LOF - 4pc Rule
Freddie: Retirement planning used to be simple, follow the 4% rule and enjoy your life. But with inflation, market swings and social media influencers shaping financial advice, is that strategy still reliable today? Is it outdated? Today, we're cutting through all of that noise to uncover what really works in modern retirement.
Hello again everyone and welcome to Leibel on Fire. I'm Freddie Bell, and joining me is Leibel Sternbach. He is the author of Living with Financial Anxiety and also the author of the book Authenticity. Leibel, hello and welcome back.
Leibel: Hey, how are we doing today?
Freddie: I'm doing well and I'm looking to see if we can figure out who these Twitter queens are and bring some logic to the discussion today.
So glad that you're with us. And before we start give us that website again because I know that people they're going to be referring to it today. I believe it's yields4U.com. Can you explain it?
Leibel: Yeah, yields4U.com. That is our website. You've got a ton of resources on there.
Financial education. We hold a whole bunch of classes every week. We're adding new ones. We've got calculators and tools for figuring out a whole lot of these questions that you have, including a 60 second retirement calculator that'll ask you some basic questions and essentially. Do a stripped down version of the retirement plan that we usually build.
It'll give you kind of back of napkin math, do you have enough money to retire? How much can you sustainably take out? It'll highlight for you the big questions that we are concerned with. And this software, by the way, is something that we created specifically for us based on how I work and how I create plans.
A lot of these cookie cutter calculators out there that kind of spit out an answer. Yes, invest all your money with us. That's the answer. Or do a million, convert everything. This more looks from a financial retirement planning perspective of, if I was your advisor and,
if my kid was only ever gonna use a calculator to figure out their retirement, what is it that I would want that calculator to do so that they got the strongest possible answer and it would point them in the direction of the things that they need to focus on. That's what this 60 second calculator does.
Freddie: I can tell you yields4U is really resourceful. You'll find just about everything you're looking for at yields4u.com. And I'm thinking that when I was looking at retirement savings and all the rest of it, I heard something about the 4% rule and I didn't give it a whole lot of thought Leibel to be honest with you.
But I'm wondering now, is the 4% rule still reliable in today's economy? When I first started looking at this, it was the dark ages. So given inflation. Market volatility and longer life expectancies. How valid is that 4% rule today?
Leibel: So the 4% rule and I'm gonna give you the academic answer and then I'm gonna tell you what we use in our plan
'cause you're gonna see in our plan that we create for you on our website, we use the 4% rule, but we don't use it the way that it was designed. We don't use it the way that academically people talk about it. We use it the way colloquially that people use it. And I think that's an important distinction that the way that people use it versus what it was intended for are two different things.
So the 4% rule, the way it was academically intended, and keep in mind this was created by a financial advisor, right? So a financial advisor was. Was putting on his sales hat, and he was like, how do I create plans for people? How do I convince people to gimme money to invest? And he is like, I'm going to come up with a way to show them how much do they need to save,
how much do they need to have saved? How much can they comfortably take out retirement so that they know my investment strategy will keep them retired for forever. From the year that financial advisor created it to today, he has revised his own number that he uses multiple times, right? I think he, like every two years he comes out with a new number, right?
The 4% was based on in the nineties what the average return was for stocks and bonds. The average return for stocks and bonds in the nineties, and by the way, the average return of stocks in the nineties was 20%. Okay. Bonds were closer to you to 8%, and so he was, when you're back testing information, you're saying, well, historically, blah, blah, blah.
Right? Well, historically it doesn't help if your view of history is distorted, right? Yes. You have years where the stocks returned 20%, and then following the nineties, we had 2001 to, 2008. Well, really 2011. Where the stock market returned 1%. Right.
And both are equally. Now you average them together, you get a 10% average. But that's not what we're experiencing, right? No. So. 4% rule was a, in theory it was. It was a concept that if you took a stock and bond portfolio and you did, and he tested different allocations, if you had a 50-50% mix sustainably, take out 4% a year and not run out of money in 25 years, that was what he was looking at.
Nice. In theory. But reality, right? I don't think that gives any of us comfort, It doesn't, it that's not what we want to hear. It doesn't seem like it's gonna hold up. And in fact, if you did a 50-50 per portfolio, I can almost guarantee that you're gonna run outta money because taking 4% out a year, and by the way, his number wasn't adjusted for inflation.
So every single year. You kept taking out the same 4%. So if in year one you took $40,000 out, you had a million dollars, you took 40,000 out. Year two, you took $40,000 out, you didn't increase that for inflation. Right. Which I don't know anyone who's living that way because that's not sustainable. We have inflation.
Prices have literally doubled in the last, five years from cost of eggs, cost of housing skyrocketing. Yes. So let's talk about how do we translate this into a sustainable way and why I use the 4% rule, but not the way most people do. So everyone in everyone has come to this conclusion, right.
Or wrongfully so, the 4% is a sustainable amount that you can take out of your portfolio and never run out of money. Forget about whether that's true or not. What I can tell you about 4% is two things, and I think it's very important from a planning perspective that we consider these two things. 4% when we're doing back of the napkin math of do we have enough money to retire?
What 4% tells us is number one, if we didn't grow our investments another penny, right? If we took that million bucks that we earned or that $2 million, whatever that is, and we parked it in the freezer, right? And you gotta put it in the freezer, by the way. 'cause if you put it on your mattress, you are gonna get rats and they're going to eat your money.
So, put it in the freezer. If you put it, if you take your 2 million bucks and you put it in the freezer. 4% right? Is going to last you for 25 years, right? So whatever that number is on $2 million, was that $80,000 a year? You can live off of $80,000 a year. For the rest of your life without running out of money.
Now you're not gonna increase that money beyond $80,000. Right. So you're gonna take $80,000 this year. You're gonna take $80,000 in 25 years. It'll last 25 years in your freezer, which is a very powerful number to know. Right. It gives you a lot of financial security to know that if I did nothing, I can last 25 years and
I'll be honest, most people I meet don't expect to live more than 25 years, so they're very happy with that number. The second thing that it does is 4% is a very achievable goal. We can get 4% return no matter what the market is doing. Right. Market's down. Market's up. We can comfortably find 4% of the market somewhere.
I can confidently. say that we can, on average get you a 4% return over the next 25 years, which means. In theory, you're not gonna run out of money in retirement. Now, obviously this is back of the napkin math because we got inflation to factor in there. Sure, you do have years where we have down years, but we can very comfortably figure out an investment an investment approach that gets you 4% a year.
Without the fear of having massive declines. Right? And that can get some of that upside when the market has upside. And so I think as a planning tool, it is a very important for us to look at the 4% rule because it tells us two very important metrics. What's our worst case scenario? And what is a safe scenario?
It's kind of two opposite extremes.
Freddie: So Leibel, in view of that, what's the best way for retirees to balance financial security? Number one with enjoying their golden years. Number two, especially in a world obsessed with the hustle culture the financial trends, and of course, as you call them, the Twitter queens.
Leibel: Yeah. The important thing, right, and this is what comes down to sound investing, is you need to have a plan and it needs to be a very clear plan that's kind of independent of what all the noise. In the market is right, and so you need to know that no matter what the market does, whether it goes up or down, your financial security is not going to be impacted by that because as soon as you build that moat, that shield, now all of a sudden we can focus on, okay.
What does the rest of your money do, right? Where are we? Are we gonna be aggressive with the growth? Are we gonna be conservative? Right? And so I think more important than is a 4% rule the rule or not, what you're really reaching for is do I have a sustainable and predictable income strategy in retirement?
And will my investments support it? And I think you. You answer the hard questions first. And that will then tell you, well, yes, you can take 4%, you can take 5%, you can take 10% sustainably out of your portfolio and not worry about it. But it requires creating that plan first.
Freddie: Creating the plan first and Leibel,
we gotta leave it right there. That's a wrap. But we've learned today that the 4% rule isn't dead, however, in today's economy, flexibility as Leibel just said is the key. So don't let social media hype dictate your retirement. Stay informed. As Leibel said, stay adaptable. Make choices that fit your life. It's just that easy.
And if you found this helpful, if you found it, really something that speaks to you. Subscribe and share, and stay tuned for more insights with Leibel on Fire.
