General vs Personalized Part 3

This is the concluding piece to my 3-part series of General vs. Personalized.  If you would like to go back and read the others you can do so here: Part 1, Part 2.

This, I feel, could have been its own 3-part series and may be in the future.  I will be discussing the 4% withdrawal rule for retirees.  Many people, financial advisors included, use the 4% rule as a benchmark to test one’s readiness for retirement.  This issue is again that this a broad brush for the general person and I think it is important to understand the history of where the rule originated.

Basically, the original analysis by William Bengen in 1994 used a portfolio consisting of 50% large-cap stock and 50% intermediate-term Treasury bonds.  It took a snapshot at the beginning of the retirement period of the total value, applied a 4% withdrawal, and increased that number each year with inflation. So, if you had a $1,000,000 portfolio you would withdraw $40,000 the first year and adjust for inflation every year after that.

Not the most efficient portfolio, but that is for another blog.

The analysis found that you’re most susceptible to running out of money in the first few years of your retirement if you have poor returns.  In the analysis, using the 4% rule the funds were able to last for 30 years before the portfolio was exhausted.

The 4% rule has been updated by Bengen since the original analysis, but again that is for another blog.

I think the 4% rule is a great tool to use to help you gauge where you are and what you can potentially withdraw in retirement.  However, my issue with the rule is that it does not address each individual’s unique situation… it’s generalized (hence the title).

When developing a plan, it is important to look at what you are trying to accomplish and what will make you happy in retirement.  Your plan may need more than just 4% in a specific year to allow you to go on that once-in-a-lifetime trip, help send your grandkids to college, handle a health situation, or buy a new vehicle. You may also need your portfolio to last more or less than 30 years.  It is important to understand what your goals are, how they fit into retirement, and how you can afford them.

Do not settle for 4% for the rest of your life.  Create a plan that fits your life and your individual goals.

-Clay Wood

BCR Wealth

BCR Wealth

From retirement planning to asset management and protecting your family's financial future, BCR Wealth Strategies provides clear guidance and comprehensive support to help you verbalize and realize your financial objectives.