We Changed The 4% Rule!?
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How and why are we rethinking the traditional 4% retirement withdrawal rule?
You heard it here first, we changed the 4% withdrawal rule.
Brent, I am so excited about this because I think this is going to be incredibly valuable because a lot of people out there are excited about retirement and even a lot of people are excited about early retirement. They're trying to figure out, how do I know if I have enough? How do I know if I've reached that point? And I worry that some people arrive at a poor conclusion because they're using the wrong input.
Well, look, everybody wants a napkin financial plan. And wouldn't it be great if all you had to do was say, you know what, if you can just take what you think you need and multiply it by 25, you got a retirement. That's essentially what the 4% withdrawal rule is. Because if you think about doing the math, what's four times 25, 100%, you should be covered and set. And we want to show you, no, there is way more going on when you're trying to figure out than just doing a napkin financial plan.
Yes, said slightly differently. It's a retirement guideline that suggests withdrawing 4% of your portfolio in the first year of retirement. Then you get to adjust that amount every year for inflation. So you build up this big pot of money. You take that big pot of money, you multiply by 4%, and that is what you get to live off of in retirement. That's what a lot of people have used, and that's what a lot of people use for their planning. But where did the 4% rule come from? Yeah, it actually came from a financial advisor, Bill Bangen, came up with the idea, and then it was popularized by the Trinity study. But even Bill has come out and said, maybe 4% isn't exactly right. Maybe we can even adjust the 4% rule of touch.
Yeah, I mean, now realize this has got asset allocation built into it, so you do try to limit volatility based upon your asset mix. But Bill did come out and updated it. It's not 4%. If you put in the right diversified portfolio, it can be increased, according to Bill, the author of this originally, 4.7%.
4.7%. And as you can imagine, when you're thinking about preparing for retirement, the higher your withdrawal rate number is, the lower your portfolio value needs to be, or the higher the income that you get to experience in retirement. So naturally, people would want to think, okay, if I can have a really high withdrawal rate, that means that, okay, maybe I can... save a little bit less, or maybe I get to live a little bit larger. But we worry about that because if you get too aggressive and you assume that, oh man, what if I had a 6%, 7%, 8% withdrawal rate, you could get yourself into some really hot water really quickly if retirement doesn't go exactly the way that you thought that it would.
Well, all of this is built off of the math. And even when you look back at the Trinity study, they're assuming a 30-year withdrawal period. But the thing is, We've covered the FIRE movement. We talked about the FINE movement where you move from financial independence to the next endeavor because maybe, especially if you're doing this in your 40s or 50s, you're not ready just to play golf or sit on the beach. There's going to be lots of things going on, but you definitely are thinking, think about somebody who's 45 years old or 50 years old. You add 30 years to that. you're probably going to live longer than that.
You're still going to make it past it.
So that's why it doesn't work to just assume that you can just use the 4.7. And let's go the other way. What if you're somebody who loves your work and you actually work until you're 60 years of age or 65 or 70 years of age? That should not have the same withdrawal rate as somebody who retires in their 50s or 60s. So there needs to be some type of elasticity or flexibility to what your withdrawal rate is.
Yeah, instead of having one safe withdrawal number, and again, we're going to talk about where it's useful and where it's not useful. Instead of having one, perhaps there should be a range. Perhaps there should be a little more elastic. So we tried to take some money guy dust and sprinkle it on the withdrawal rate rule to come up with something that could be a little more helpful for you.
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Chapters
7 chapters
1
How and why are we rethinking the traditional 4% retirement withdrawal rule?
0:07–7:08
2
Where did the 4% rule originate and what revisions has William Bengen proposed?
7:08–15:04
3
How should retirement age change your safe withdrawal rate recommendations?
15:04–16:25
4
What dynamic withdrawal framework does Money Guy propose for early vs. late retirees?
16:25–21:10
5
When is the 4% rule useful as a planning shortcut and when should you stress-test your plan?
21:10–30:37
6
How can the Wealth Multiplier tool help you estimate future retirement income today?
30:37–42:18
7
What practical financial order-of-operations advice did they give during live Q&A (529–end)?
42:18–1:06:53