How to Make the 4% Rule Even Better

Retirement income planning is a complicated and–for many–an elusive task.  Industries that exist to help everyday Americans prepare for retirement spend millions of dollars every year trying to craft flashier and fancier marketing hooks to convince would-be retirement preppers to entrust them with their hard-saved dollars.  And well-meaning reporters churn out thousands of articles every year trying to help people navigate this tricky subject.  Sadly, most of this information is misguided and draws strange conclusions that lead people to wander in the wild with an often false sense of security.

Then there are times that someone pens something so laughably meaningless that it catches the attention of The Insurance Pro Blog.  Bet you know what we'll be talking about today.

Investor's Business Daily recently published an article discussing the “Bengen Rule.”  This is also commonly cited as the 4% Rule because that was rough–sort of…kind of…not really–the number that William Bengen mentioned being ideal for a retirement portfolio annual drawdown to ensure that the account would not reach a zero balance within a 30-year timeframe.

But wait…maybe it's not 4%.  You see, Bengen's Rule has often been misquoted, misinterpreted, misunderstood, and misapplied.  He's spoken publicly for a few decades now that he never intended to recommend a static 4% be withdrawn from some mythical account year-over-year and others seeking recognition for their own slant on the subject have taken shots at him attempting to prove that there are likely more optimal drawdown percentages.  Mr. Bengen would happily agree with them as he did when he originally presented the idea.

Today, we're not talking about the Bengen Rule, its legitimacy, or even why such a rule matters in the retirement planning space.  We'll save that for a different day.

Instead today, we're addressing an attempt to “help” people through inciting the Bengen Rule that is so asinine it bore highlighting if only to make a feeble attempt at repelling people from the lazy thinking that went into publishing such nonsense.

The Article, which you can read by clicking this link right here exclaims that the 4.7% Rule is Like a 283,000 Retirement Savings Bonus!  That should get a few people's attention.

The main throw of the article is that 4.7% is better because it will create more money for the retiree in terms of the money they can generate in retirement…thank you Captain Obvious.  I don't know who needs to hear this, so I'm making this statement without regard for an intended audience.  Increasing the withdrawal percentage will ALWAYS result in you having more money on an annualized basis.

But this article doesn't stop at increasing the withdrawal percentage increases the income you can generate.  It also notes the inverse relationship of increasing withdrawal percentages and what that would require you to save when targeting a specific income goal.  The article states:

Following the 4.7% Rule instead of the 4% Rule can save you big bucks. Why? You don't need to save as much and will still have the same amount of income in retirement. For the average person, it makes a difference of about $283,000 in their retirement savings.

This isn't a function of any sort of financial wizardry.  If we assume that the amount of money we can generate from our assets is higher per dollar of assets acquired, then the sum of those assets can be less.  But the problem we run into is the casual way this article addresses this subject.  As if you suggest this 4.7% withdrawal rate will save the day for retirees because it means they can get by through saving less.  Sort of like how the PBGC keeps pensions afloat by allowing them to assume that they will always somehow achieve an 8% return on assets despite many pension funds almost never-ending inability to achieve that benchmark.

Increasing Withdrawal Income Boosts Income…You Don't Say?

The article fancifully remarks that increasing the withdrawal percentage from 4% to 4.7% has the ability to boost retirement income by 12.11% in the example it walks through.  Again, it should surprise absolutely no one that this happens.

But what's strange about the context in which this discussion takes place, there's an undertone of “lucky you dear hopeful retiree, you now have more income!”

I've been doing this for a while.  Long enough to have provided guidance for a number of people who are now in retirement.  All of those retirees–and I mean absolutely every single one of them–approach income the same way.  They only produce what they need for income from their retirement assets.  I don't care if their withdrawal percentage is 4% or 1.2%, if that's all they need, that's all they take.  Why?  Because there's no point in withdrawing more money than they need.

In fact, this is one of the biggest failings–in my opinion–made by the majority of financial planning writers be they, bloggers or journalists.  They all pretend that retirees go about generating income like salaried government employees.

These purveyors of financial hot tips pretend that everyone will gather up their assets, punch the clock for the final time, and head home ready to deploy money from these assets with a fixed interest rate withdrawal that will replenish the balance of their checking account on the 1st and 15th of every month.

Nope, not my experience.

Retirees spend the money they need to, and then they make decisions on what flexibility they might have to “splurge” on bigger purchases.

Sure some have a wider degree of discretionary income than others, thus making those not-absolutely-necessary spending decisions a little easier, but I've never had a client, nor met a retiree who withdrew money out of his or her retirement savings accounts just for the lol's.

In fact, why would you want to?

After explaining how much more money you earn annually by using a 4.7% withdrawal rate vs. a 4% rate, the article's author claims:

Over a decade, that puts an extra $133,000 into your bank account.

So am I to assume that we're suggesting people move out of an asset that's probably growing at a rate of around 5-7% annually to move into an asset that at best might produce 0.60% annually?

It's also at this point that the article remarks:

Further, the fact that your withdrawal income alone is higher — $89,300 vs. $76,000 — as well as your combined income, means there's a good chance that your Social Security benefits would be higher.


I'm going to restate that and add my own emphasis for the part by which I'm especially perplexed…

Further, the fact that your withdrawal income alone is higher — $89,300 vs. $76,000 — as well as your combined income, means there's a good chance that your Social Security benefits would be higher.

Social Security Benefits in terms of the “retirement” income benefit are based on the wage base calculation–which is a booger of a calculation best left to the SSA's number crunching, but we can think of it as mostly being tied to the amount of income you earn annually before you begin receiving benefits from the program.

Increasing your retirement income does not…repeat DOES NOT…increase your social security benefits.  In fact, if anything is likely increases your Modified Adjusted Gross Income and REDUCES!!! your net Social Security income because it subjects more of it to income taxes.

But this Also Means you Can Save Fewer Dollars

Then we get to the part that I think was supposed to be the focal point of this entire article.  The article notes that if using the 4.7% withdrawal rate from the outset of establishing your retirement plan, you can get by with a lower savings rate.  Because withdrawing 4.7% is greater than withdrawing 4%, this means you need fewer dollars to generate the same retirement income.  Requiring fewer dollars means you can safely save fewer dollars, which I guess means you can now go buy more lattés…or something?

Look, the good news is for those who feel they are way behind on retirement preparedness this might be a sliver of good news pointing out that perhaps things aren't as headed to a certain warm underground place in a carrying device named for the means of holding it as originally assumed.  Okay, thumbs up to the little ray of sunlight for those who are living life a bit more on the edge.

But there is something way more problematic about all of this…

Because…You Know…It Just Works that Way…Right?

Bandying about the 4%, 4.7%, 4.3%, 4. who-the-hell-cares?% number doesn't help anyone.  Is it reasonable to assume you can withdraw 4.7% of your retirement assets without fear of running out of money?  I'm sure in some situations it's perfectly fine.  I personally know of some situations where the percentage can be higher than that and everything works out a-okay–hint it has a lot to do with the lack of volatility of the assets and there's one asset I know of that tends to be extremely nonvolatile.

But telling people they are going to withdraw 4-ish percent from their assets is the problem, not the solution.  Telling people HOW they are going to go about withdrawing assets is the real solution.

I don't know William Bengen personally, but what I've read about him leads me to believe that the “Bengen Rule” was more intended as a guidance tool for professional advisors, not a catch-all rule-of-thumb for anyone with a 401(k) balance.

In other words, when it came to crafting plans for clients who reached retirement, 4% was more a way to ensure the income generated wasn't beginning to wander into dangerous territory.  Most professionals have guidance tools like this to ensure the soundness of their recommendations.  In fact, Bengen's original work was published in the Journal of Financial Planning, which was by no means a consumer-facing periodical.  Now it's entirely possible that after the idea caught fire he assumed–correctly–that he could make some additional retirement savings money from the idea himself.

But regardless of the intentions Mr. Bengen or anyone else had, we simply cannot pretend like average-everyday people have all the tools necessary to employ something like the 4% rule and flawlessly live through their retirement years.  There are a lot of levers at a retiree's disposal and blindly withdrawing 4% isn't going to ensure success.  Withdrawing 4.7% isn't the answer that makes it “more better” either.

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