FREE NEWSLETTER
Go to main Forum page »
Most people use a version of the 4% SWR in retirement. I think it’s the wrong approach for most, although it offers a tempting idea: an extremely high probability of not running out of money and genuine income stability. These reasons are its biggest Achilles heel—it causes the median retiree to pass with a large amount of unspent wealth. Many studies suggest two-thirds to four-fifths of retirees end with a portfolio equal to or larger than their starting balance.
This reality stems from the rule’s design. The creator identified the worst possible 30-year period and calculated the largest withdrawal rate so the portfolio lasted 30 years.
Safeguarding against ruin is the flaw in the system. If you happen to experience your retirement in any timeframe that doesn’t emulate the worst-case scenario—which means nearly every retirement—you end up with a large portfolio balance at the end of life. Statistically, most could have had a more comfortable retirement with higher spending levels.
The rigidity of the rule makes things worse. It demands that a retiree take an inflation-adjusted withdrawal every year, regardless of market performance. In a good year, this fixed withdrawal is too low, leaving significant growth unspent. In a bad year, a temporary reduction in spending could substantially protect the portfolio, but the rule prescribes moving ahead with the inflation adjustment anyway.
In my mind, for the typical retiree, the 4% rule presents a bit of a conflict. Is your goal really just seeking a 100% guaranteed promise of your portfolio lasting, and be damned about a large ending balance, or is it maximizing lifetime spending and enjoying the retirement you worked so hard for?
I’m drawn towards the idea of dynamic withdrawal strategies—they’re gaining traction with financial planners. Cynics might suggest it’s because a dynamic strategy is a bit more complex, and some might prefer using a professional to run the plan, earning fees for the planner.
/https://www.whitecoatinvestor.com/guyton-klinger-guardrails-approach-for-retirement/
However, the benefits are clear: These flexible strategies use fairly simple rules that increase your spending above inflation during good years and require no increase or small decreases during bad years. This lets you catch more of the market’s “upside” and significantly lowers the possibility of large unintended inheritances while still providing a high level of portfolio security.
I think the 4% rule is a good big-picture planning guide. Unfortunately, its very foundational ethos is more likely than not acting as a brake on what most of us could spend during retirement. Taking a closer look at these guardrail systems could let the majority spend more freely without much compromise…other than in the size of your final balance.
When a respected organization like Vanguard is citing dynamic withdrawal as a better pathway for lifetime income, I think it’s time we all have a closer look at the 4% SWR system. Could it possibly have had its day?
I think that the 4% (now 4.7%?) rule gets dragged out of context a little. I don’t think that many would argue it should be absolute bedrock of your financial plan. But if you’ve got no idea how much to save for retirement, taking your yearly income requirement and multiplying by 25 at least gives you some target. And when you enter retirement, you can multiply your invested assets by 0.04 and at least have some starting point on what a reasonable draw down might be.
I wholeheartedly agree that it warrants more thought and perhaps some expert advice beyond that, but the 4% rule is a pretty good starting point.
I think we need to remember than many outside of the HD community spend very little, if any, time thinking about retirement investments. For that cohort, the 4% rule is a pretty good shortcut.
As I’ve said before I personally doubt people live rigidly to the letter of the 4% rule. For starters what measure of inflation should they apply and when to time that.
It is a very useful tool for determining what “enough” is for people setting retirement portfolio goals and an ongoing useful check.
I think having a more fluid approach in drawdown is probably useful.
If nothing else we are emotional animals and the thought that we should keep spending regardless when there is a market driven dip in our portfolio will probably make many uncomfotable when it comes to higher level discretionary (luxury) spend.
And I recognise that by nature of the prudence of the “rule” most will come out ahead of it. Periodic reappraisal seems sensible – perhaps unwise to harvest every year but certainly adjusting for upside every few years seems sensible if (and this goes to other threads) the spend enabled is personally meaningful.
I hope my portfolio outpaces my drawdown in the early years but the 4% rule is there to provide me comfort if it doesn’t. At 5 years I plan to fully reappraise in the light of “new life” budget expectations and what my actual sequence of returns has been. If that means rebooting by reapplying my chosen SWR then I’m good with that.
If we break it down into multiyear cycles I suspect there will be some where I feel bound by the SWR and others where I will nowhere near an upward revised figure. It won’t matter overall to wealth but I’m considering allocating a notional “when it’s gone it’s gone” pot to sit outside any SWR calcs to smooth lifestyle, so that again would be flexing the “rule”. Conceptual idea is I top that up in years of plenty.
Thanks for these links, Mark. I will check them out. We only started taking from our accounts this year and it was hard to decide how much to take. Looking back, I think we could have taken more, but we weren’t going to take any big trips this year. We needed to stay close to home since Spouse’s brother was dying of ALS earlier in the year. Chris
Spot on Mark!