No longer the 4% rule

BLUF (Bottom Line Up Front):  This millennia old (it seems like) rule has been updated by the famous planner who created it.  Video below if you want to skip my pontifications 📽️👇

The #1 request of every retiree and near-retiree who comes through my door is a retirement income plan.  These Big 3 questions all connected:

1. How much income will I have in retirement?
2. When can I retire?
3. How much do I need to retire?

In order to calculate that we need to know two things:

1. How much will you have at retirement
2. What is our planned distribution rate?

Now, there is a ton that goes into answering the distribution rate question.  How much risk can you take?  What is your liquidity needs?  What is the most tax efficient withdraw strategy?  What happens if the market tanks?  So on and so on….

But, the back of the napkin way to calculate your retirement income (if you insist your retirement should be calculated on the back of a napkin) is the famous olf 4% Rule.

Basically, take what you expect to have in retirement (assume no .com/housing/COVID/inflation bubble bursts) and multiply it by 4%, then add that to your social security and other guaranteed sources of income.

So…have a $1,000,000 in an IRA…you get $40,000 per year + social security…and there is your retirement income.

The guy who calculated that rule updated it.  To be clear, I am just the messenger here.  I think the reason for the update and the practices of my industry generally are out of date, along with a host of other problems. but this is good information for anyone using the old Wall St way of doing things.

Basically the inventor discovered small-cap stocks (small companies) and update the 4% rule.

In obtaining my ChFC at a conference the rule was basically 4% if you want to die with money in the bank, 5% if you want to die on the day you spend your last dollar.  Given modern investments and tools I personally use around 6.5% for my clients.

Anyhow, video below 📽️👇if you would like an updated way to update your income plan.

So, when constructing a financial plan in Sammamish, Bellevue, Maple Valley, or anywhere, I use a higher anticipated withdraw rate because modern investments for financial planning and retirement planning allow it.  As a fiduciary using these investments helps increase the confidence my retirees have in their retriement income plan, and the amount of money they can have in retirement.

https://www.youtube.com/watch?v=43WhvQX3CAk