The 4% Rule: Friend or Foe in Your Retirement Journey?

The Withdrawal Myth

Unpacking a Popular (But Potentially Flawed) Retirement Strategy

Congratulations! You’ve diligently saved and invested, building a nest egg of over $1 million. Now, as you approach or enter retirement, a crucial question arises: how can you generate income to sustain your desired lifestyle?

The 4% rule, a widely cited guideline, suggests withdrawing 4% of your retirement savings every year, in the hopes that your money will last for the rest of your lifetime, to ensure your money lasts for 30 years. Sounds simple, right? However, for investors with significant assets like yourself, the 4% rule can no longer be counted on with today’s volatile markets. Here’s why:

The Evolving Landscape of Retirement and the 4% Rule’s Achilles’ Heels:

  • Sequence of Returns Risk: Repeated studies show that if you experience a market downturn early in your retirement, it can significantly deplete your principal. This is the crux of sequence of returns risk. A prolonged bear market at the beginning of your retirement can force you to sell assets at a loss, reducing your overall portfolio value. With less capital to generate returns, you may be compelled to reduce your withdrawals or deplete your savings prematurely. This highlights the fragility of relying on a fixed withdrawal rate like the 4% rule in an unpredictable market environment.
  • Market Volatility: The 4% rule assumes that stocks and bonds returns what they have historically. However, past performance doesn’t guarantee future results. Market fluctuations and potential downturns can significantly impact your withdrawal strategy. Let’s delve deeper: The 4% rule assumes a relatively smooth and predictable market ride. However, history is filled with periods of significant market volatility, like the 2008 financial crisis and the COVID-19 pandemic in 2020 caused a significant market decline, with the S&P 500 dropping over 30% in both of those instances. A severe downturn early in retirement could deplete your principal far faster than anticipated under the 4% rule, jeopardizing your long-term financial security. Any retirement plan where you may run out of money is deeply, inherently flawed.
  • Inflationary Surprises: The 4% rule assumes that you increase your withdrawals to keep pace with inflation. However, unforeseen economic factors can cause inflation to spike, eroding the purchasing power of your fixed withdrawals. Here’s the hidden danger: Erosion of Buying Power. Even a seemingly modest increase in inflation over time can significantly reduce the purchasing power of your retirement income. For example, in 2022, when stocks declined over 19% and bonds declined over 12%, inflation was 6.5%.This kind of perfect storm renders the 4% withdrawal rule useless if this were ever to reoccur again, forcing you to cut back on your desired lifestyle or forcing you to return to work.

Beyond the 4% Rule: Exploring Tailored Solutions for Your $1 Million+ Portfolio

McAdam Financial believes in a more personalized approach for high-net-worth investors like you. We go beyond a one-size-fits-all solution, especially a significantly outdated rule of thumb, and consider a range of factors to create a sustainable retirement income strategy:

  • Spend, Protect, Grow: With the 4% rule no longer a reliable option, McAdam Financial implements a “spend protect grow” strategy tailored to your $1 Million+ portfolio. We aim to create a safe and sustainable income stream (spend), a strategy to protect some of your assets from losing principal (protect), and put the remainder in a (grow) bucket to fight long term inflation.
  • Risk Tolerance: Your comfort level with market fluctuations plays a crucial role. We’ll assess your risk tolerance and develop a portfolio that aligns with your goals.
  • Tax Efficiency: Minimizing your tax burden throughout retirement is essential. McAdam Financial advisors are well-versed in tax-advantaged strategies to help you keep more of your hard-earned money.
  • Income Needs Fluctuations: Retirement expenses may vary over time. We’ll factor in potential healthcare costs, travel plans, and other anticipated changes in your spending habits.
  • Legacy Planning: Do you wish to leave a financial inheritance for loved ones? We’ll integrate your estate planning goals with your income strategy.

Unveiling the Advantages of a Professional Retirement Plan

Navigating the complexities of retirement planning, especially with a $1 million+ portfolio, can be overwhelming. A McAdam Financial advisor can act as your trusted guide, offering:

  • In-depth Analysis: We’ll delve into your financial situation, risk tolerance, and retirement goals to create a personalized plan.
  • Advanced Strategies: Our team utilizes advanced tools and techniques, like Monte Carlo simulations, to assess potential market scenarios and optimize your withdrawal strategy, considering sequence of returns risk.
  • Ongoing Monitoring & Adjustments: The market and your life circumstances can change. A well crafted plan requires flexibility. We’ll continuously monitor your portfolio and adjust your strategy as needed.
  • Confidence: Knowing your retirement is on solid ground allows you to focus on enjoying this well-deserved chapter of your life.

Taking Control of Your Retirement Journey

The 4% rule is an outdated and unreliable approach for high-net-worth investors like you. A more comprehensive approach is necessary. At McAdam Financial, we believe in crafting customized retirement plans that minimize risk and maximize your chances of living a fulfilling and financially secure retirement.

Written by McAdam Financial as of 6/18/24. This article is provided by McAdam LLC (“McAdam” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this article is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax, or legal advice. Certain information contained in this report is derived from sources that McAdam believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages.

Securities offered only by duly registered individuals through Madison Avenue Securities, LLC (MAS), member FINRA/SIPC. Investment advisory services offered only by duly registered individuals of McAdam, LLC, a registered investment advisor. Insurance products and services offered through McAdam Financial. McAdam, LLC and McAdam Financial are not affiliated with MAS.

Artificial intelligence was used to create this content. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by our firm.

Call Now Button