw a larger amount from their investments for a several years before they receive their Social Security benefits. As a result, the traditional 4% rule may not be applicable for them.

And lastly, it's very important to consider Advisor fees, as they can greatly impact the amount of withdrawals you are able to take during retirement. For instance, if you have a $2M portfolio and pay a 1% fee to your advisor, and you follow the 4% rule. You will be taking out $80k the starting in the first year of retirement, which is 4%, and your Advisor will also be taking out $20k in Fees the first year. So, your first year in retirement will be a total of 5% withdrawal rate, which may be too high. 

Let’s Explore some Alternatives to the 4% Rule:

One simple alternative would be to start with the 4% rule, but instead of increasing the rate each year with inflation use a more “dynamic” approach by taking out more when the market is up and less during down markets.  

Another similar approach, is Morningstar's "safe withdrawal rate" rule. It is similar to the 4% rule because it adjusts for inflation after year one, but it uses past history and forward-looking projections to determine a safe starting point.  Morningstar comes out with a new “safe withdrawal rate” every December.  For new retirees starting to take withdrawals in 2023, their safe starting withdrawal rate is 3.8%. However, for those who retired last year in 2022 the starting rate was only 3.3%.

Another withdrawal approach is called the "Dynamic Distribution Rates" or the guardrails withdrawal strategy, which determines the maximum withdrawal rate based on a percentage of the overall portfolio value and fluctuates based on several rules. We will discuss this in more detail in my next episode.

The final strategy I'll discuss is called the "Staggered Withdrawal Strategy." This approach involves withdrawing a larger percentage of your investments and savings in the initial years of retirement while delaying your Social Security to take advantage of the 8% increase you get per year by waiting to start Social Security. This strategy varies greatly among retirees depending on multiple factors.

Here's an example: You retire at age 62, you are in good health, longevity runs in your family, and you have enough money saved where you may live off some of your savings until FRA, 67 or even age 70, so you can delay SS and take advantage of the higher guaranteed benefits. 

To minimize the risk of running out of money, retirees can also consider setting aside 1 to 2 or even 5 years or more of income in safe investments. The number or years will depend on your personal risk tolerance and other factors. Some safe investments may include short-term government bonds, government bond ladders, Short-term Treasury ETFs, CDs, MM’s. 

Using one of these strategies can help reduce the sequence of returns risk. Which is the risk your portfolio will have negative returns near the beginning of retirement as  you start taking withdrawals.  This can have a big impact on how long your investments will last in retirement.  Setting aside a few years of income at the beginning of retirement in guaranteed safe investments can help reduce your chances of running out of money.   

In summary, the 4% withdrawal rule is a good starting point and can be a good strategy for some, but there may be more suitable and practical withdrawal strategies for others. It's essential to consider various factors and determine a safe withdrawal rate based on your unique circumstances including length of retirement, investment allocation, income needs, taxes, risk tolerance, financial goals among others. In my next episode, I will discuss the Dynamic Distribution Rates" or the guardrails withdrawal strategy in more detail.  

Thank you for tuning in to this episode of Retire with Confidence. I hope you found the information helpful in your retirement planning journey. If you enjoyed this episode, please subscribe to my podcast and leave a review to help others discover the show.

If you have any questions, topic ideas, or want to discuss your retirement plan, feel free to reach out to me, George Jameson with Capital Wealth Group, a Flat Fee Only Firm. You can visit our website at capitalwealthplan.com to learn more about our services.