Originally posted on Forbes. Conventional financial planning uses two rules of thumb. One is the 70% replacement-rate, retirement-spending rule. The other is the 4% retirement-asset, spend-down rule. The replacement-rate rule says you need to accumulate enough assets to be able to spend 70% of your pre-retirement income in retirement. The 4% rule says you should withdraw and spend an amount equal to 4% of the retirement account balances you held when you first retired. Whether these two rules, both of which tell you what to spend in retirement, are mutually compatible is a good, but apparently never posed question to which I'll return in a subsequent column.
Hi George, Thanks for writing. The only way any such rule makes sense is if it's a share of the present value of net (of net taxes) remaining lifetime resources. But it's not. It's a share of assets -- regular plus retirement account assets. Since Social Security can be dramatically more or less important for people, not to mention other future resources and liabilities, like paying off a Parent loan for a child's education. Also, ever year's correct ratio of spending to assets will be different. The 4 percent rule is putting everything on autopilot and sleeping at the wheel. Bergen should just run MaxiFi and tell everyone to do the same. Why assume that everyone should follow the same rule? Yours, Larry
Hi, Larry. I've been a fan for many years and have been a long time subscriber to your MaxiFi (formerly ESP) financial planning software for many years. However, in this instance, I think you've dismissed the 4% rule somewhat cavalierly. William Bergen devoted considerably research in putting forth the rule and has updated it numerous times over the years. You've made it sound like it was just a number that was pulled out of the clouds in the 1950's and has been followed blindly by the uninitiated. It's fair to argue whether it's the right guidepost to go by when considering a sound withdrawal plan, but give credit where credit is due. My two cents. I'm still a loyal follower of your software and podcasts!
Hi George, Thanks for writing. The only way any such rule makes sense is if it's a share of the present value of net (of net taxes) remaining lifetime resources. But it's not. It's a share of assets -- regular plus retirement account assets. Since Social Security can be dramatically more or less important for people, not to mention other future resources and liabilities, like paying off a Parent loan for a child's education. Also, ever year's correct ratio of spending to assets will be different. The 4 percent rule is putting everything on autopilot and sleeping at the wheel. Bergen should just run MaxiFi and tell everyone to do the same. Why assume that everyone should follow the same rule? Yours, Larry
Hi, Larry. I've been a fan for many years and have been a long time subscriber to your MaxiFi (formerly ESP) financial planning software for many years. However, in this instance, I think you've dismissed the 4% rule somewhat cavalierly. William Bergen devoted considerably research in putting forth the rule and has updated it numerous times over the years. You've made it sound like it was just a number that was pulled out of the clouds in the 1950's and has been followed blindly by the uninitiated. It's fair to argue whether it's the right guidepost to go by when considering a sound withdrawal plan, but give credit where credit is due. My two cents. I'm still a loyal follower of your software and podcasts!