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It’s Time to Break the 4% Rule

If you’ve ever read anything about taking withdrawals from your portfolio at retirement, you probably came across something called the “4% rule.” This idea, which came from a few studies done more than 25 years ago, says you should aim to take no more than about 4% of your portfolio starting value as an annual withdrawal, adjusted annually for inflation, if you want it to potentially last for 30 years.   

This idea is still around today, although it’s gone through a few different iterations over the years. In some cases, with interest rates as low as they are today, some pundits have recently decreased it to somewhere around 2% to 3%. Imagine that: if you have a $1 million portfolio, you can only take out around $20,000 to $30,000 per year, plus inflation, if you want your money to last!  

But here’s something you need to know: this 4% “rule” isn’t really a rule – it’s more of a guideline, or a base number to start. And because rules and guidelines are sometimes meant to be broken, in certain instances you might be able to take more – maybe even a lot more – than 2 or 3 percent.   

Let’s see how that can happen using a hypothetical example.   

We’ll take a single individual who wants to retire at age 64. She has $750,000 saved up and needs $5,000 of monthly income to live. If she took her Social Security at 64, she’d get $2,300 per month in our made-up example. That leaves a $2,700 per month shortfall, which she will have to take from her portfolio, or about a 4.4% distribution rate on the $750,000. That’s not too bad and may be workable.   

But what if this individual expects to live a long time? In that case it might be better if she waits until age 70 to take her Social Security, allowing her benefit could grow to $3,500 per month. So at that point she would need a lot less from the portfolio—just $1,500 per month. But in the meantime, for the next six years, she needs to take a $5,000/month gross withdrawal (and perhaps an annual inflation adjustment), which is an 8 percent distribution from her $750,000 portfolio.  

You might be thinking that 8% is unsustainable. And you’re right. It is unsustainable over a long period of time. But the woman in our example is only taking it for the next six years, until her Social Security benefits kick in. After that, her distribution rate could go down dramatically because Social Security should be providing well over half of her income needs.  

What this allows our hypothetical individual to do is to take a higher distribution rate now, for a short amount of time, in exchange for what may be a much lower distribution rate and higher Social Security benefits for the rest of her life. And you’ll notice that in this scenario, we’ve ignored the 4% rule and are taking a lot more, at least for the first six years of retirement.  

Of course, in order for this to work, this person’s assumed longevity would have to become a reality. Obviously, if she postpones Social Security until age 70 and uses up extra money in her portfolio to buy her the extra time she needs, and then unexpectedly dies at age 71 or 72, she made the wrong choice. In that scenario, her cumulative Social Security payments would be a lot less and her heirs would lose out on the money she used from the portfolio for income. But if she does make it to age 71, the SSA calculates her life expectancy at right around age 87, in which case it was a very good decision! Her cumulative SS benefit starting at 70 would be over $100,000 MORE than the cumulative benefits she would receive if she started at age 64. 

But this example demonstrates in real terms why you sometimes need to ignore what passes for common wisdom and just focus on your own goals instead. We as financial advisors at Lucia Capital Group do this for our clients every single day. How can we help you? Just give us a call. 

Important Information:

The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy will be profitable for a client's or prospective client's portfolio, thus, investments may result in a loss of principal. Accordingly, no client or prospective client should assume that the information presented serves as the receipt of, or a substitute for, personalized advice from LCG or from any other investment professional.

You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

Examples cited are hypothetical, are for illustrative purposes only, are not guaranteed and subject to potential federal and state law amendments. There is no guarantee that you will achieve the results discussed or illustrated.

The information provided is based on current laws, which are subject to change at any time. Lucia Capital Group is not affiliated with or endorsed by the Social Security Administration or any government agency.

Social Security rules can be complex. For more information about Social Security benefits, visit the SSA website at www.ssa.gov, or call (800) 772-1213 to speak with an SSA representative.

Rick Plum is a registered representative with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the name Lucia Capital Group, a separate entity from LPL Financial.

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