Its a Friday before a long Labor Day weekend… I am on the road with weak Wifi, so a totally new post is difficult… This is heavy, but super important, and I am overdue in getting this to you.. So Happy Long Weekend! Happy Friday, and expect this post may be repeated soon, just so everyone sees it… Or .. maybe all see it with a 50% longer weekend ! Either way enjoy!
The 4% rule was made famous by Bill Bengen in the early nineties. The rule stated that a 4% draw rate was safe for most investment portfolios.
Like many theories …this “Rule” Italics because it really is not a rule, just a theory, has been poked and prodded from all angles.
Recently we have seen a uptick in articles (We read a ton of what we call Daily Industry Rags and as you know listen ferociously to Podcasts) so we wanted to throw in some poking and prodding too!
The most recent arguments again from our Industry Rags are a “Flexible” Withdraw rate. Meaning taking a higher draw rate, the higher draw sounds really neat on the surface … BUT … if needed the “Flex” comes in the form of much lower draw rates if necessary… WHAT !! That’s not a practitioner view. Very few are willing to lower their draws and that timing usually occurs at the most inconvenient of moments…. like an economic or other slowdown, when the draw needs to stay at the same level. Nope, we disagree!
For the record, many of the other studies/pokes/prods are laced with a product that will save the day and allow you a higher draw rate. Not a fan of this at all …. sounds great until the “Never seen that happen before!” event occurs… pass on new angles from an unproven method.
Ok… will stop throwing knives and get to our thoughts on the subject!
What gave us concern for over a decade?
Almost all portfolios should/do/need some fixed income, and that allocation grows as the draws become real, given the higher fixed income rate currently and looking forward (and some perils created by artificially low rates – a discussion for another time) the 4% draw rule looks much safer!
Longer term low Bond/Fixed Income/Interest rate look back
The following chart is the 10 year treasury… a good proxy for long but not super long yields… We specifically chopped the date from 2008 until 2020 as that was more of the worried time… The 10 year stayed well below 4% for this time sometimes well below 2%….
Not withstanding our posts of late on Warsh Bessent/FIMA and Baby twist – In which the officials are trying to put a lid on interest rates, the below chart, current day is well above 4%, looking closely towards 5% on the 10 year….
Cutting to the chase ….here are our candid thoughts
Generic Rules to make the 4% theory work long term:
Have a Base line plan and know the draw rate – Just like we have a GPS for driving, a plan is needed- but this journey/plan/GPS map is also to monitor, adjust, review and track as there really is not a known destination, just a fun journey!
The first five years are the most important – Getting off to a great start and not violating draw goals greatly helps the long term trajectory.
Do not take huge draw downs – Once drawing, the portfolio needs to be in a safer allocation, free from concentration and well diversified to help avoid never seen before events that may occur.
Younger versus older starts – Someone well into their 70’s can fudge on the 4% rule and likely be ok, but someone starting in their 40’s for retirement; All of the above bullets are magnified …and we would even add, never error over the 4% for the first several decades!
Have a Great “4% Rule Revisited” Day!
John A. Kvale CFA, CFP
AI Content Authenticity: All of the following text content has been completed by myself and has not been edited or created by AI. Occasionally we do use AI for images and will note when appropriate.
Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
