February 10, 2025 • 30 mins
How much can I take? – How retirees determine a safe withdrawal rate is one of the
most frequent questions clients ask their financial advisors. Chris Boyd, Jeff Perry, and
Russ Ball review a recent Morningstar article (see link below). The conversation
includes the pros and cons of relying on the standard rate of 4% as well as the risks of
using stagnant rules in financial planning. Jeff raises the concept of cash flows as
suggested by the “Retirement Smile” concept and Chris highlights the need for
determining an annual withdrawal amount in the context of a comprehensive financial
plan.
https://www.morningstar.com/retirement/how-retirees-can-determine-safe-withdrawal-
rate-2025
For more information or to reach Chris Boyd, Russ Ball or Jeff Perry, click the following
link: https://www.wealthenhancement.com/s/advisor-teams/amr
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Welcome to Something More with Chris Boyd.
Chris Boyd is a certified financial planner practitioner
and senior vice president financial advisor at Wealth
Enhancement Group, one of the nation's largest registered
investment advisors.
We call it Something More because we'd like
to talk not only about those important dollar
and cents issues, but also the quality of
life issues that make the money matters matter.
(00:22):
Here he is, your fulfillment facilitator, your partner
in prosperity, advising clients on Cape Cod and
across the country.
Here's your host, Jay Christopher Boyd.
Welcome to the program.
Glad to have you with us.
We are available on video as well as
audio.
You might be used to listening to our
podcast, available wherever you like to listen to
(00:45):
podcasts, but we're also posting our videos not
only on YouTube, but on our own web
page.
You can find that by going to somethingmorewithchrisboyd
.com as well as the Wealth Enhancement Group
YouTube page.
Well, that being said, Jeff, let's introduce our
(01:06):
topic today.
We've got, inspired by an interesting Morningstar article,
but you know, I was thinking the topic
here, we've labeled it, How Much Can I
Take?
And I started thinking people might be thinking
we're just fed up.
I'm mad as hell and I can't take
it anymore, you know, kind of a thing,
(01:28):
you know.
They could think that, but that's the beauty
of the title, right?
When it has more than one meaning.
Yeah.
So that's not really what we mean.
Chris isn't mad.
Mad.
Although you could, are you mad?
Are you mad?
Yeah.
All right.
Let's hope not.
But it is a common question.
Like, I mean, people and during their accumulation
(01:50):
phase of their lives, they're saving their 401ks
IRAs and saving in brokerage accounts and investing
and, you know, paying their way, building their
pay, hopefully paying off their mortgage, all these
things that people are trying to do to
get to this retirement dream.
Right.
And so they, what's my number?
(02:11):
How many times do our listeners hear that?
Clients want to know what their number is,
meaning how much do they need in their
retirement assets to be able to retire?
And that really means is how much can
I take from my retirement assets on a
regular basis to replace my income so I
can live that retirement lifestyle that I've worked
(02:35):
my tail off to be able to do?
Because if you, that's the goal, right?
That's the dream.
That's the dream of retirement that I can
accumulate enough assets or cash flow from other
sources to be able to live 20, 30,
who knows how many years, maybe longer, in
(02:57):
a lifestyle doing the things that I want
to do, spending, back to the previous episode,
recent episode, spending my time doing things that
I want to be doing.
And I think most, most of our listeners
are probably educated listeners, meaning I don't think
you listened to us, unless you just came
(03:17):
across this for the first time, which if
you did, welcome.
But most of our regular listeners are, you
know, students of this, right?
They're clients who want to know what we're
doing, or they're people who are thinking about
hiring an advisor.
But I think most of you...
Pay attention to financial issues, personal finance, one
type or another.
I think most people have in their head,
(03:40):
if they're somewhat educated, or have done some
reading is all right, well, I can take
4% a year, there's an old study
that says I can take 44% a
year and adjust for inflation.
And my money has a good percentage of
not running out over a 30 year period.
High probability of running of being in and
(04:00):
that that 4% rule that we often
talk about was originally designed around a couple
age 65.
Right.
And the notion of how long they would
live.
And it wasn't necessarily that you wouldn't spend
down on principal, it was just that you
wouldn't run out of money before you passed.
Right.
And so thinking about the joint life expectancy.
(04:23):
Well, over the last decade, there have been
a lot of maybe less than that, even
there's been a lot of renewed attention to
this question, particularly when interest rates were, you
know, near zero.
And does that affect what people can do
as a withdrawal rate?
We've had in the midst of the last
(04:44):
decade, you know, the 2000s, I guess that's
more than a decade, sorry, the first decade
of the 2000s, where we had disruptions in
the markets and we had then the financial
crisis.
And, you know, was there essentially this lost
decade of equity performance?
(05:05):
You kind of look at those kind of
considerations and people were saying, oh, I wonder
if maybe that that same 4% rule
applies to add to that the complexity that
people are living longer.
Right.
There's more people turning age 100 than we
used to have.
You know, I mean, there's that issue of
longevity.
(05:26):
And of course, with longevity comes, you know,
the potential for higher costs for health care,
you know, long-term care considerations.
But putting that aside.
Recently, we had this bout with inflation.
And we've had inflation at some point.
So costs are going higher.
So people want to withdraw more.
(05:46):
There's a lot of different approaches to this.
You know, we don't talk about guardrails or
any of these kind of things, but just
this notion of withdrawal rate is one that
Christine Benz, in this article, we're fans of
Christine Benz.
She's been on the show, right.
And does a great job when talking to
people about personal finance.
(06:07):
We kind of parrot some of the things
she talks about with buckets, you know, that
notion that we buy into that notion as
a way to think about varying degrees of
risk as we think about how people want
to structure their access to capital and their
investment strategies and so forth.
(06:29):
So in any case, she had this topic
revisited in this article on Morningstar about how
much one can think about a withdrawal rate.
And I think one of the challenges becomes,
(06:50):
you know, do we think about this in
generic broad terms?
Oh, what's that rate?
Is it 4 percent?
Well, first off, they do seem to offer
a, well, what's the new number, you know.
But then there's a little more nuance of,
well, how old are you?
How long are you going to live?
How much risk are you taking?
(07:11):
Some really interesting things.
So even in the original 4 percent rule,
you know, I think as I opened it,
my comments were most people probably have heard
of it, but they don't know that you
started at 65, right?
Yeah.
They don't know the asset allocation model that
was assumed underlines, which was a 50-50
(07:34):
portfolio.
So it's a good point.
She goes into some good detail about the
different levels of equity investment.
And it's, you know, before I read this,
I had the assumption of, well, if you're
taking more risk, then the theory would be
(07:57):
you'd be able to have a higher percentage.
And if you took real low risk, your
percentage would be really low because you wouldn't
be getting the growth out of the equities
over a long period of time.
But that's not exactly what the article came
out with.
That was really interesting.
Russ, you mentioned there was some thought process
behind why it was that higher equity weights
(08:23):
might not be given as much room for
withdrawal as Jeff was just describing you'd expect.
Do you want to elaborate on that?
Yeah, I think they use their Morningstar capital
assumptions for the next 30 years.
And some of those numbers return assumptions have
(08:43):
come down a little bit since last year.
So I don't have the numbers in front
of me, but I think for large cap
growth equities, it was around seven, seven points.
Where is it?
I don't see here.
(09:03):
It was around seven or seven and a
half percent for large cap growth and a
little bit higher, a little over eight percent
for large cap value.
Which is a little bit of a disruption
from, and I think a big part of
that, I'm just going to elaborate a little
bit, is because of valuations.
(09:25):
We look at, we talk about this a
lot, like the PE ratio associated with some
of these large cap names is pretty extended.
And I think that's a part of that
assumption that they're overstated.
(09:46):
There's going to be a reversion to the
mean and therefore their performance will not be
as high as we might have expected, given
that we've kind of already gotten some of
those returns is the concept.
OK, so the question becomes is, will the
innovation allow that to be greater than expected
(10:08):
or to move that rate higher than it
has historically been?
Everyone's always reluctant to say this time is
different.
That notion that it's going to be different
than it used to be.
So that being the case, there's an assumption
(10:30):
of lower returns from a higher equity weight,
perhaps, than maybe historically being the case.
And with higher degree of equity comes a
greater degree of volatility.
And if there's a higher degree of volatility,
the probabilities of success get impacted.
(10:53):
Right.
So the reason they're choosing where this success
rate is getting diminished is because of that
potential for a higher degree of volatility, maybe
not as much income return as historically has
been the case because of the perception of
extended valuations.
(11:15):
It's interesting dynamic to evaluate.
Yeah.
Yeah.
So.
So let me put an example on that,
if you don't mind, Chris.
Yeah, go for it.
So we talked about the 50-50 model
that was used in the 4% theory,
right?
Yeah, over 30 years, right, was the now
(11:40):
the common analysis.
So if you go to their chart and
I'm going to post this article, which includes
this chart that I'm talking about right now
in the show notes.
So if people want to go and read
the entire article and dig into the chart
as well, they can certainly do that.
So if you look at the 50%
equity weighting and you go over to 30
years, that brings their suggested or their model.
(12:03):
With all rate, the purpose, the rule, the
4% rule now would be the 3
.7% rule and that notion that you
could withstand that.
You know, one of the things I often
wonder and I don't recall the details of,
does that mean, Jeff, do you and Russ,
you might know if.
(12:26):
I start off with a 3.7%
rule.
Sure.
And the portfolio value declines as I erode
principle.
Does that mean I'm taking a 3.7
% on a smaller amount or am I
taking the amount I started out as 3
.7% annually over the 30 years in
(12:48):
this case?
Well, as I understand it, you first of
all, you pick a date like the end
of the previous year.
So in our example here, if you, if
you pick 3.7 in 2024, you would
have an account balance at the end of
2024 and then you would adjust the 3
.7 to inflation and then you would take
(13:12):
the 3.7 based upon that.
And if the market went down, I believe
that the 4% study rule is that
you would take the 3.7 if you
were on a stagnant rate, whether the market
went up or down.
So you'd take the rate, not the dollar
amount.
That's right.
And I think that's a challenge for a
lot of people, right?
Because they would be willing to adjust their
(13:35):
rate, you know.
And the other thing is, too, I mean,
it seems that doesn't seem to jive with
me because as I think it's got to
be somewhere that there's a fixed number, because
as time passes, you wouldn't have the worry
of asset depletion if you're always only taking
3.7 percent.
(13:56):
But you do adjust it for inflation and
that's typically up.
Oh, yeah, that's a good point.
All right.
I'm following you.
Yeah, right.
So.
So we talk about this in shorthand, right?
Right.
And say, oh, OK, therefore I can take
X dollars.
And rarely do we have people then say,
I'm going to reduce my dollars I take
because of inflation.
(14:17):
They always say, OK, that I could just
for simplicity, a million dollars of three point
seven, that's thirty seven thousand dollars I can
take per per year.
Right.
And then, OK, next year I'm taking three
thirty seven thousand plus inflation and so on
and so on and so forth, eventually eroding
my million dollars.
(14:39):
In this case, you're saying, no, no, you'd
have to say it's three point seven percent
plus, you know, two percent on the inflation.
So that's three point nine or whatever, whatever
that really is.
But you follow the point and then on
on whatever the value is on that year.
So my my rate might incrementally increase each
(15:01):
year by a modest percentage to adjust for
inflation.
But the dollar amount is going to be
subject to what's what's the starting principle?
What's the starting value of of the account
that year?
I got a little bit in the weeds
there.
Sorry.
I don't know if that made sense to
people.
It does.
And it emphasizes, you know, that this is
(15:23):
a dynamic thing.
I think it's I don't think anyone should
just set a rate and assume it's going
to work.
You have to monitor, you have to look
at this in your annual review with your
financial advisor.
And nothing in life is 30 years predictable
with absolute certainty, including your own cash flow.
Yeah, I mean, I think we use we
(15:45):
use different approach often in terms of thinking
about this.
We we do talk about this as shorthand
for people as a relevant, you know, something
to have in mind.
But as a practical reality, we like to
model it out on financial planning software and
update that as we go.
Right.
As the numbers change, markets rise, markets fall,
(16:07):
account values will adjust.
Withdrawals have taken, you know, their toll.
And we want to look at how does
this forecast routinely of are we going to
have enough?
Are we going to meet our goal, which
is to say most people's goal is not
to run out of money.
You know, maybe even to have something left
over, depending on their their state wishes, you
(16:29):
know, they want to be able to pass
money on.
We talk about this.
We haven't talked about in a while, but
it's probably worth bringing up now is the
concept of the retirement smile.
Yeah, where most I think most people, not
all, but most people have a couple of
periods in their.
Retirement that they're spending more or spending less,
(16:50):
if you will, when you first retire, I
think you're I think you're going to spend
more because you have built up demand for
activities, for vacations, for renovations, for whatever it
is, you know, you've been planning for this
date of retirement and you've been excited about
it.
(17:10):
And usually not always, but usually those things
that you're excited about have a cost to
them.
You know, I'm going to Europe for a
month.
I'm putting a new addition on the house.
I'm buying a new car.
I'm taking up this hobby, whatever it is.
So the the kind of concept of a
smile, if you can draw a smile with
(17:31):
your finger wherever you are, the the beginning
of the smile and the end are higher.
And so that the theory behind it is
you're spending more in the beginning of your
retirement and more at the end of your
retirement and the the end smile may not
be happy, but the end smile is that
you probably have more uncovered medical issues, things
(17:53):
that aren't covered by insurance.
So maybe you need some help in the
house from someone to help you clean to
maybe even some home care or long term
care.
Yeah.
And these cause your expenses to go higher.
Right.
I think you're right, though.
We we routinely find that when we talk
to clients about their expenditures, their planned expenditures,
(18:15):
I'm I'm fairly sure most people kind of
overestimate their expenditures by saying some of their
expenditures by saying what, at least for some
of their goals, they'll say, oh, I'm going
to spend X dollars a month for travel
(18:36):
or a year for travel.
And will they really travel as much as
they like have their goal number?
Well, I see don't.
Yeah.
Oftentimes they don't.
Right.
On the other hand, you know, they might
say, well, I'm going to spend X dollars
on a car, but maybe cars costs go
up more rapidly than they might expect.
So, you know, there might be some offset
(18:58):
there.
But what we do find is, to your
point, is that as people settle into retirement,
some of their costs of living have gotten
more modest, right?
They're they're they're just not spending the way
they did.
You know, they're they just have a more
(19:19):
modest need relative to what they might have
expected.
That being said, too, I would I would
say , you know, I've come across some
academic stuff where they say, oh, you know
how much you're going to need.
And I find a lot of times people
will say, oh, I'm only going to need,
(19:40):
you know, 75 percent of what I'm going
to spend now.
And I think you have to really be
careful about that.
You know, what is what?
Why is that?
What what is going to change?
Is it because you're you've paid off your
mortgage and now you don't have the mortgage
and you just timed that so that you
(20:00):
could do that?
All right.
Maybe that's legitimate.
Yeah.
OK, if that's the case, maybe a lot
of people just keep a mortgage for a
really long time into retirement.
And that's probably not going to you know,
you're not going to be dropping 75, you
know, to 25 percent of your costs.
Well, I won't be commuting.
OK, not going to be commuting, so let's
(20:20):
go somewhere, though.
But you've got more time on your hands,
right?
What are you going to do?
You're going to spend some money.
And usually those things you do cost money.
Yeah, exactly.
Or a portion of them.
Exactly.
You know this.
There's a reality, you know, we're going to
go out to lunch more.
We're going to do we're going to go,
you know, have some fun at some occasion.
(20:43):
There's usually some cost.
Yeah.
So just that's one of those things that
I think is a challenge, like the four
percent rule.
You know, people that assumption of how much
do I how much am I going to
spend?
Oh, it's less than you did in your
working years.
Maybe.
Maybe not.
I like to try to plan for if
(21:04):
people have a lifestyle, what they spend.
Let's presume they're going to spend something similar.
Yeah.
And then, yes, if we want to say,
oh, we got the mortgage ready to expire
on a certain date.
OK, we can we can plug that in
properly so that expires.
Out of their cash flow.
And then, oh, they have a car payment,
but then it stops and then they buy
(21:25):
a new car and we can we can
model those kind of things where they actually
get added in and out of the cash
flow.
How often do you buy a car?
You know, every five years, every 10 years.
Well, differs from one family to another.
But, you know, these kind of things, you
have to give thought to what's what's realistic.
(21:45):
I think clients are they understand those.
They can focus on when do you buy
a car and, you know, when does your
mortgage get paid off?
Some of the ones that they seem to
struggle with is do you plan on helping
your family, anyone in your family?
They kind of they usually look at each
other and like, maybe we should have talked
about this.
(22:07):
And those can those we see, you know,
we see some difficult situations where people can
be too generous or they can be too
eager to bail out.
Not literally, but maybe to bail out.
Figuratively, anyway, to step in, to assist a
child, adult child who had a setback, right?
(22:28):
Whether it's a divorce or a job loss.
Yeah.
Rush, you got any doubt to that?
Yeah, I mean, I see it a little
bit in my family and people in my
life that we've talked about this recently, that
as I'm not a parent myself, but as
parents and the parents I know will bend
over backwards for their kids, a lot of
(22:50):
them.
Yeah, we see it a lot.
And sometimes, you know, to their own detriment
or the detriment of their financial plan and
having a big picture view where they're not
going to run out of money.
So adding all those those pieces into the
equation is really important.
And that's that's what we do with a
financial plan.
We can look at it and we can
say, OK, is this going to be a
(23:12):
sustainable level of support that you're providing for
your child?
Or is that something if that's something that
the client would like to do?
Let's see how that would work or let's
see what that would look like.
Maybe it's something they hadn't thought of before,
but they would like to do.
So one of the challenges for us is,
you know, we can look at something and
say, oh, that's not a good financial decision.
(23:34):
And we you know, we can try to
offer counsel.
But our role isn't to be the decider
or the and we can't create magic either.
You know what I mean?
But so our role isn't to be the
one who says you have permission or not.
Yeah, it's not a value judgment.
(23:55):
It's ultimately their money, their decisions, their values.
Right.
But it becomes challenging at times when you
see someone's on a path for a problem
and you want to try to warn them
off of that path.
But ultimately, you know, let's face it.
A lot of family, a lot of family
comes first and people are prioritized that and
(24:18):
and they want to do all they can
to get their family members on track and
help them out out of difficult times, going
through a divorce or getting off, you know,
getting launched, you know, that kind of thing.
So, you know, you can you can see
how that happens.
But at the same time, it becomes one
(24:39):
of these things where, you know, we've we've
we've all talked about this.
We've done shows on this topic where just
there's times when you just see the the
risk that people are putting themselves into for
their own financial security.
And, you know, the challenge of how do
you help them navigate this is often difficult.
But it comes back to this topic of,
(25:00):
you know, withdrawal rate and, you know, responsible
use of funds and how much we will
talk to people at times about deviating from
a responsible withdrawal rate, for example, for maybe
the early start of their retirement with the
intention of saying spend a little more now
(25:24):
and you'll have to spend less later because
your social security or pensions or whatever will
kick in with more that it can be
desirable to delay.
Right.
Right.
Counterintuitive to a lot of people.
But it's for many, it's the right thing
to do.
So ultimately, though, our role is to just
(25:44):
try to give you knowledge and power, you
know, that notion of like that.
Once you know what the options are, that
can be empowering to you to make decisions
and help you to navigate some of these
challenging choices.
But ultimately, these are choices that are our
clients and will give you guidance and our
(26:05):
our best judgment and how we can based
on what you decide how can we help
you figure out what's the best path, what
to do next?
You know, that kind of thing.
But ultimately, these are choices that come down
to the client's preferences and priorities.
Yeah, absolutely.
It's and sometimes it's behaviors, you know, not
(26:30):
everyone has, you know, I think sometimes we
end up finding ourselves having made choices and
we go, oh, I wish I thought about
that differently or maybe I shouldn't have done
that or whatever, right?
Right.
And that's that's kind of past tense.
So it doesn't you can't live in the
what if if only whether it's, oh, I
should have saved more, I should have spent
(26:50):
less or, you know, some particular any of
these kind of things.
You got to go from where you're at.
And how do we how do we move
forward given where we're at?
Yeah.
Yeah.
Yeah.
I think this article was good because it
discussed many of these topics, including the one
you're talking about, spending more early in on
(27:10):
your retirement.
It's also important to think about.
Your own health, your own family history.
These things are really relevant.
No one can predict, you know, the day
we're going to leave, leave this earth, but
it's important to plan for it.
And how many times, Chris, have we heard
I'm not going to live that long?
Yeah.
(27:31):
You know, so I mean.
And I've heard that many times from people
who lived a lot longer.
That's what I mean.
Right.
Yeah.
So a lot of dynamics here in this
rule for which is, you know, commonly the
rule.
Yeah, it's it's OK to use it as
a guidepost.
But, you know, all these rules of thumb
(27:52):
are very individualized.
And really, you shouldn't rely on them to
structure your own kind of DIY financial plan.
You should really get some help and model
it and look at these many other things
and many that we haven't touched on to
see how it would really impact your your
own individual plan.
Because the last thing you want to do
(28:12):
is not have money.
You know, later in life, you find your.
Yeah.
When you might need it and you might
have to downsize when you don't want to
downsize.
You might not be able to help somebody
you thought you could help or whatever the
situation or not.
You might not have the help at home
and you might have to make another alternative,
which is something you really didn't want to
(28:34):
do.
So, yeah, yeah.
Get some help with this decision.
And it's not a stagnant decision.
It was one that it's one that needs
to be reviewed annually anyway or periodically to
make sure you're on course.
Yeah.
Good points.
Really good points.
So thank you for bringing this article out.
Check it out in the show notes.
As you said, I think people will find
(28:55):
that chart or grid or whatever in the
middle of the article.
As interesting as we did.
However, you know, keep in mind how it's
supposed to work, you know, and that also
that notion that none of us knows how
long we have.
So you want to pad your numbers probably
(29:16):
to make sure you don't plan, you know,
assume a life expectancy or a time horizon
that's different from what you might really want
it to be.
All right.
With that, thanks, everyone, for being with us.
Don't hesitate to reach out to us as
we can be a resource for people dealing
with financial planning and portfolio management.
(29:36):
We're happy to to speak with you when
the timing is right.
Until next time, keep striving for something more.
Thank you for listening to something more with
Chris Boyd.
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(29:57):
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(30:38):
conduct their own due diligence before making any
financial decisions.
Welcome to Something More with Chris Boyd.
Chris Boyd is a certified financial planner practitioner
and senior vice president financial advisor at Wealth
Enhancement Group, one of the nation's largest registered
investment advisors.
We call it Something More because we'd like
to talk not only about those important dollar
and cents issues, but also the quality of
life issues that make the money matters matter.
(00:22):
Here he is, your fulfillment facilitator, your partner
in prosperity, advising clients on Cape Cod and
across the country.
Here's your host, Jay Christopher Boyd.
Welcome to the program.
Glad to have you with us.
We are available on video as well as
audio.
You might be used to listening to our
podcast, available wherever you like to listen to
(00:45):
podcasts, but we're also posting our videos not
only on YouTube, but on our own web
page.
You can find that by going to somethingmorewithchrisboyd
.com as well as the Wealth Enhancement Group
YouTube page.
Well, that being said, Jeff, let's introduce our
(01:06):
topic today.
We've got, inspired by an interesting Morningstar article,
but you know, I was thinking the topic
here, we've labeled it, How Much Can I
Take?
And I started thinking people might be thinking
we're just fed up.
I'm mad as hell and I can't take
it anymore, you know, kind of a thing,
(01:28):
you know.
They could think that, but that's the beauty
of the title, right?
When it has more than one meaning.
Yeah.
So that's not really what we mean.
Chris isn't mad.
Mad.
Although you could, are you mad?
Are you mad?
Yeah.
All right.
Let's hope not.
But it is a common question.
Like, I mean, people and during their accumulation
(01:50):
phase of their lives, they're saving their 401ks
IRAs and saving in brokerage accounts and investing
and, you know, paying their way, building their
pay, hopefully paying off their mortgage, all these
things that people are trying to do to
get to this retirement dream.
Right.
And so they, what's my number?
(02:11):
How many times do our listeners hear that?
Clients want to know what their number is,
meaning how much do they need in their
retirement assets to be able to retire?
And that really means is how much can
I take from my retirement assets on a
regular basis to replace my income so I
can live that retirement lifestyle that I've worked
(02:35):
my tail off to be able to do?
Because if you, that's the goal, right?
That's the dream.
That's the dream of retirement that I can
accumulate enough assets or cash flow from other
sources to be able to live 20, 30,
who knows how many years, maybe longer, in
(02:57):
a lifestyle doing the things that I want
to do, spending, back to the previous episode,
recent episode, spending my time doing things that
I want to be doing.
And I think most, most of our listeners
are probably educated listeners, meaning I don't think
you listened to us, unless you just came
(03:17):
across this for the first time, which if
you did, welcome.
But most of our regular listeners are, you
know, students of this, right?
They're clients who want to know what we're
doing, or they're people who are thinking about
hiring an advisor.
But I think most of you...
Pay attention to financial issues, personal finance, one
type or another.
I think most people have in their head,
(03:40):
if they're somewhat educated, or have done some
reading is all right, well, I can take
4% a year, there's an old study
that says I can take 44% a
year and adjust for inflation.
And my money has a good percentage of
not running out over a 30 year period.
High probability of running of being in and
(04:00):
that that 4% rule that we often
talk about was originally designed around a couple
age 65.
Right.
And the notion of how long they would
live.
And it wasn't necessarily that you wouldn't spend
down on principal, it was just that you
wouldn't run out of money before you passed.
Right.
And so thinking about the joint life expectancy.
(04:23):
Well, over the last decade, there have been
a lot of maybe less than that, even
there's been a lot of renewed attention to
this question, particularly when interest rates were, you
know, near zero.
And does that affect what people can do
as a withdrawal rate?
We've had in the midst of the last
(04:44):
decade, you know, the 2000s, I guess that's
more than a decade, sorry, the first decade
of the 2000s, where we had disruptions in
the markets and we had then the financial
crisis.
And, you know, was there essentially this lost
decade of equity performance?
(05:05):
You kind of look at those kind of
considerations and people were saying, oh, I wonder
if maybe that that same 4% rule
applies to add to that the complexity that
people are living longer.
Right.
There's more people turning age 100 than we
used to have.
You know, I mean, there's that issue of
longevity.
(05:26):
And of course, with longevity comes, you know,
the potential for higher costs for health care,
you know, long-term care considerations.
But putting that aside.
Recently, we had this bout with inflation.
And we've had inflation at some point.
So costs are going higher.
So people want to withdraw more.
(05:46):
There's a lot of different approaches to this.
You know, we don't talk about guardrails or
any of these kind of things, but just
this notion of withdrawal rate is one that
Christine Benz, in this article, we're fans of
Christine Benz.
She's been on the show, right.
And does a great job when talking to
people about personal finance.
(06:07):
We kind of parrot some of the things
she talks about with buckets, you know, that
notion that we buy into that notion as
a way to think about varying degrees of
risk as we think about how people want
to structure their access to capital and their
investment strategies and so forth.
(06:29):
So in any case, she had this topic
revisited in this article on Morningstar about how
much one can think about a withdrawal rate.
And I think one of the challenges becomes,
(06:50):
you know, do we think about this in
generic broad terms?
Oh, what's that rate?
Is it 4 percent?
Well, first off, they do seem to offer
a, well, what's the new number, you know.
But then there's a little more nuance of,
well, how old are you?
How long are you going to live?
How much risk are you taking?
(07:11):
Some really interesting things.
So even in the original 4 percent rule,
you know, I think as I opened it,
my comments were most people probably have heard
of it, but they don't know that you
started at 65, right?
Yeah.
They don't know the asset allocation model that
was assumed underlines, which was a 50-50
(07:34):
portfolio.
So it's a good point.
She goes into some good detail about the
different levels of equity investment.
And it's, you know, before I read this,
I had the assumption of, well, if you're
taking more risk, then the theory would be
(07:57):
you'd be able to have a higher percentage.
And if you took real low risk, your
percentage would be really low because you wouldn't
be getting the growth out of the equities
over a long period of time.
But that's not exactly what the article came
out with.
That was really interesting.
Russ, you mentioned there was some thought process
behind why it was that higher equity weights
(08:23):
might not be given as much room for
withdrawal as Jeff was just describing you'd expect.
Do you want to elaborate on that?
Yeah, I think they use their Morningstar capital
assumptions for the next 30 years.
And some of those numbers return assumptions have
(08:43):
come down a little bit since last year.
So I don't have the numbers in front
of me, but I think for large cap
growth equities, it was around seven, seven points.
Where is it?
I don't see here.
(09:03):
It was around seven or seven and a
half percent for large cap growth and a
little bit higher, a little over eight percent
for large cap value.
Which is a little bit of a disruption
from, and I think a big part of
that, I'm just going to elaborate a little
bit, is because of valuations.
(09:25):
We look at, we talk about this a
lot, like the PE ratio associated with some
of these large cap names is pretty extended.
And I think that's a part of that
assumption that they're overstated.
(09:46):
There's going to be a reversion to the
mean and therefore their performance will not be
as high as we might have expected, given
that we've kind of already gotten some of
those returns is the concept.
OK, so the question becomes is, will the
innovation allow that to be greater than expected
(10:08):
or to move that rate higher than it
has historically been?
Everyone's always reluctant to say this time is
different.
That notion that it's going to be different
than it used to be.
So that being the case, there's an assumption
(10:30):
of lower returns from a higher equity weight,
perhaps, than maybe historically being the case.
And with higher degree of equity comes a
greater degree of volatility.
And if there's a higher degree of volatility,
the probabilities of success get impacted.
(10:53):
Right.
So the reason they're choosing where this success
rate is getting diminished is because of that
potential for a higher degree of volatility, maybe
not as much income return as historically has
been the case because of the perception of
extended valuations.
(11:15):
It's interesting dynamic to evaluate.
Yeah.
Yeah.
So.
So let me put an example on that,
if you don't mind, Chris.
Yeah, go for it.
So we talked about the 50-50 model
that was used in the 4% theory,
right?
Yeah, over 30 years, right, was the now
(11:40):
the common analysis.
So if you go to their chart and
I'm going to post this article, which includes
this chart that I'm talking about right now
in the show notes.
So if people want to go and read
the entire article and dig into the chart
as well, they can certainly do that.
So if you look at the 50%
equity weighting and you go over to 30
years, that brings their suggested or their model.
(12:03):
With all rate, the purpose, the rule, the
4% rule now would be the 3
.7% rule and that notion that you
could withstand that.
You know, one of the things I often
wonder and I don't recall the details of,
does that mean, Jeff, do you and Russ,
you might know if.
(12:26):
I start off with a 3.7%
rule.
Sure.
And the portfolio value declines as I erode
principle.
Does that mean I'm taking a 3.7
% on a smaller amount or am I
taking the amount I started out as 3
.7% annually over the 30 years in
(12:48):
this case?
Well, as I understand it, you first of
all, you pick a date like the end
of the previous year.
So in our example here, if you, if
you pick 3.7 in 2024, you would
have an account balance at the end of
2024 and then you would adjust the 3
.7 to inflation and then you would take
(13:12):
the 3.7 based upon that.
And if the market went down, I believe
that the 4% study rule is that
you would take the 3.7 if you
were on a stagnant rate, whether the market
went up or down.
So you'd take the rate, not the dollar
amount.
That's right.
And I think that's a challenge for a
lot of people, right?
Because they would be willing to adjust their
(13:35):
rate, you know.
And the other thing is, too, I mean,
it seems that doesn't seem to jive with
me because as I think it's got to
be somewhere that there's a fixed number, because
as time passes, you wouldn't have the worry
of asset depletion if you're always only taking
3.7 percent.
(13:56):
But you do adjust it for inflation and
that's typically up.
Oh, yeah, that's a good point.
All right.
I'm following you.
Yeah, right.
So.
So we talk about this in shorthand, right?
Right.
And say, oh, OK, therefore I can take
X dollars.
And rarely do we have people then say,
I'm going to reduce my dollars I take
because of inflation.
(14:17):
They always say, OK, that I could just
for simplicity, a million dollars of three point
seven, that's thirty seven thousand dollars I can
take per per year.
Right.
And then, OK, next year I'm taking three
thirty seven thousand plus inflation and so on
and so on and so forth, eventually eroding
my million dollars.
(14:39):
In this case, you're saying, no, no, you'd
have to say it's three point seven percent
plus, you know, two percent on the inflation.
So that's three point nine or whatever, whatever
that really is.
But you follow the point and then on
on whatever the value is on that year.
So my my rate might incrementally increase each
(15:01):
year by a modest percentage to adjust for
inflation.
But the dollar amount is going to be
subject to what's what's the starting principle?
What's the starting value of of the account
that year?
I got a little bit in the weeds
there.
Sorry.
I don't know if that made sense to
people.
It does.
And it emphasizes, you know, that this is
(15:23):
a dynamic thing.
I think it's I don't think anyone should
just set a rate and assume it's going
to work.
You have to monitor, you have to look
at this in your annual review with your
financial advisor.
And nothing in life is 30 years predictable
with absolute certainty, including your own cash flow.
Yeah, I mean, I think we use we
(15:45):
use different approach often in terms of thinking
about this.
We we do talk about this as shorthand
for people as a relevant, you know, something
to have in mind.
But as a practical reality, we like to
model it out on financial planning software and
update that as we go.
Right.
As the numbers change, markets rise, markets fall,
(16:07):
account values will adjust.
Withdrawals have taken, you know, their toll.
And we want to look at how does
this forecast routinely of are we going to
have enough?
Are we going to meet our goal, which
is to say most people's goal is not
to run out of money.
You know, maybe even to have something left
over, depending on their their state wishes, you
(16:29):
know, they want to be able to pass
money on.
We talk about this.
We haven't talked about in a while, but
it's probably worth bringing up now is the
concept of the retirement smile.
Yeah, where most I think most people, not
all, but most people have a couple of
periods in their.
Retirement that they're spending more or spending less,
(16:50):
if you will, when you first retire, I
think you're I think you're going to spend
more because you have built up demand for
activities, for vacations, for renovations, for whatever it
is, you know, you've been planning for this
date of retirement and you've been excited about
it.
(17:10):
And usually not always, but usually those things
that you're excited about have a cost to
them.
You know, I'm going to Europe for a
month.
I'm putting a new addition on the house.
I'm buying a new car.
I'm taking up this hobby, whatever it is.
So the the kind of concept of a
smile, if you can draw a smile with
(17:31):
your finger wherever you are, the the beginning
of the smile and the end are higher.
And so that the theory behind it is
you're spending more in the beginning of your
retirement and more at the end of your
retirement and the the end smile may not
be happy, but the end smile is that
you probably have more uncovered medical issues, things
(17:53):
that aren't covered by insurance.
So maybe you need some help in the
house from someone to help you clean to
maybe even some home care or long term
care.
Yeah.
And these cause your expenses to go higher.
Right.
I think you're right, though.
We we routinely find that when we talk
to clients about their expenditures, their planned expenditures,
(18:15):
I'm I'm fairly sure most people kind of
overestimate their expenditures by saying some of their
expenditures by saying what, at least for some
of their goals, they'll say, oh, I'm going
to spend X dollars a month for travel
(18:36):
or a year for travel.
And will they really travel as much as
they like have their goal number?
Well, I see don't.
Yeah.
Oftentimes they don't.
Right.
On the other hand, you know, they might
say, well, I'm going to spend X dollars
on a car, but maybe cars costs go
up more rapidly than they might expect.
So, you know, there might be some offset
(18:58):
there.
But what we do find is, to your
point, is that as people settle into retirement,
some of their costs of living have gotten
more modest, right?
They're they're they're just not spending the way
they did.
You know, they're they just have a more
(19:19):
modest need relative to what they might have
expected.
That being said, too, I would I would
say , you know, I've come across some
academic stuff where they say, oh, you know
how much you're going to need.
And I find a lot of times people
will say, oh, I'm only going to need,
(19:40):
you know, 75 percent of what I'm going
to spend now.
And I think you have to really be
careful about that.
You know, what is what?
Why is that?
What what is going to change?
Is it because you're you've paid off your
mortgage and now you don't have the mortgage
and you just timed that so that you
(20:00):
could do that?
All right.
Maybe that's legitimate.
Yeah.
OK, if that's the case, maybe a lot
of people just keep a mortgage for a
really long time into retirement.
And that's probably not going to you know,
you're not going to be dropping 75, you
know, to 25 percent of your costs.
Well, I won't be commuting.
OK, not going to be commuting, so let's
(20:20):
go somewhere, though.
But you've got more time on your hands,
right?
What are you going to do?
You're going to spend some money.
And usually those things you do cost money.
Yeah, exactly.
Or a portion of them.
Exactly.
You know this.
There's a reality, you know, we're going to
go out to lunch more.
We're going to do we're going to go,
you know, have some fun at some occasion.
(20:43):
There's usually some cost.
Yeah.
So just that's one of those things that
I think is a challenge, like the four
percent rule.
You know, people that assumption of how much
do I how much am I going to
spend?
Oh, it's less than you did in your
working years.
Maybe.
Maybe not.
I like to try to plan for if
(21:04):
people have a lifestyle, what they spend.
Let's presume they're going to spend something similar.
Yeah.
And then, yes, if we want to say,
oh, we got the mortgage ready to expire
on a certain date.
OK, we can we can plug that in
properly so that expires.
Out of their cash flow.
And then, oh, they have a car payment,
but then it stops and then they buy
(21:25):
a new car and we can we can
model those kind of things where they actually
get added in and out of the cash
flow.
How often do you buy a car?
You know, every five years, every 10 years.
Well, differs from one family to another.
But, you know, these kind of things, you
have to give thought to what's what's realistic.
(21:45):
I think clients are they understand those.
They can focus on when do you buy
a car and, you know, when does your
mortgage get paid off?
Some of the ones that they seem to
struggle with is do you plan on helping
your family, anyone in your family?
They kind of they usually look at each
other and like, maybe we should have talked
about this.
(22:07):
And those can those we see, you know,
we see some difficult situations where people can
be too generous or they can be too
eager to bail out.
Not literally, but maybe to bail out.
Figuratively, anyway, to step in, to assist a
child, adult child who had a setback, right?
(22:28):
Whether it's a divorce or a job loss.
Yeah.
Rush, you got any doubt to that?
Yeah, I mean, I see it a little
bit in my family and people in my
life that we've talked about this recently, that
as I'm not a parent myself, but as
parents and the parents I know will bend
over backwards for their kids, a lot of
(22:50):
them.
Yeah, we see it a lot.
And sometimes, you know, to their own detriment
or the detriment of their financial plan and
having a big picture view where they're not
going to run out of money.
So adding all those those pieces into the
equation is really important.
And that's that's what we do with a
financial plan.
We can look at it and we can
say, OK, is this going to be a
(23:12):
sustainable level of support that you're providing for
your child?
Or is that something if that's something that
the client would like to do?
Let's see how that would work or let's
see what that would look like.
Maybe it's something they hadn't thought of before,
but they would like to do.
So one of the challenges for us is,
you know, we can look at something and
say, oh, that's not a good financial decision.
(23:34):
And we you know, we can try to
offer counsel.
But our role isn't to be the decider
or the and we can't create magic either.
You know what I mean?
But so our role isn't to be the
one who says you have permission or not.
Yeah, it's not a value judgment.
(23:55):
It's ultimately their money, their decisions, their values.
Right.
But it becomes challenging at times when you
see someone's on a path for a problem
and you want to try to warn them
off of that path.
But ultimately, you know, let's face it.
A lot of family, a lot of family
comes first and people are prioritized that and
(24:18):
and they want to do all they can
to get their family members on track and
help them out out of difficult times, going
through a divorce or getting off, you know,
getting launched, you know, that kind of thing.
So, you know, you can you can see
how that happens.
But at the same time, it becomes one
(24:39):
of these things where, you know, we've we've
we've all talked about this.
We've done shows on this topic where just
there's times when you just see the the
risk that people are putting themselves into for
their own financial security.
And, you know, the challenge of how do
you help them navigate this is often difficult.
But it comes back to this topic of,
(25:00):
you know, withdrawal rate and, you know, responsible
use of funds and how much we will
talk to people at times about deviating from
a responsible withdrawal rate, for example, for maybe
the early start of their retirement with the
intention of saying spend a little more now
(25:24):
and you'll have to spend less later because
your social security or pensions or whatever will
kick in with more that it can be
desirable to delay.
Right.
Right.
Counterintuitive to a lot of people.
But it's for many, it's the right thing
to do.
So ultimately, though, our role is to just
(25:44):
try to give you knowledge and power, you
know, that notion of like that.
Once you know what the options are, that
can be empowering to you to make decisions
and help you to navigate some of these
challenging choices.
But ultimately, these are choices that are our
clients and will give you guidance and our
(26:05):
our best judgment and how we can based
on what you decide how can we help
you figure out what's the best path, what
to do next?
You know, that kind of thing.
But ultimately, these are choices that come down
to the client's preferences and priorities.
Yeah, absolutely.
It's and sometimes it's behaviors, you know, not
(26:30):
everyone has, you know, I think sometimes we
end up finding ourselves having made choices and
we go, oh, I wish I thought about
that differently or maybe I shouldn't have done
that or whatever, right?
Right.
And that's that's kind of past tense.
So it doesn't you can't live in the
what if if only whether it's, oh, I
should have saved more, I should have spent
(26:50):
less or, you know, some particular any of
these kind of things.
You got to go from where you're at.
And how do we how do we move
forward given where we're at?
Yeah.
Yeah.
Yeah.
I think this article was good because it
discussed many of these topics, including the one
you're talking about, spending more early in on
(27:10):
your retirement.
It's also important to think about.
Your own health, your own family history.
These things are really relevant.
No one can predict, you know, the day
we're going to leave, leave this earth, but
it's important to plan for it.
And how many times, Chris, have we heard
I'm not going to live that long?
Yeah.
(27:31):
You know, so I mean.
And I've heard that many times from people
who lived a lot longer.
That's what I mean.
Right.
Yeah.
So a lot of dynamics here in this
rule for which is, you know, commonly the
rule.
Yeah, it's it's OK to use it as
a guidepost.
But, you know, all these rules of thumb
(27:52):
are very individualized.
And really, you shouldn't rely on them to
structure your own kind of DIY financial plan.
You should really get some help and model
it and look at these many other things
and many that we haven't touched on to
see how it would really impact your your
own individual plan.
Because the last thing you want to do
(28:12):
is not have money.
You know, later in life, you find your.
Yeah.
When you might need it and you might
have to downsize when you don't want to
downsize.
You might not be able to help somebody
you thought you could help or whatever the
situation or not.
You might not have the help at home
and you might have to make another alternative,
which is something you really didn't want to
(28:34):
do.
So, yeah, yeah.
Get some help with this decision.
And it's not a stagnant decision.
It was one that it's one that needs
to be reviewed annually anyway or periodically to
make sure you're on course.
Yeah.
Good points.
Really good points.
So thank you for bringing this article out.
Check it out in the show notes.
As you said, I think people will find
(28:55):
that chart or grid or whatever in the
middle of the article.
As interesting as we did.
However, you know, keep in mind how it's
supposed to work, you know, and that also
that notion that none of us knows how
long we have.
So you want to pad your numbers probably
(29:16):
to make sure you don't plan, you know,
assume a life expectancy or a time horizon
that's different from what you might really want
it to be.
All right.
With that, thanks, everyone, for being with us.
Don't hesitate to reach out to us as
we can be a resource for people dealing
with financial planning and portfolio management.
(29:36):
We're happy to to speak with you when
the timing is right.
Until next time, keep striving for something more.
Thank you for listening to something more with
Chris Boyd.
Call us for help, whether it's for financial
planning or portfolio management, insurance concerns or those
quality of life issues that make the money
matters matter.
(29:57):
Whatever's on your mind.
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Financial Talk Show Wealth Enhancement Advisory Services and
(30:18):
Jay Christopher Boyd provide investment advice on an
individual basis to clients only.
Proper advice depends on a complete analysis of
all facts and circumstances.
The information given on this program is general
financial comments and cannot be relied upon as
pertaining to your specific situation.
Wealth Enhancement Group cannot guarantee that using the
information from this show will generate profits or
ensure freedom from loss.
Listeners should consult their own financial advisors or
(30:38):
conduct their own due diligence before making any
financial decisions.
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