If you’ve ever spoken with a financial advisor or researched retirement income, you’ve likely encountered the 4% rule. Since Bill Bengen’s study in 1994[i], the 4% rule has been the gold standard in financial planning for determining how much you can withdraw from your portfolio while reasonably expecting it to last for 30 years. There is ongoing debate in academic circles about whether the 4% rule should be adjusted up or down, how income should be modified each year in retirement, and how this concept holds up against spending shocks like long-term care costs or other emergencies. However, for the purposes of this white paper, we will use 4% as the benchmark.
Before we discuss how to increase your retirement income beyond 4%, let’s first understand why the rule exists and makes sense in the first place. From 1957 to 2023 the S&P has returned 10.32% before taxes and fees.[ii] [PC1] Simple math might suggest that one could withdraw closer to 8% (after taxes and fees) and still maintain their nest egg. However, this reasoning fails to consider the difference between arithmetic and geometric returns[iii]. Even if you withdraw 8% and average an 8% return, the sequence of returns can mean the difference between doubling your money or running out of it in just a few years. Put simply, the order in which returns occur greatly impacts your results, especially when withdrawing from an account.
Adding to the complexity, factors like market volatility, large spending shocks (e.g., major home repairs, healthcare emergencies, car purchases), potentially rising taxes, and the uncertainty of how long the money needs to last make 4% or less[iv] the standard.
So, the question becomes: If stock market returns alone won’t allow you to increase retirement income without taking on significantly more risk, what other strategic methods exist to do so? Let’s explore the top 3 strategic approaches to increase your retirement income without taking on more risk:
- True Liquidity
If the reality of geometric returns restricts your withdrawal rate to around 4%, what if you had money outside your stock portfolio (variable) that could be used during market downturns? According to Dr. Tom Wall in his book Permission to Spend, if you’re willing to start with a higher income and keep it level (rather than increasing it for inflation), having true liquidity can boost your withdrawal rate to 6-8% (depending on the number of years of true liquidity available) while maintaining a 90% chance that your money will last 30 years or more.
- Income for Life
Through options like an immediate annuity or a lifetime income rider within an annuity contract, you can leverage insurance companies to guarantee a withdrawal rate of 5%, 6%, 7%, or 8%, depending on the contract terms, your age, and how long you wait to begin income withdrawals after starting the contract. This method guarantees[v] a paycheck for as long as you (or you and your spouse) live, with a higher payout rate than the 4% rule. Some contracts also offer the potential for income increases, which can be advantageous if this source represents a significant portion of your overall retirement income.
- Spend Down
Instead of trying to make a lump sum of money last for 30+ years, what if you planned to spend it down over 15 or 20 years? Doing so can double the amount of gross income produced, and depending on the tax status of the asset (pre-tax, after-tax, or tax-advantaged), your net income could look even better. You may wonder what happens after the money has been spent down—a valid concern. However, if planning is in place to comfortably replace what has been spent down from other sources, this concern can be alleviated. This approach is often referred to as the “Rich Uncle” strategy. If you knew you had a wealthy uncle who would leave you a large inheritance in 15 or 20 years, how would that change how you spent your assets today?
An integrated approach…
Combining the efficiency of True Liquidity with guarantees of Income for Life and the tax advantages of the Spend Down approach can help you increase your withdrawal rates without taking on additional market risk. An integrated approach can also address concerns like rising tax rates, loss of purchasing power, running out of money, and the cost of major spending shocks. The art of properly combining these three strategies and selecting the right tools for each “bucket” is where customized advice and professional guidance become essential. If you’d like to discuss your unique situation, please use our booking link to schedule a complimentary initial conversation.
A Case Study…
Hypothetical Clients: Retiring at Age 68/67
Income Producing Assets: $2,780,000
Desired Retirement Cash Flow: $120,000 net after taxes (not including Social Security Income)
4% Approach:
- Year 1 of Retirement: $81,482
- Year 32 of Retirement: $81,482
- Total Lifestyle: $2,688,906
- Projected Legacy: $2,436,454
Integrated Approach:
- Year 1 of Retirement: $120,198
- Year 32 of Retirement: $129,735
- Total Lifestyle: $4,238,560
- Projected Legacy: $1,262,308
Strategies Used:
- 15-year spend down with Rich Uncle on the backend.
- Purchasing Guaranteed Income with an annuity.
- True Liquidity concept to increase withdrawal percentage on assets.
[i] https://www.financialplanningassociation.org/sites/default/files/2020-05/7%20Determining%20Withdrawal%20Rates%20Using%20Historical%20Data.pdf
[ii] https://www.officialdata.org/us/stocks/s-p-500/1957?amount=100&endYear=2023
[iii] https://www.investopedia.com/ask/answers/06/geometricmean.asp
[iv] https://www.morningstar.com/retirement/good-news-safe-withdrawal-rates
[v] Subject to the issuing insurance companies financial strength and ability to pay claims
2024-180206 8/26
Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only.
This material contains the current opinions of Joel Gardner and Consolidated Planning only. These are not the opinions of Park Avenue Securities, Guardian, or its subsidiaries. Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. Consolidated Planning, Inc. is not an affiliate or subsidiary of PAS or Guardian.CA Insurance License #- 4122962
All scenarios and names mentioned herein are purely fictional and have been created solely for educational purposes. Any
resemblance to existing situations, persons or fictional characters is coincidental. The information presented should not
be used as the basis for any specific investment advice.
