For nearly four decades, I’ve been collecting financial planning tools. Some are blunt but effective, while others are as precise as surgical instruments.
You may have heard of one of the most famous tools in our industry known as the “4% Rule.” It was created in 1994 by Bill Bengen, an MIT-trained aeronautical engineer turned financial advisor. Essentially, it suggests you can withdraw 4% of your portfolio annually and reasonably expect your money to last 30 years.
First, Bill Bengen never intended the 4% rule to be a one-size-fits-all solution. The basis of his research was to determine how much someone could safely withdraw in a worst-case historical scenario and still avoid running out of money in retirement.
More recently, he has even revisited his findings, suggesting that the 4% rule is now closer to 5%.
No matter the percentage, when we build specific financial plans, we must look at variables that a simple percentage can’t capture.
Why Your “4%” Might Be Different
Two major factors often require us to modify this guideline:
1. Tax Location: $1,000,000 in a 401(k) or IRA is not the same as $1,000,000 in a trust account. Withdrawals from retirement accounts are generally subject to income tax, while trust accounts and other “non-qualified” accounts often benefit from lower capital gains rates. The “net” amount in your pocket is what actually matters.
2. Your Legacy Goals: Some clients want to spend every last dime enjoying their retirement. Others want to leave as much as possible to their heirs. Neither choice is wrong, but they require very different approaches.
Tailoring the Plan to You
In our practice, we see a few main groups who benefit from a departure from traditional math:
· Experience Seekers: If you’ve worked hard for forty years, you may feel so inclined to turn that money into memories, and you deserve to! For you, we want you to be able to focus on squeezing every drop out of each year rather than maximizing the ending balance.
· Solo Agers: For clients without children or heirs, the priority often shifts to personal security. The goal here is a bulletproof plan that ensures the highest level of care and comfort for as long as you live.
· Solo Agers who Seek Experiences. While this may sound a little like something you’d find on a profile in a dating app, this demonstrates that life is full of all sorts of individuals and our goal is to tailor our offering to you as an individual and not lump you in with others ‘your age’ or who have ‘your level of wealth.’ Everyone is different and we enjoy finding solutions that fit you.
The Bottom Line
There is no “magic number” that fits everyone. This is why I wrote my book, Make Your Money Last a Lifetime®. Our job is to listen carefully and fit our professional tools to your personal desired outcome.
As always, please call us with any questions.
This commentary reflects the personal opinions, viewpoints and analyses of the Bourke Wealth Management employees providing such comments, and should not be regarded as a description of advisory services provided by Bourke Wealth Management or performance returns of any Bourke Wealth Management client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Bourke Wealth Management manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
