Page 22 - Boca ViewPointe - March '25

Page 22, Viewpointe March 2025
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From The 4% Rule To Personalized Strategies

By Carolina Rosenthal, Bengen’s 1994 paper did not explicitly refer to a “4% William Klinger, which starts with a higher withdrawal
CPA and Principal rule” – that monicker only became popular as financial rate but adjusts the amount annually based on portfolio
advisors and the media digested and simplified his performance and previous withdrawals. This allows for
This article is a findings, which, to his credit, were much more flexible higher spending when markets perform well and lower
companion to a recent and nuanced. The simplified 4% rule, as it is commonly spending when markets underperform, ensuring that
episode of our Amplified understood, suffers from several limitations. First, it’s retirees don’t outlive their assets.
Wealth – According to Plan important to remember that it was created in a specific Similarly, for retirees who are concerned about
podcast: https://youtu. historical context and calculated based on market inflation, one option is to adopt a reduced inflation
be/6urcKKWFJAM conditions and inflation rates from previous decades. In adjustment strategy, skipping inflation adjustments in
In retirement planning, today’s dynamic market environment, inflation rates and years following market declines. This approach can
one of the key decisions interest yields may deviate from historical norms. help preserve the portfolio during challenging economic
is determining how to Another major limitation is that it assumes fixed levels conditions, but it also requires the retiree to adapt to
sustainably withdraw from your portfolio to maintain of both income and spending throughout retirement. changing living standards.
your lifestyle without depleting your nest egg. Financial Retirees’ spending often varies significantly depending on Another strategy involves using Required Minimum
advisors and academics have articulated dozens of life stage and health. For example, many retirees spend Distributions (RMDs) as a withdrawal framework, where
retirement withdrawal strategies in recent decades, with more in the early years of retirement during their “Go-Go the withdrawal percentage increases as life expectancy
none as widely-cited and enduring as “the 4% rule.” years,” followed by a decline in the “Slow-Go” years, and decreases. While this method mirrors the structure required
While the 4% rule is a valuable rule of thumb, it has potentially a rise in healthcare costs during the “No-Go” for retirement accounts like IRAs, it can also be applied
its limitations. In this article, we’ll explore the origins years. The 4% rule doesn’t account for these changing more broadly. However, this approach may lead to greater
and value of the 4% rule, examine its limitations, and spending needs, nor does it account for unexpected one-time volatility and less predictability in annual withdrawals.
discuss how technology now allows financial planners expenses. Inflation-adjusted income in retirement can also While all of these “rule of thumb” strategies are useful,
to create personalized retirement withdrawal strategies be similarly variable depending on factors such as when a financial advisors nowadays have many technological tools
that are flexible and can adapt over time. retiree begins drawing on Social Security, size and timing at their fingertips that enable them to create personalized
Origins And Limitations Of The 4% Rule of pension and annuity payouts, RMDs, and more. withdrawal plans for clients. Utilizing sophisticated
The 4% rule has its origins in a 1994 paper by financial Another significant limitation of the 4% rule is that planning software, advisors can easily account for factors
planner Bill Bengen titled “Determining Withdrawal Rates it doesn’t fully account for taxes. For simplicity and like variable income sources (e.g., delayed Social Security,
Using Historical Data.” Bengen’s goal was to help retirees ease of calculation, Bengen assumed that the retirement pensions without cost-of-living adjustments), variable
maximize their withdrawals while reducing the risk of portfolio was a traditional (non-Roth) retirement account spending needs (e.g., home repairs, weddings, or vacations),
running out of money. Using historical investment data, and that taxes would be paid from the withdrawals. In individual goals (such as leaving a legacy for heirs), and
he examined withdrawal rates, portfolio allocations, and the real world, clients may withdraw from an array of tax considerations. Planning platforms also enable ongoing
retirement outcomes. He concluded that retirees could accounts with different tax treatments (IRA, Roth IRA, monitoring and adjustments, ensuring that retirees stay on
safely withdraw 4% of their portfolio in the first year of taxable brokerage, etc.) The bottom line is that any track even as their circumstances change and the market
retirement, adjusting for inflation each year thereafter, effective withdrawal strategy has to account for both pre- fluctuates. The ability to model different scenarios in real-
and expect their portfolio to last 30 years. This “rule” withdrawal income tax due and tax due on the withdrawal time offers peace of mind and ensures that retirees can
was based on a portfolio consisting of 50% stocks (the itself, when applicable. confidently manage their finances over the long term.
S&P 500) and 50% fixed income (intermediate-term U.S. Portfolio allocation also plays a crucial role in the Flexibility Is Key
Treasuries), and assuming annual rebalancing. success of the 4% rule. Bengen understood that retirees’ The key to successful retirement planning is flexibility.
risk tolerances and portfolio compositions can vary widely. Retirees must be prepared to adapt their withdrawal strategies
While he found that a 50/50 portfolio was the safest risk- based on their individual circumstances and changing
adjusted allocation to ensure not running out of money over market conditions. No two retirements are alike, and while
Community a 30-year retirement period, this need not imply that it is the a “one-size-fits-all” approach may succeed, it is unlikely to
best allocation for everybody. More aggressive portfolios
maximize value for a given retiree. By personalizing your
Channel might offer higher returns and expected final portfolio value, withdrawal strategy and leveraging financial planning tools to
monitor and adjust your over time, we can help you develop a
but come with greater volatility. On the other hand, less
Have You Seen It? aggressive portfolios may not generate the growth necessary retirement that is not only sustainable but also tailored to your
to cover expenditures in the later years of retirement.
needs and goals. Staying flexible and regularly reviewing
Alternative Withdrawal Strategies your strategy with a financial advisor will help you navigate
The Boca Pointe Community information channel Recognizing the limitations of the 4% rule, financial the uncertainties of retirement and maximize the enjoyment
is currently broadcast on Comcast channel 63 and planners and academics expanded on Bengen’s findings of your golden years.
soon will be transitioning to channel 1075. Please and developed alternative withdrawal strategies that
check both channels on your TV to see which channel allow for greater flexibility. One such strategy is the Author Carolina Rosenthal is a resident of Boca
hosts our community information. If you are unable guardrails approach developed by Jonathan Guyton and Pointe. Email: crosenthal@withum.com. 
to view either channel, please call our office (561)
395-7551. Tune in for community updates, BPCA/
committee meeting dates and current events. 

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