Retirement Withdrawal Nonsense

The 4% rule is useless. What should I do?

Each day this year about 11,000 people will turn 65. The last 10 years of the Baby boom Tsunami is starting now. These new retirees will face a second Tsunami. The flood of terrible advice on how to access their funds. There are a lot of ways to make yourself miserable worrying about running out of money. I just want to concentrate on one of them!

The 4% rule is defined as taking your nest egg and withdrawing a maximum of 4% the first year, then increasing it each year by the rate of inflation. That’s it. Few do it. Certainly not my clients. Advisors don’t figure it out for them and rates of inflation are conflicting. It ridiculously simple and impossibly difficult at the same time. The assumptions of the 4% rule is that you stay perfectly balanced at 50% bonds and 50% stocks. Of course that has to be adjusted at least yearly. So, first someone would have to convince you to buy a bunch of bonds before you get started. That move is worse than the 4% rule!

The really sad part is that the goal of the 4% rule is not to run out of money. It’s like a builder telling you the goal for his homes is that they don’t fall down within 25 years. What we do is help people attain and grow wealth forever, which for retirement purposes is death. The Pickleball really slows down after that. But you have children and the great causes you hold dear. So running out of money upon death is not usually desirable.

Only a handful of the retirees will have had the discipline to pay themselves first, the logic to own equities and the courage to not panic out. If you haven’t invested in stocks and have put it in banks and bonds the whole time you never invested. You have no equity. You have lost most of it to inflation and paid tax on the interest. You have saved. Collecting interest from someone who is in debt to you is not investing! When you buy a bond or CD those people owe you money. They have borrowed from you. That is why it is called debt on company financial statements. The rate you agree on is paid to you over the agreed period and when you get interest checks they are taxed at ordinary income. (Stock dividends are taxed as capital gains.)

You can’t get there with inflation like returns-Think of it like this:

Imagine a world where there is never inflation. A dollar today is a dollar forever. Many people think that would be great. How much would you have to save to get the amount you are earning to retire, say 10,000 per month? You invest 2,000 each month and put it away in a vault for retirement. 24,000 a year. A great commitment. 30 years later you have $24,000 x 30yrs. or $720,000. Since you have been living on $8,000 you would like to replace that. So, you begin taking out $94,000 year ($8,000 a month.) That gives you 7.66 years of retirement! Even if you put $5,000 a month away you could only retire for 19 years. That is exactly the same as saving at 4% while inflation is 4%. It won’t get you there.

Now, lets talk about you, one of the 10% of people who have accumulated $500,000 or more for retirement. Or, are you one of 3% of people who saved $1 million or more? You got here because of owning the great companies of the world. You are an owner. You share profits and distributions of cash in like manner with the CEO. It’s the only way to get here and the only way to give you a shot at having a good lifestyle after retirement.

You don’t invest in stocks over 30-40 years and average 10-12% return, only to be told you can only take out 4%. But, there is a limit. Taking out 10% could be disastrous. Of course, it also depends on what investments make up your portfolio.

Next up- How to take the money out and still grow wealth

You may contact me directly at craig@craigverdi.com