𝐃𝐨𝐞𝐬 𝐭𝐡𝐞 “𝟒% 𝐑𝐮𝐥𝐞” 𝐫𝐞𝐚𝐥𝐥𝐲 𝐰𝐨𝐫𝐤?

Although “The 4% Rule” (or theory) may provide a predictable and easy to follow withdrawal process, it ignores many financial implications that can affect a retirement portfolio, such as rising taxes, inflation, a spouse needing long term care, or a retiree beginning retirement with a negative sequence of returns.

You may have heard the phrase “timing is everything,” and in regards to when you begin retirement that phrase certainly holds true. Experiencing a bad sequence of returns (multiple negative return years early in your retirement) is one of the biggest risks that can cause you to out-live your retirement portfolio. Withdrawing funds from your retirement when experiencing a bad sequence of returns only compounds the problem.

In order to better understand how having a bad sequence of returns in the early years of your retirement can negatively affect your portfolio, the following two scenarios will illustrate experiencing both a good sequence of returns as well as a bad one.

Both scenarios will depict the exact same returns, but one of them will be in reverse order.

In both scenarios, the retirees begin retirement at the age of 65 and with a balance of $1,000,000.

Both retirees will withdraw 4% of their starting balance plus 2.5% after the first year to account for inflation.

Retiree B’s returns depict the actual S&P 500 returns from 2000-2021. Retiree A’s returns depict the same S&P 500 returns in reverse order starting with 2021’s returns. Both average 7.05% returns.

𝙏𝙝𝙚 𝙧𝙚𝙨𝙪𝙡𝙩𝙨 𝙤𝙛 𝙚𝙖𝙘𝙝 𝙍𝙚𝙩𝙞𝙧𝙚𝙚’𝙨 𝙨𝙚𝙦𝙪𝙚𝙣𝙘𝙚 𝙤𝙛 𝙧𝙚𝙩𝙪𝙧𝙣𝙨 𝙖𝙧𝙚 𝙙𝙚𝙥𝙞𝙘𝙩𝙚𝙙 𝙗𝙚𝙡𝙤𝙬 𝙚𝙖𝙘𝙝 𝙘𝙝𝙖𝙧𝙩. 𝙏𝙝𝙚 𝙧𝙚𝙨𝙪𝙡𝙩𝙨 𝙖𝙧𝙚 𝙖𝙨𝙩𝙤𝙪𝙣𝙙𝙞𝙣𝙜.

Note that in both scenarios an increase in taxes, the need for long term care, and many other retirement risks were not taken into consideration. All that was taken into account was a 4% withdrawal plus a 2.5% annual increase to adjust for inflation.

𝗣𝗿𝗼𝗽𝗲𝗿 𝗿𝗲𝘁𝗶𝗿𝗲𝗺𝗲𝗻𝘁 𝗽𝗹𝗮𝗻𝗻𝗶𝗻𝗴 𝗰𝗼𝗻𝘀𝗶𝗱𝗲𝗿𝘀 𝘁𝗵𝗲 𝗽𝗼𝘀𝘀𝗶𝗯𝗶𝗹𝗶𝘁𝘆 𝗼𝗳 𝗿𝗲𝗰𝗲𝗶𝘃𝗶𝗻𝗴 𝗮 𝗯𝗮𝗱 𝘀𝗲𝗾𝘂𝗲𝗻𝗰𝗲 𝗼𝗳 𝗿𝗲𝘁𝘂𝗿𝗻𝘀 𝗮𝗻𝗱 𝗺𝗶𝘁𝗶𝗴𝗮𝘁𝗲𝘀 𝗼𝗿 𝗲𝘃𝗲𝗻 𝗲𝗹𝗶𝗺𝗶𝗻𝗮𝘁𝗲𝘀 𝘁𝗵𝗮𝘁 𝗿𝗶𝘀𝗸.

Don’t let the lack of planning and preparing for a bad sequence of returns rob you off a happy retirement. The time to prepare is now. I’m helping my clients protect their accounts from this risk and many others every day. If you’re interested in how I do it, let’s setup a time to talk about some options.