How Much Can I Spend in Retirement?

Tyler Gardner (0:00)

Retirement is not a game of precision. It's a practice of constant adjustment. No model will ever know the exact path ahead. Every study you've read is about the past, and every tool you've used is some projection of the future that will never quite unfold the way in which we imagine. So stop trying to model your current decision on a battle we've already fought, or the one that the tea leaves say is about to come. Hello friends, this is Tyler Gardner welcoming you to another episode of Your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing. So let's get started and get you one step closer to where you need to be.

I've always had a hard time with the 4% rule. Not because it's completely wrong, but because it's overly simplistic, it's rooted in worst-case scenario thinking, and over time, it's been treated as gospel for one of the biggest financial decisions of your life. When to stop working and start living. Or in other words, how much money can I spend each year and still be okay for the rest of my life? In today's episode, I'd like to explore five reasons why you should give some serious thought to the 4% rule, if you will, before adopting it for your own purposes. And by episode's end, hopefully you will not only know exactly what the rule is and where it comes from, but also how it might impact you and your choices moving forward. And if there might be even a better way to think about your money, then by adhering to a rule that was, well, never meant to be a rule. And as always, if any of this is helpful, please consider leaving a review, as it helps more people find us and join the conversation. If you've got feedback or ideas, shoot me a note directly at socialcapconnect.gmail.com.

I read every message, and this show is always and forever for you. Reason number one, why I'd like to challenge the 4% rule. It was born from fear-based thinking, not freedom-based thinking. It all started in 1994 with a man named Bill Bangen, who by the way is a fantastic thinker, and it's certainly not his fault that we took his research, butchered it, and turned it into the holy gospel of never spending a dime in retirement. But his research and findings have indeed gone on to haunt retirement calculators for the past three decades. Bangen's insight was straightforward, but revolutionary at the time. He wanted to figure out how much someone could safely withdraw from their retirement portfolio each year without running out of money. And the good news, and why I really like Bangen, is that unlike the countless financial voices we hear from today, who continue to regurgitate the 4% rule to all of their clients, pretending it's based on their own careful analysis, Bangen did something that most of us never do. He went to the data itself, and he ran the numbers himself. Specifically, he looked at every rolling 30-year period in US history, going back to the early 20th century, through the Great Depression, through the high inflation of the 1970s, through recessions and recoveries. What he found was that if a retiree had a balanced portfolio, let's say 50% stocks and 50% bonds, they could withdraw 4% of their starting balance in the first year of retirement, and adjust that amount each year for inflation, and still have a very high likelihood of never running out of money over a 30-year retirement. And that's all great. This wasn't some random guy's opinion. This was math. It was stress-tested, and it worked. Even in the worst historical markets, 4% tended to hold up, meaning simply there were very few periods in which someone would have actually run out of money. But here's the catch, and it's the part that almost everyone skips over when quoting the 4% rule. Bangen was solving for the worst case scenario. His question wasn't, what's the most efficient way to spend down assets in retirement? Rather, it was, what's the safest withdrawal rate that would have worked during the most brutal 30-year market stretch in US history? Am I really the only one who sees a problem with the way we're framing that? Hey, how can I design my life to survive the single worst-case scenario in market history? So, we inherited this safety-first mindset, or I'll just say fear-based mindset, and now sometimes it's referred to as safety max, and it became the standard framework of advisors everywhere. Understandable. As in a profession built on risk management, finance, it feels better to tell a client they'll be okay even if the market collapses tomorrow. But when you build your retirement plan around the single worst historical outcome in market history, you end up anchoring your life to fear, not likelihood. Cut to a few years later, 1998, and the Trinity Study, which many of you have probably heard of, comes along and reinforces Banggood's work. Great. More data to keep us terrified. Professors from Trinity University, Cooley, Hubbard, and Walz, ran their own analysis on different stock bond allocations and withdrawal rates over 15, 20, 25, and 30 year time horizons. And again, 4% rule passed with flying colors. If you had a 75 stocks, 25 bonds split portfolio, you'd be safe 96% of the time. But again, the focus was on failure rates, on what could go wrong, rather than what was likely to go right. And the 4% rule was hence put into practice as the maximum amount anyone would dare withdraw from their portfolio moving forward, in fear of winding up destitute under a bridge, peddling old crisscross CDs in exchange for a warm meal from time to time. Reason number two I'd like to challenge the 4% rule, building on the above, we have ignored entirely the massive upside data that Bangen and the Trinity Study have presented. This inherited history of 4% rates might be the one moment in history where the story wasn't written and told by the winner, but rather by these apparent hypothetical losers. So here's what the winners would have shared about these studies. Let's take the Trinity Study, this inherited gold standard for validating the 4% withdrawal rate. It actually proved something far more optimistic. People with equity-heavy portfolios didn't just succeed, they ended up extremely wealthy and could have spent far more money than they did throughout their lives.