This week I’m talking about the 4% rule. 

The 4% Rule is a short-hand rule of thumb that helps you calculate how much of your portfolio you can safely withdraw in retirement without running out of money. To use the 4% rule, you take your portfolio value at retirement and multiply it by 4% and you have a safe withdrawal rate for year one. Increase that for inflation each year and you have a simple rule of thumb for calculating a safe withdrawal rate in retirement where you’re unlikely to outlive your portfolio. 

On the surface it sounds like the 4% rule is a useful tool. After all, it’s backed by research and makes the complexities of planning for retirement a lot simpler. 

But is the 4% rule oversimplified? That’s what I’m talking about today. 

Do a quick search on google for the 4% rule, and you’ll find more articles that poo-poo the 4% rule than articles in support of this popular rule of thumb. 

That’s because spending in retirement is too complicated to capture with an easy rule of thumb.

Most people who just stick with the 4% rule in retirement will probably never run out of money, perhaps to the detriment of the enjoyment of their own lifestyle in retirement. Or you could run out of money as I explained yesterday if they are unlucky enough to retire in the midst of a recession and a major downturn in the stock market. 

Instead, you’ll want to consider how your spending in retirement is a dynamic and changing thing. You may want to spend your early years in retirement travelling and spending more money on travel, but are you still going to be trekking around Europe at 85? Probably not. You also have big, one time expenses that can’t be captured with the 4% rule - a child’s wedding, helping out with your grandkids college, the mortgage that will be paid off 5 years into retirement, the remodel that you plan to do in 10 years, or the new car you’re paying cash for in 7 years. 

The reality is our spending can’t be captured with a rule of thumb because life can’t be captured with a rule of thumb. Spending ebbs and flows depending on needs and what’s happening in life right now. So to try to plan for a consistent and auto-pilot spending rate using the 4% rule in retirement doesn’t capture what spending in retirement will really look like. 

That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip. 

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