Transcript

00:00:00:00 – 00:00:18:18

Mike

Is the 4% rule still something that we should be following when it comes to retirement? Now, by the way, if you have a question for us, just there’s a link right below the video you can click and type in your question. And who knows, maybe we’ll cover your question on a future episode. Well, first, what is the 4% rule?

00:00:18:19 – 00:00:42:20

Mike

October of 1998. My parents came to me and said, Hey, Mike, we’re looking to retire here at the end of the year and we want your help. Back then it was 1998. We knew how to plan for retirement. We used the 4% rule. So what is the 4% rule? Well, here we have an Investopedia definition. The 4% rule You can go ahead and go to Investopedia and read out all about it.

00:00:42:28 – 00:01:10:16

Mike

But I’ll tell you in English what it was. It’s really simple. Research told us that if you would build a balance portfolio, roughly half of your money in stocks and roughly half of your money in bonds. But if it was, it was diversified. Some U.S. positions and international positions maybe sprinkle in some real estate. If you do a good job having a diversified, balanced portfolio, then you should be able to withdraw 4% of your initial amount.

00:01:10:26 – 00:01:38:20

Mike

And then each year increase that with inflation. For example, if you retired with $500,000, right. The first year you could take out 4%, which would be 20,000. And then that 20,000 each year could grow with inflation. And the research said that if you follow that rule, that your money should last about, oh, 90% of the time for a 30 year retirement.

00:01:38:20 – 00:01:57:16

Mike

That was kind of a path that we followed. And that’s exactly what I did for my parents. January one, 1999 in the first year. The market was good and it was awesome. They started my parents by the way, and they retired, had 300,000. They wanted to get 4% of that, which was 12,000 a year or $1,000 a month.

00:01:57:26 – 00:02:23:16

Mike

And so the first year, that’s what we did I invested a balanced portfolio. They took their $12,000 and at the end of the year they had $320,000. Meaning not only did they take their income, but they grew their money. It was awesome. In 2000 dot.com crash 2000 19 11 2002 recess by 2000 through 2002 in that three year period.

00:02:23:29 – 00:02:53:22

Mike

The stock market, like big blue chip companies were down 43% 43%. Now think about this. Here’s my. Here are my parents and the rest of our clients in a balanced, diversified portfolio. They’re taking out 4% every year for three years. In a row. That’s 12%. Then their portfolio, the stock portion is down roughly half. And if that is another 25% the bonds were doing well at the end of the day at the end of 2002.

00:02:53:29 – 00:03:17:03

Mike

My parents they started with 300,000 taken out 4%. We set it up exactly where I found this 4% rule. They were down to about $160,000. Almost half of their money was gone. And guess what? So was everybody else who is retired at the time. If my parents would have kept taking 12,000 a year out of that portfolio and at the time is 160,000, they would be broke today.

00:03:17:11 – 00:03:41:11

Mike

They would have gone broke just like that. In 2008. The stock market’s down 37% the year and a half period from October of 07 to March of 09 that year. And a half period. Big blue chip company stocks down 50%. Again, if you were following the rule of the 4% rule balanced diversified portfolio taking out 4% again, you would have failed.

00:03:41:11 – 00:04:08:11

Mike

You would have gone broke. What we have learned is that this 4% rule, we’ve learned that it only works in the markets cooperate, markets go south, you’re in trouble. And in fact, Morningstar now tells us that rule is dead. Morningstar says the 4% rule dead. Morningstar’s research says that if you do a balanced portfolio in today’s world, interest rates are a lot lower.

00:04:08:21 – 00:04:38:26

Mike

Markets are volatile in today’s world, that 4% should only be 2.8%, as some people in the South might say. That dog don’t hunt, right? You don’t want to like. That’s just not enough. If you structure your portfolio the right way, you can enjoy 4% income, maybe as much as 5% income on your portfolio in retirement and do it with a lot of safety.

00:04:38:27 – 00:05:04:26

Mike

I’ve got this article right here. To my right, the title right here, this article. Planning for retirement income in an increasingly volatile and uncertain world. And it actually says in this article, if you follow that 4% rule, if the stock market is down 20% for the year, just one time in a ten in the first ten years of your retirement, that thing’s going to completely collapse on you and you’re going to run out of money.

00:05:05:00 – 00:05:34:13

Mike

The historical way of doing it balance portfolio diversified. Withdraw 4%. That just doesn’t work anymore. But you can get 4%. You can get 5%, maybe even a little more. If you have the right strategy, that, by the way, a topic of another video. But there you go. That answers the question. Is the 4% rule still legitimate? Not so much the traditional way, but do it the right way and it’ll probably work for you.

00:05:34:18 – 00:05:35:13

Mike

We’ll see you next time.