The 4% rule gets talked about like gospel in retirement planning. But let’s be honest, it’s always been more of a rough guess than a golden rule. Now, its original creator is revising it to 4.7%. So, does that mean your retirement paycheck just got a raise, or is this just another headline that oversimplifies a complex decision?
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The 4% rule gets talked about like gospel in retirement planning. But let’s be honest, it’s always been more of a rough guess than a golden rule. Now, its original creator is revising it to 4.7%. So, does that mean your retirement paycheck just got a raise, or is this just another headline that oversimplifies a complex decision?
Important Links: Website: http://www.yourplanningpros.com
Call: 844-707-7381
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Transcript:
Marc:
The 4% rule gets a makeover. Let's talk this week here on Plan With The Tax Man about the change in the 4% rule by the guy who created it. It's pretty much the gospel in retirement planning, so what does that mean for us? Let's get into it with Tony. Hey everybody, welcome to the podcast. Thanks for hanging out with Tony Mauro and myself as we talk investing, finance, retirement, and the 4% rule getting a makeover is the big topic this week, Tony. I want to dive into this conversation just a little bit, but first, how are you, my friend?
Tony Mauro:
I'm doing very good, how are you?
Marc:
I'm doing very well. Have you seen this? I'm sure you have-
Tony Mauro:
I have seen it.
Marc:
About the move to 4.7%. Doesn't have the same ring as the 4% rule, but it's being bumped up to 4.7%. And so I want to talk about this a little bit because this thing really, truly has... The guy who made this, and I'll let you give us a little back story here in a second, I wonder if he thought that this thing was going to be like the golden rule gospel of retirement planning when he made this thing 30 some odd years ago, right?
Tony Mauro:
Yeah. Well, I don't know if he did and it's been around for what, since the '90s I believe?
Marc:
Yeah, early '90s.
Tony Mauro:
Basically what he came out with, and there's been books written about it and everything else, and so it's very popular that what he came out with was retirees should basically, if you're going to live off of the income, you should take out 4% or right around there just for inflation. So for basically over your retirement lifetime, which at then was 20, 30 years, you wouldn't run out of money.
Marc:
Yeah, and it was like a 50/50 split too, right? I think it was instead of the 60/40, it was 50/50. And to make it easy, Tony, I guess we can say, look, you got $1 million, and it feels like everybody, even people who aren't in the financial industry have heard of this 4% rule. If you're getting close to retirement, you've probably heard it. And so it's like, okay, you got $1 million, take out 4%, it's $40,000 a year. Nice and easy, right?
Tony Mauro:
Right. And then it would continue to grow, you could continue to do that and you wouldn't run out of money.
Marc:
That's your safe withdrawal rate, right?
Tony Mauro:
Yeah, safe withdrawal rate. Now, in a person's overall financial plan, I like to go against the grain on this a little bit. I think when we talk about this at the distribution stage, I try to get them to buy into the fact that we want to do a hybrid type of take on this. Number one, we want to start out, because I think in today's, depending on their appetite for volatility, I think you can get closer to 5% easy. You have to cut back your bonds a little bit.
Marc:
Interesting. Well, and that's kind of what Bill's saying. And by the way, his name was Bill Bingen for folks who were-
Tony Mauro:
Yep, Bill Bingen.
Marc:
Who are listening. He's saying 4.7%, so you're saying maybe even 5%.
Tony Mauro:
I like to suggest 5% and I've been doing it with my own father for years and several others that like that. Now, if their propensity, they don't want to see any of their portfolio when they look at a statement or something and see it bouncing around, I try to get them, "Let's not worry about that, it's going to go up and down." But the income, we can get 5% easy, but I try to get them to buy into the fact, is let's say that we base it on 5%. Yeah, if we have a bad market, let's bump our distribution rate down a little bit to 4% or 4.5%. And if we have a good market, well, then let's bump it up a little bit in that year.
So we kind of get a little more activity, because I think the one thing I don't like about this rule is a lot of people think, "Well, I've got to leave all my money to whomever," and whatnot. I think the number one thing that we need to think about is, the first thing is you need to make sure that the rest of your life is stable and you have enough money. Then if there's money left, you can leave it to heirs. But I think too many of us get wrapped up in, "I don't want to take any money out." And I think it depends again, what you want to do in life, but they kind of shortchange a good retirement when they have money that they could do it with.
Marc:
Yeah. Okay, so looking at what Bill has done here, he's changed a couple of things. His 2025 update, Tony, is now 55% stock and 45% on the bond side. So he's kind of acknowledged that over the last couple of years, the bond market has not been so great, so he's kind of peeled that back a little bit, bumped it up to this 4.7%. And I think if people who see this, sometimes I kind of wonder, do they feel like that gives them a green light to, "Hey, I'm getting a raise in retirement?" Maybe, but maybe not.
Because for a long time, Tony, I've been talking with advisors for 10 years now and the 4% rule constantly gets brought up and people would say, "Well, it's really more like the 3.2% rule because we can't really pull that out," because interest rates were terrible. Zero on bonds and stuff for a long time, so it gets confusing for folks. They think, "Is it lower than 4% or is it higher than 4%?" Here, you're saying maybe up to 5%. So is it a green light to spend or is it a green light to say, "Let's rerun some numbers, re-analyze?"
Tony Mauro:
I think just like I said, it's a green light to re-analyze year after year and say it depends. It's definitely not an increase just to go spend more, but with bond yields as they've been over the last many years, the whole 50/50 split doesn't work. Even 55/45 is not going to quite get you 4.7%. It might if the stock side is doing okay, but in those years that we might have a down year, it certainly is not going to. I believe that, like I say, if we have a running range and depending on how things went, then that is what you're spending for the following year should be, and then you stick to that and then reassess. Your advisor's going to help you with this, so-
Marc:
Hopefully.
Tony Mauro:
It's not hard to... Yeah, hopefully. It's not hard to do, but definitely not a green light to just go spend more.
Marc:
Well, okay, so here's my thought on this and you tell me, because obviously you've been doing this for 30 plus years and I've just been talking with advisors for 10 years. But I think what sometimes happens, and this doesn't mean the 4% rule is wrong, by the way.
Tony Mauro:
Nope.
Marc:
I think it's like any rule of thumb, Tony. It's a conversation starting point. We'll go back to that $1 million account, 4% is $40,000 a year. If you're trying to figure out what do you need to pull from your assets to help your shortfall, because you're going to have your social security, maybe a pension, whatever. Do you have $1 million, I guess would be the first question. What kind of account is it? Because you might not have $1 million in it. It might be $1 million, but you may owe Uncle Sam $300,000, so now you got $700,000. Well, 4% on that's what, $28,000 a year? So does that fix your shortfall or does that leave you in the hole? This is where the strategy has come into play versus just a general rule of thumb.
Tony Mauro:
It is. And I think like you say, rule of thumb is a starting point. With your advisor every year, you need to be trying to figure that out because it really evolves as you age and what your, of course, needs and wants are.
Marc:
Right.
Tony Mauro:
And then of course, you may start out in retirement saying, "I'm going to go spend all this money." Health of a spouse, something else gets in the way and then all of a sudden your goals change, and so your plan needs to change, too. So keep in mind, it's a great place to start. We generally will start with that, but we like to plan from there and that's where the advisor is really going to prove their value to you being able to adjust this on the run.
Marc:
Well, Tony, what factors matter more than just the percentage you withdraw? I mean, I think that's got to be a question that people ask themselves. What other things matter, like market sequence of return risk? I mean, that's timing, taxes. I mean, these different pieces.
Tony Mauro:
Taxes, all that. I mean, how long are you going to live? What type of things you want to do. You got to factor in if you've got a spouse or significant other, what you want to do there. It also factors in, is how much if any, do you want to leave heirs? Maybe they're taken care of and that's not even an issue for you. For somebody else, that's goal number one. All of that needs to be factored in, so we have to allow for adjustments in that, all while providing you the retirement that you want. It's not all just about leaving it. One thing I notice with a lot of clients, my father included, is as we age, we've talked about this before, I think, is people don't want to spend any money. And I'm not saying run out and just blow all of your money.
Marc:
Right, but enjoy it.
Tony Mauro:
Yeah. And if we've planned and we try to hold them to it, because ask them a lot of questions. And we put it in the plan as, "Here's what you told us that you wanted to do, are you really doing that? I mean, are you really doing the part-time job you always wanted to do or starting that foreign language that you always wanted to do? And if not, why?" I mean, maybe your plans have changed, but most of these plans involve spending some money and that's where we get into it. But it's a nice topic to talk to everybody about really what they want before the end.
Marc:
Yeah. Well, okay, let's finish it with this kind of point. I think ultimately people want to know, "Well then, what is my personal safe withdrawal rate? How do I figure that out?" Because we're talking 4% rule or 4.7% or 5%, it's some rules of thumb. Or potential, people are going to come in and say, "Hey, what is my with safe withdrawal rate? How do we figure that out?" And that's really where the strategizing and the plan comes in. Because Tony, as I mentioned earlier, let's just use you and me as an example. If you come in and sit down with yourself, if you come in and you've got social security and assets, those are the two main things that you're pulling from, and I come in and I've got social security pension and assets. Well, my withdrawal rate may be different because I got the pension money.
Tony Mauro:
You got the pension money.
Marc:
Right?
Tony Mauro:
People ask us that, yeah. I say, "You know what? I have no idea what your safe withdrawal rate is. However, I will be able to find out, once we delve into some things, then I can tell you." But just blankly saying it's 4%, we could start there, but if I don't know what you have and what your goals are, there's no way for me to help you. Which is, it's basically is why you're paying a financial advisor, is to add that value and be able to help you determine what your safe withdrawal rate is. But it's no different than going to your doctor and they've got to ask you some questions before they can prescribe you medicine or figure out what to do for you.
Marc:
Right. I mean, it's 100 year old joke, but I still always giggle at it. "Doctor, it hurts when I do this." "Well then, don't do that."
Tony Mauro:
That's right, stop doing that.
Marc:
It's like with your financial advisor, he's like, "Hey, advisor, it hurts when I pull money out." "Well, don't pull money out." It's like, "Well, I have to." So you got to get the math put together, you got to get the strategy put together and take a look at it. And to your point, you can't generalize. I mean, you can if you're just having that quick conversation. You and the loved one are sitting around having dinner, "Hey, we're getting close to retirement. This should work, we've got this and we would do this," blah, blah, blah. But then take, run those numbers, right Tony, through the real value process and the calculators and the various different levers that get pulled when you turn this on and you do that and so on and so forth in that overall retirement strategy and see how it's all going to play together?
Because that's the big thing, too. I mean, you could think about the DIY movements. It's a lot easier the last number of years, to build our wealth and accumulate our wealth, especially if you're a DIYer. A lot of tools out there, a lot of resources. But I think when people get to realizing all the different nuances that make up retirement strategy and all the different things we got to deal with, they kind of like, "Yeah, I need a little help here."
So get on the calendar, come in, have a conversation. Talk about your withdrawal rate and taxation and market volatility and sequence of return risk. All these pieces, it all factors in. So reach out to Tony, get yourself some time on the calendar, folks, at Yourplanningpros.com. That is Yourplanningpros.com, or call him at (844) 707-7381 to have a conversation about today's topic or any other that's important to you. Tony, we're going to drop this right around the 4th of July, so happy 4th of July, my friend.
Tony Mauro:
Same to you and same to everyone out there. Hopefully everybody stays safe.
Marc:
Absolutely, enjoy. I'll see you next time here on Plan With The Tax Man, with the one and only Tony Mauro.
Securities offered through Avantax Investment Services SM, member FINRA, SIPC. Investment advisory services offered through Avantax Advisory Services. Insurance services offered through an Avantax affiliated insurance agency. Investment strategies discussed in this episode may not be suitable for all investors. Please consult with a financial professional.
