3 Things 6-2-25

 Thing One

The Pros and Cons of the 4% Rule

The 4% rule is a widely recognized guideline for retirees to manage withdrawals from their savings, aiming to ensure funds last throughout retirement. Introduced by William Bengen in 1994, it suggests withdrawing 4% of the initial retirement portfolio in the first year, with subsequent withdrawals adjusted for inflation annually. For example, a retiree with a $1 million portfolio would withdraw $40,000 initially, then increase that amount based on inflation (e.g., $41,200 if inflation is 3%). The rule assumes a balanced portfolio, typically 60% stocks and 40% bonds, and is designed to sustain savings for at least 30 years. While its simplicity and historical grounding make it appealing, the 4% rule has both strengths and limitations that retirees must carefully consider.

One major advantage of the 4% rule is its simplicity and ease of application. Retirees can calculate a straightforward withdrawal amount without complex financial modeling, making it accessible for those without extensive financial expertise. The rule is grounded in historical market data, analyzed by Bengen using U.S. stock and bond returns from 1926 to 1976, which showed that a 4% withdrawal rate survived even the worst economic downturns, like the Great Depression. This historical resilience provides retirees with confidence that their savings can weather market volatility, including inflation and sequence-of-return risks. For many, the rule offers a practical starting point for planning, balancing the need for income with the goal of preserving capital over decades.

Another benefit is the rule’s flexibility in providing a predictable income stream. By adjusting withdrawals for inflation, retirees can maintain their purchasing power, which is critical as living costs rise over time. The 4% rule also allows for a diversified investment approach, as it assumes a mix of stocks and bonds, reducing reliance on any single asset class. This diversification helps mitigate risks associated with market fluctuations. Additionally, the rule’s conservative withdrawal rate compared to higher, unsustainable rates (e.g., 7-8%) helps prevent premature depletion of savings, offering a disciplined framework for those who might otherwise overspend early in retirement.

However, the 4% rule has notable drawbacks, particularly its reliance on historical market performance. It assumes future returns will mirror past U.S. market conditions, which may not hold in today’s environment of lower bond yields and potentially slower stock market growth. Some financial experts suggest a lower rate, such as 3-3.5%, may be safer for modern retirees, especially in prolonged low-return or high-inflation periods. The rule also overlooks variable expenses, such as unexpected healthcare costs or lifestyle changes, which can disrupt the fixed withdrawal plan. Taxes, fees, and other costs are not factored in, potentially reducing the effective income available to retirees.

Furthermore, the 4% rule’s one-size-fits-all approach may not suit everyone. Retirees with shorter or longer retirement horizons, unique spending needs, or non-traditional portfolios (e.g., heavy in real estate or international assets) may find the rule less applicable. It also assumes consistent investment discipline, which can be challenging during market downturns when retirees might panic and deviate from the plan. Critics argue that dynamic withdrawal strategies, which adjust based on market performance or personal circumstances, may offer greater flexibility and sustainability. Ultimately, while the 4% rule provides a solid foundation, retirees should consult financial advisors to tailor withdrawal plans to their specific goals, risk tolerance, and economic conditions.

Thing Two

 A Retiree Counsels His 18-Year-Old Self

Well, not actually since that’s not possible. But a financial writer for Kiplinger did write a hypothetical letter to the 18-year-old version of himself with some pretty sound advice.  Here are the highlights of what he said:

 

“…Budgeting isn't punishment, it's freedom

Nowadays, I agree with Andrew Bates, the COO at Bates Electric, who says, “More young adults should know about the 50/30/20 budget rule: 50% of your income goes to needs (rent, groceries, bills), 30% to wants (dining out, streaming subscriptions) and 20% to savings or debt repayment…

What's the difference between wants and needs?

·       Needs are the non-negotiables: housing, food, utilities, health care and transportation

·       Wants are the extras: fancy coffee, expensive footwear, impulse buys online and the latest phone upgrade

Here’s a trick I learned: When you’re considering a purchase, ask yourself, “Will this help keep a roof over my head?” If the answer is no, it’s probably a want, not a need.

Investing isn't just for rich people

For my young self, investing was something I’d do after I had money — like, real money. The kind that came with suits, stockbrokers and words like diversify and portfolio. So I was waiting until I felt ready, until I felt I had enough.

Here’s what I wish I’d understood sooner: You don’t need a lot of money to start investing — you just need to start.

The real magic of investing isn’t about how much you put in (it can be as little as $50 per month). It’s about how long it stays in. That’s the power of compound interest.

Debt is not evil, but it's not your friend either

The key is understanding the difference between good debt and bad debt. Good debt is the kind that helps build your future, like education or property. Bad debt is high-interest consumer debt that drains your checking account, leaving you with nothing to show for it…”

Thing Three

Just A Thought  

“The pessimist complains about the wind. The optimist expects the wind to change. The leader adjusts the sails.” ― John Maxwell