Ep # 97: Is The 4% Withdrawal Rule Dead? Take 2.

Benjamin Haas | Apr 17, 2023

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Benjamin Haas 00:02

Hi everyone and welcome to A/B Conversations where we will help you CFP your way out of it. A podcast where you get into the minds of a couple of Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now! Hey Adam.

Adam Werner 00:27

Hey.

Benjamin Haas 00:28

How are we doing today?

Adam Werner 00:30

Fantastic. It is sunny and it is warm outside.

Benjamin Haas 00:36

I can tell that you've got like, sometimes you ask that question if somebody, they'll give you the canned response, like Yeah, I'm good. I'm great. Fantastic. Do you really mean it? I think you mean it today. I bought it.

Adam Werner 00:46

I do. We had a busy day and that's always good. It's a good busy, energy.

Benjamin Haas 00:52

Keeps the juices flowing.

Adam Werner 00:55

I'm wearing a polo, so it's not buttoned down. I feel good.

Benjamin Haas 00:59

Good. Well, then let's take that energy into a really good topic and I know we always say that. We get to pick our topics, so we should think that we're good. But we're actually going to review something that we talked about almost three years ago, almost 100 podcasts ago and it's one of the I'll say, foundations of planning to us.

Adam Werner 01:22

Yes.

Benjamin Haas 01:23

So, let's talk about the 4% rule. Maybe more importantly, what has changed over the last couple of years. But could I start with you, if people like really need a refresher on it maybe go listen to podcast number four. But can I start with you? Maybe when we say the 4% rule, what the heck are we talking about? And then we'll get into where are we today.

Adam Werner 01:45

So, it is a foundational planning element I think for many people.

Benjamin Haas 01:51

Not just us.

Adam Werner 01:52

It's the general idea that when you get to retirement, whatever that pool of money is that you have, you can theoretically safely withdraw 4% of that balance, adjusted for inflation, every year until you pass. The idea being hopefully you're invested for some growth, that you're not dwindling that down and you run out of money, right? It's hopefully going to last you however many years in retirement and there's so many variables that go into that for people. But the idea being if you take 4%, you'll leave it invested, adjust that amount for inflation every year. Theoretically, I think it's like 96% of the time, by following that rule, you will still outlive your money.

Benjamin Haas 02:40

Yeah, and that assumes investing a certain way. This is lots of research that has gone into this, isn't just you and I saying here's the rule. I think we've often used the illustration that if you're taking much more than that, it's kind of like having geese that are supposed to lay your golden eggs in retirement. If you're eating more than, let's say, 4% eggs, what are you really doing? You're killing a goose in order to feed yourself. At some point, then that goose now is not going to lay any more eggs. You're cutting too far into principle and you can run out of money. So, I believe what we were talking about three years ago, almost three years ago, was this idea of, hey, is this rule kind of like dead and defunct based on the environment we were in? And at that time, we were kind of saying, no, it just required thinking about it differently. But I think we have some additional things to share now three years later.

Adam Werner 03:39

We'll call it an update. I call this like, take two on is the 4% withdrawal rule dead? Because yeah, going back roughly those three years ago, I think it was like, was it August of 2020? Some somewhere in that timeframe?

Benjamin Haas 03:52

Sure

Adam Werner 03:55

It was three years ago, how could you possibly expect me to know timelines? Pre COVID, post COVID. Time is irrelevant. That's a perfect way to put it. There were many articles or many headlines, feel like even clients were pointing them out to us and sharing them with us that says, is this something I should be concerned about? How are we approaching this? So it was certainly kind of out there and again, I think the way you put it, it's situational. There are many variables that go into that, it was the market environment at the time, interest rates were still historically low. To get to that 4% withdrawal kind of realm and wanting it to last for a very long period of time, it required a little bit more risk in your investments to make sure that you were going to be able to keep up with inflation over that long period of time, more stock risk. Flash forward three years and here we are in a very different market environment than we were roughly three years ago. And, I don't know if you already said this - we don't believe the rule is dead and not only do we not believe that it's dead, the environment right now is actually potentially more conducive to meeting that rule, but also with less potential risk over the long term, too.

Benjamin Haas 04:02

It was ish. Yeah, and I think that goes back to maybe giving a little bit of education or reminder, we should say, to the different ways that you go about investing. There are three different buckets, the way we talk about it, cash, which for a very long time, was really not paying you anything. You had cash to basically feel secure. But how many jokes do you hear? Oh, I'll get three cents of interest from the bank over the last whatever period of time. Yeah, you have fixed instruments, let's call them bonds that are supposed to pay you interest and then of course, people do equate market to stocks. That's where you're hoping for capital appreciation, but you can lose money. So, to get to that 4%, there's many different ways to do it and what you were sharing three years ago, because bond yields were so low, because you weren't getting anything in cash to get to 4%, was having to participate more in risk. So completely different environment today where we're recommending people actually do CDs again. We're talking about yields actually being meaningful that you don't have to take a lot of risk to get part of that 4%. That's got to feel good. I hope people feel good knowing that.

Adam Werner 06:30

Yeah, and I want to give a specific example. Just to like frame what does that actually mean from a dollar amount. Impact, just as an example. I was going to say, but...I had another thought. It vanished so I'll just dive into it and maybe it'll pop back into my head. So right, the 4% withdrawal rule, the standard being round numbers, if you had a million dollars, you could safely withdrawal $40,000 a year, adjusted for inflation. Again, a lot of variables are going to go into it but just general idea. I created this example; we created this example of let's just say somebody needed that same $40,000. And if you're taking, well, I guess the approach being if you could only invest in bonds, this is just to show the impact of the bond changes over the last couple of years, because stocks are stocks. They are going to move around; we know they're going to be volatile. This is going back to the end of 2020, the 30-year treasury bond was yielding one and a half percent. Okay, so to sort of generate your $40,000 of income, if this is the only thing you invested in, you needed $2.6 million at a one and a half percent dividend to get your $40,000 a year. Now, here we are April of 2023. The numbers move around but the 30-year Treasury right now is roughly 3.6%. So more than double, to get that same $40,000 of interest, right now, if you went out and bought a 30-year treasury bond, it's $1.1 million that you would need to generate that same level of income. So just a just a huge difference in the starting amount that you would need to generate that level of income.

Benjamin Haas 06:40

Go for it. Yeah, I really love that perspective because, again, what are we most concerned about with our clients? It's the emotional ride that they're sometimes on and acknowledging we don't want them to exit a strategy or feel like they can't participate in the market ups and downs anymore because of the stress of seeing values move. But when we think about the production of income, right, we're now hopefully going to be able to have people in a better spot where they're not having to be uncomfortable taking as much risk just to get to that 4%. So, in a way, look, inflation was not good for our pocketbooks. It certainly wasn't good for the market last year. Congratulations to people that have stuck it out, you know, in a certain way, I hope 2022 was ripping the band aid even on this whole 4% rule, where people can get back into a more historically normal environment where my bonds are producing a good amount of income. I've got some stocks to keep up with inflation over time and even my cash is maybe paying me a little bit. It all feels historically a little bit more normal again when we think about recreating those paychecks.

Adam Werner 09:27

Yeah ,and what popped back into my head was what I was going to say earlier is

Benjamin Haas 09:31

I knew if I filibustered long enough, you'd get back to it.

Adam Werner 09:35

No, no, it was perfect. It's the whole idea and it's maybe it's just unfair of me to pick on the media and headlines, but I'm going to do it anyway.

Benjamin Haas 09:46

Please, to go for it.

Adam Werner 09:47

It's to get clicks. It's to get eyeballs. So just the thought of a headline being, is the 4% withdrawal rule dead? By the way, that was the name of our podcast, so maybe I'm pointing fun at us too. But I don't believe that it's ever going to be dead, the path to get there may just have to adapt over time. I think the last three years are a perfect example of that as we kind of already stated, where we were a few years ago required more risk. Now here we are a snapshot in time, bond yields are way higher. Cash yields are way higher, in the stock market is at a lower starting point than it was beginning of 2022, which, in theory should lead to higher returns expected moving forward, just starting point. We believe the markets are going to rebound which we do so it doesn't necessarily take away the power of the rule. I think it really just comes down to the flexibility and being able to ride out the market movements. As we've said, at nauseam time and time again. I think it's just interesting to kind of see how quickly the market can move and as long as someone's able to ride that out and has a proper plan in place that has flexibility built into it. Again, even now being a snapshot in time, bond yields probably won't be this high for very long, maybe it sticks around for a few years. Who knows, I don't have the crystal ball, maybe flash forward three years and we're right back in an incredibly low interest rate environment. And we're back to where we were, you know, in 2020. But in our mind, that's okay because everything cycles.

Benjamin Haas 11:32

And that's the key takeaway, does this environment now necessitate some major shift in strategy for somebody? The answer to that for us is going to be no, just like it was three years ago. Is it our job to make these tweaks and maybe overweight or underweight things? We talked about this in an investment meeting just last week. Are we still a little over allocated to stocks? Well, that started a couple of years ago because we did recognize this. We were getting good returns in equities and that was making up for a lack of interest. You know, will that level out again? Yes. But does it mean that you're flipping a light switch on and off, as you like to say, it's not. But I think it shows that if you zoom out enough, these things do level out over time and they normalize. That's why it's so important not to look at a year, like last year and just go, everything's broken, nothing's working. It may feel that way in the short term. But there are some positives that came out of what kind of felt like a major reset and I think this 4% rule is one of them.

Adam Werner 12:32

Yeah, and so I'll throw one more example in there. I distinctly remember a conversation I had with somebody who was very close to retirement or maybe had just retired, and was legitimately concerned, rightfully so and seeing the market drop. Again, we've talked about this in other podcasts, it wasn't just stocks, it was bond values falling too. The thought of, well, maybe I shouldn't have retired, maybe I need to go back to work. I don't want to be taking withdrawals from this account while the market is falling and merit to that, we'll set that aside. The point that I made back to them was, yes, however, because bond yields have now risen, theoretically, you need less of that pool of assets that go back to my earlier example, right, you need less to generate that same level of interest or that same level of income. So, if all we're worried about is making sure that someone has the right level of income, for what they need, then we know the dollar amount is going to fluctuate. As long as we're okay with that, then it's that income, especially in retirement, that is really kind of the crux of success or not in retirement. You know, theoretically then with yields higher you need, you need a smaller pool to still have that same level of income and the same lifestyle.

Benjamin Haas 13:51

So, if your geese are now laying more eggs.

Adam Werner 14:00

Bigger eggs.

Benjamin Haas 14:01

Theoretically, you need less and skinnier geese.

Adam Werner 14:05

Sure, yeah. That makes sense.

Benjamin Haas 14:08

Yeah, it's just that whole idea and maybe we can leave it there because I feel like you summarized that very well. It all comes back to just not losing focus on the key purpose of that savings. I realized that when people retire and that's really what we're talking about here, this is a retirement planning strategy on what you take out, you know that pool is finite. You're now not saving to bring that value up, you saw the value go down and it feels horrible because you know, you're not going to save back into it. But you're making the most important point. If that's now producing more income for you to live off of, we know those values will rebound over some time. Let's keep the perspective that things are still okay. This is a snapshot in time. You're getting more eggs from those geese. That's good, as long as you didn't kill any in the process. That's key. But that's why we're here to let you know what's possible and what's not, but to a lot of people that have stuck through this, pat yourself on the back a little bit. You got the right.

Adam Werner 15:07

Yeah, not everybody did.

Benjamin Haas 15:09

Thanks. It was good. It was a fantastic day with a fantastic podcast. Thank you so much! Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!

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Ep # 97: Is The 4% Withdrawal Rule Dead? Take 2.