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My latest MoneySense Retired Money column is titled The 4% rule, revisited: A more flexible approach to retirement income. Click on the hyperlink for full column.
It goes into more detail on William Bengen’s updated book about the 4% Rule, which was one of three recently published financial books we reviewed in the last Retired Money column.
For that column I had originally planned to focus exclusively on that book, A Richer Retirement, Supercharging the 4% Rule to Spend More and Enjoy More. However, I decided to review two other books at the same time; meanwhile I ended up on a related project on my own site, which involved asking more than a dozen financial advisors on both sides of the border what they think of the 4% Rule and the tweaks Bengen covers in his follow-up book. You can see all responses in this blog that appeared earlier this month on Findependence Hub, but at over 5,000 words it was a tad long for the space normally assigned to the Retired Money column.
For the MoneySense version, I focused on the most insightful comments and added a few thoughts of my own. The survey was conducted via Linked In and Featured.com, which has long supplied good content for my site.
Broader diversification spawns a 4.7% Rule
Trusts and estates expert Andrew Izrailo, Senior Corporate and Fiduciary Manager for Astra Trust, says Bengen’s original idea was to provide a sustainable income stream for at least 30 years without depleting your savings. In his new book, Bengen “revisits this concept using updated data and broader asset allocations,” summarizes Izrailo, “He now argues the safe withdrawal rate could rise to around 4.7%, supported by stronger market performance and portfolio diversification beyond the original stock-bond mix.”
For American investors, Izrailo still begins with 4% as a baseline because “it remains simple and conservative. Then I evaluate three major factors before adjusting: market volatility, portfolio performance, and expected longevity.” For Canadian retirees, “I tend to start lower, around 3.5%, due to differences in taxation, mandatory RRIF withdrawal rules, and the impact of currency and inflation differences compared to U.S. portfolios.”
Toronto-based wealth advisor Matthew Ardrey, of TriDelta Financial was not part of the original Featured roundup but agreed with the general view that while a helpful starting point, the 4 Rule is only a guideline. “When I meet with a client, I don’t rely on the 4% rule at all,” said Ardrey, who has worked with clients for more than 25 years “I’ve learned that rules of thumb — like the 4% rule — pale in comparison to the clarity and confidence that come from a well-crafted” and personalized financial plan. Such a plan should reflect each person’s unique circumstances, priorities, and goals, allowing them to build the right decumulation strategy for their situation.
No one size fits all
Almost all the experts caution against taking a one-size-fits-all approach to the 4% Rule or its variants. Over 20 years with her own clients financial advisor and educator Winnie Sun, Executive Producer of ModernMom, starts with 4% as the baseline, then adjusts it based on actual client spending patterns and market conditions … The biggest mistake I see isn’t about the percentage itself: it’s that people forget about tax efficiency in withdrawal sequencing.”
Oakville, Ont.-based insurance broker James Inwood says the 4% rule is “a decent guideline, but it’s not some magic number you can set and forget. I’ve watched people get into trouble because they didn’t account for medical bills, which are a real wild card here in Canada. I always tell people to build in a cash buffer and check in on that withdrawal rate every couple of years instead of just locking it in permanently.”
Bengen is now recommending a broader asset diversification to add in small percentages of international equities and small-cap stocks in addition to his historic investment portfolio of 50% U.S. large-cap stocks and 50% intermediate bonds, says attorney Lisa Cummings: “He claims with this broader diversification the safe withdrawal rate could now be up to 4.7% under best case scenario, 4.15% worst case.” Modern retirees have to deal with both rising inflation and longer lifespans, she adds, so she advises clients to have a two-year cash cushion in case of prolonged negative markets, and otherwise maintaining a flexible annual withdrawal range ranging between 3.5 to 4.5%.
Most Retirement income doesn’t come just from traditional investment portfolios
David Fritch, a CPA with 40 years’ experience serving small business owners, stopped treating the 4% Rule as gospel once he noticed their retirement income rarely came from just traditional investment portfolios. “Most had business sale proceeds, real estate holdings, and irregular cash flows that made the 4% rule almost irrelevant.” He also realized the sequence of withdrawals and from which vehicles withdrawals came was more important than mere annual percentages.
Digital marketer Fred Z. Poritsky says late-income career changes can radically affect Retirement Withdrawal math. The 4% rule assumes you’re done earning but “if you’re keeping one foot in the working world (consulting, part-time, passion projects that earn), you can probably push 5-6% in those active years since you’re adding income streams.”
My own conclusions
So, after absorbing all this input, what have I concluded myself? I’ve not really changed the observations on the Rule that I made in the last MoneySense column on this topic. 4% is a nice round number and starting point that ensures you don’t grossly underestimate how much you need to save.
If you’re obsessed with living too long in a world of future hyperinflation, by all means whack it down to 3% or less. If you have a generous inflation-indexed Defined Benefit pension plan you’re probably not reading this or are not greatly fussed about the 4% guideline. If you’re like the Retirement Club members who lack DB pensions and are essentially your own DIY pension manager, you probably need to start your projections with some version of the 4% Rule, as explained in Bengen’s followup book. If you choose in whole or in part to pensionize your nest egg with annuities or similar vehicles, then the product providers will decide the exact annual withdrawal amount.
The 4% Rule also works in the other direction. If you’re like me and a bit pessimistic about future markets and make the kind of tweaks to your situation recommended by Bengen’s new book, you may be pleasantly surprized that you get nudged into considering living it up a little and withdrawing 5 or 6%, in your go-go years, at least as long as the economy and markets remain sunny.
As they say, a journey of a thousand miles begins with a single step, and the 4% Rule is a very good first step.
