A client came to me and said that I was gonna be one of their best clients . I asked them why ? And they said because they have a very healthy portfolio balance north of $5 million in a very low withdrawal rate . And I said I think you'll be one of my worst clients . They said what do you mean ? I thought a low withdrawal rate was good .
I thought that meant I would never come close to running out of money . I go oh yeah , and I could do you one better . If you wanna have the best withdrawal rate , go work 30 more years . Your withdrawal rate will be very low and they go . Well then I can't retire and do everything I wanna do . I go exactly .
The point in life is not to have the lowest withdrawal rate . It's actually to have the highest withdrawal rate without running the risk of running out of money . That's good planning . So level one , which they're alluding to wisely , is can they retire ? I think a lot of you that are reaching out know you're in a spot to retire .
The question is how much can you take out of your portfolio ? You could , of course , take out maybe $6,000 a month if you have $2,000,000,000 , and be rest assured you won't run out of money .
The question is can you take out $8,000,000,000 , can you take out $10,000,000,000 , can you take out $12,000,000,000 , or $15,000,000 , and maybe , if you're only doing that for a portion of your retirement , call it the first two , three , four , five years , while you're also paying , maybe , for health insurance and other travel and you name it .
Well , I want you to do those things , and I want you to do it if you're in a sustainable spot to do it . Now , if you're not , it's a different story and that's what we're gonna be talking about today . What are the withdrawal rate rules that you should follow so that you can really have a successful retirement ? And too many people follow the 4% rule .
The 4% rule . There's nothing wrong with it inherently when people look at it , and it is the foundational aspect of most retirement plans . Now , of course , I'm recording this on YouTube , so if you want to actually see me go through this and the thinking and actually watch me explain it , you're more than welcome to do so .
If you're listening just on the podcast application , that works great with me as well . I am gonna go ahead and start with a review of the week , and this one comes from Angel2 , who says I love this podcast . Ari does a wonderful job getting into the weeds of finances with early retirement and I'll tell you why I do that .
He covers any and all topics relating to early retirement lots of details you might not have considered when contemplating an early retirement . Also , love his relatable stories of others that are on the journey now with him . He is very genuine , smiley face . Angie , thank you very much for that review .
I love that you said I get into the weeds , because one person came to me and this is a current client that might be listening right now and if you are , this is about you and I will not say your name but they came to me and they said Ari , one advisor that we spoke with just told us don't worry about the weeds , you're fine , meaning you're in a fine
spot to retire . Now , for those of you that don't know me or new to the show , fine is my trigger word , and so what that means is a lot of people . They're triggered by people that are bad drivers or whatever it is . I'm triggered when people say , yeah , it looks like I'm fine . It's like we don't do fine , we do optimize .
You work too hard to not make the most out of what you've worked so hard for . So people joke at the firm because they go . We know Ari's weekend wasn't fine . It was optimized and I'm used to it at this point . And then Angie goes on to say he brings up details you might not have considered when contemplating an early retirement .
And that's what really today is all about . I'm talking about the 4% rule , and a lot of people follow this 4% rule and if they did , would they be fine ? A lot of people would be fine , they'd be okay . But most of you are going no , I want to know , could I do better ? Can I retire two years earlier ?
Can I spend more time with my mother who's not in the best health ? People go do you love taxes ? I go no , I love the idea that if you're smart with numbers , you can do a whole lot more fun stuff in life . That's what this comes down to . So the challenge , as I see it , is the 4% rule . It's too surface level .
I'm going to walk through a few examples today , but I want to walk through a few notes first . So I like to start with that basic story . Give you a financial example and then , of course , hit you with the logic of it the weeds , if you will . Thank you , angie . So here's the reality .
The reality is , most people say I'm gonna spend 8,000 a month in retirement , or 10,000 a month , or 6,000 or whatever it is , and they just stop there and go , okay , I'm gonna plan that for retirement . That's not real life , though , and I don't work with robots . I work with people Most people in retirement .
Maybe they're still a mortgage , maybe it's only the first few years , maybe you wanna travel for the first five to 10 years , maybe you're going you know what . I actually wanna retire , but I'm gonna have to come out of pocket for health insurance before Medicare kicks in .
So this idea of marrying 8,000 or 6,000 or 10,000 a month sounds good and it's easy for my software , but in reality , it's going to change , and it's gonna change the taxes , and it's gonna change the withdrawal strategy , and there's a lot of moving pieces to it .
And then , on top of that , most people say , once again , I'm gonna spend 8,000 a month , but what about part-time income ? What about social security and the fact that that might turn on in five years ? And so does that mean I could take a whole lot more for my portfolio , or less Like ? How do I think through all of that . Maybe there's a pension .
So I'm gonna walk through a few reasons why I don't love the 4% rule , then I'm gonna explain why it does have validity and then finally hit you with the pro withdrawal rate tips . So here's the first thing to know . A lot of people base all of their retirement analysis on the 4% rule , and here's what that means .
Let's assume that you have a million dollars and you wanna take out 4% of your portfolio . Well , that's $40,000 . And if the study that was done by Bill Bangin showed that , if you do that you will not run out of money , so it sounds good . But it's based on a traditional retirement from 65 to 95 .
So if you're trying to retire early call it age 60 , 55 , whatever it is well , if you pass away at 90 , you might run out of money . So that's the number one flaw is it's not designed for an early retirement .
The other flaw is , if you wanna take out $40,000 , really you might have to take out 55,000 or 50,000 or even 60,000 out of your portfolio so you can end up with $40,000 . Now , of course , it depends on your tax situation , and some of you are going . If I keep my income really low , my ordinary income brackets are really low .
You can , of course , pay even less , so maybe you're taking out $45,000 to actually end up with $40,000 , but the 4% rule is not accounting for taxes and the bigger issue that I see with it is it doesn't assume a dynamic strategy .
So the number one issue with the 4% rule is that it's not dynamic , meaning when markets are doing well , I'll go to my clients and say , hey , markets are doing well , this is the time to take an extra trip . Think about it like giving yourself a bonus at work . If you've done well at work and you're getting a bonus , you're not gonna decline the bonus .
And if markets aren't doing well , you're not gonna just take extra income and go take a trip . Just as if you were in business and your company wasn't doing well and you're the CEO and you need to hit payroll , you're not gonna say , yep , I'm gonna go take some extra trips , unless you're a very bad CEO .
So the idea here is do you have a dynamic withdrawal strategy that adjusts with markets , adjusts with your income sources and the timing of all of this ? The 4% rule just says take 40,000 every single year . Assume you have a million bucks and just don't worry about it , you'll be fine . Once again , my trigger work Now .
The 4% rule also doesn't assume you're invested in a diversified mix of assets , which most of you are . The 4% rule assumes that you have 50% intermediate term US bonds and 50% large caps , which is the S&P 500 . The reality is most people that are working with us , they have a whole lot more than that .
They have international markets emerging and developed within that , different sectors , small cap , international value , and what that allows you to do is it allows you to invest a whole lot more intentionally and decide where you wanna pull assets from when you actually retire .
So the tax and withdrawal strategy transparently is the number one reason people reach out to our firm . But if you go to my YouTube channel , you'll see a video where I actually walk through an example of the risk of the 4% rule and the risk of not being diversified , because all of us know we should diversify .
Most of us don't know to the extent in why we actually do it . So if you want the logic or the weeds , as Angie says , you can go ahead and check that out . Now the other thing I wanna talk about is really what are RMDs ?
So RMDs are required , minimum distributions and so if you've invested really , really well and you're gonna grow that IRA and that's all pre-tax money , in the future you're gonna have these required minimum distributions which , for most of you , is gonna start at age 75 . That's gonna start at 3.8% . That's where it begins .
Now at age 85 , you're at six and a quarter , so 6.25% . So some of you are going , hey , that's not a big deal , like it's just not that much for my portfolio . Others of you are going wait a second .
If I have two , three , four , five million bucks in my IRA because I'm gonna touch that last , maybe live on brokerage account , I've got a really healthy 401K and you have to take out 2% of a million dollars , well , that's pretty simple . That's $20,000 . But now , if you're looking at 6% of a million dollars , you're looking at 60,000 .
Maybe you have $2 million and you have to take out 6% at age 85 . Maybe you've invested really well , maybe you have to take out $200,000 , $300,000 and you have Social Security and you have a pension and so all of that extra money you don't necessarily quote , unquote need you're gonna be taxed at the highest bracket .
Now I'm gonna pause for a second and explain the following , because I love , when this client mentioned it to me . They said , ari , do you know how I knew I was successful ? I said no , I mean you're retired and you seem happy . But what do you mean ? They said I knew I was successful when distributions meant I had to take out more than I need .
It means I invested so well that I'm not even gonna need everything the government's gonna require me to take out . I said you know what I like ? That definition that's pretty cool , can I share on the show ? And they said yes . And I said well , that doesn't mean you don't do good tax strategy . And they go oh , I know . That's why I'm hiring you guys .
I want you to do all the tax strategy to minimize my taxes . But that's when I knew I was in a good spot , when I was gonna be forced to take out more than I needed . And so I just think it's a nice reframing , because it's really easy to get mad when the government's gonna force you to take money out of your pre-tax accounts .
But if we could take a step back and say , hey , listen , this is pretty cool . You invested really well , you're gonna be forced to , yes , take out a lot of money , let's do good tax strategy . And our joke here at the firm is don't be , you know , we're all about being patriotic , just not to the point . You pay more in taxes than you need to .
So making sure you're following all the strategies to minimize that , but also taking a second and say , hey , we're in a good spot . So the 4% rule doesn't blow up required minimum distributions . It's a mouthful . Rmds are only on the pre-tax part of your portfolio .
So if half of your RMD , for example , is coming from a pre-tax account and half is coming from a taxable account , you're really only having to pay taxes the required distributions on the pre-tax balance . Most people don't think about it that way .
Most people go yeah , I'm gonna get taxed on everything and that's just kind of how it works , when in reality that's not how it works .
So the 4% rule not only does it assume a 30-year life expectancy , but if you're 85 years old and you're really not worried because you're going well , I'm gonna have a million dollars in the future , I'm gonna have to take out four and a half or 5% of my portfolio . You really don't . It's not that you shouldn't follow the 4% rule .
What it means is , if you do follow the 4% rule , it's not gonna be near as impactful to you because in the future , required distributions are gonna start and you're not gonna have to be forced to take out a ton where it's gonna put you in a huge tax burden .
Meaning , in plain English , if someone came to me and they have $500,000 and they were gonna be forced to take out 4% of their portfolio , it's probably not the end of the world , even quite simply . If they're taking 1% out of their portfolio , okay , so they're taking 5,000 out .
If they have to take out 20,000 , 4% , the truth is they're probably gonna have to spend that on living expenses . Anyways , it's not a huge deal .
The issue becomes if you have 2,345 million in pre-tax balances , well , now , all of a sudden , it is a big deal , and so that 4% rule is something that you likely don't wanna follow because you're gonna be hit with this big tax burden . So retirement planning has to be dynamic and for most of you , you're coming to me going hey , I wanna retire early .
I know there are specific strategies to follow . What are the pro tips that your clients do to actually retire early successfully ? And one of them is this dynamic withdrawal strategy .
So let me tell you why I once again don't love the 4% rule to summarize , which is it's based on a 30 year life expectancy , it doesn't assume a dynamic strategy and it doesn't diversify the portfolio . The inherent assumptions I don't think are actually applicable to the way most people invest today .
Then the reason I do like the 4% rule is it's easy to understand , so most people just base their whole logic on that and if you do that once again , it's a nice spot to start , it's fine . I just don't do fine .
I do optimize , and so whenever I'm creating analyses for withdrawal rates for my clients , walking through the 4% rule or really any of these concepts that you hear me talk about , I really want to make sure that you don't take the assumption , like the client story at the beginning , of hey , yeah , it looks like I could take out 1% of my portfolio and just be
fine . You probably could , and you could be really fine and look back and go why didn't I spend more ? Now the final thing I'm going to leave you with and this is the pro level stuff One client came to me and I recommended they retire and they had a 7% withdrawal rate and you're like how on earth could you possibly recommend that ?
That's terrible advice , and you're right . It is terrible advice if that particular client had a 7% withdrawal rate for the rest of their retirement .
There was one year they were retiring at 63 that they wanted to renovate the home , they wanted to travel and they wanted to buy a car because the car was breaking down , and I recommended they take 7% out of their portfolio .
The market was up it was last year and they were in a fine spot to do so , because what was going to happen is very quickly their pension was going to turn on and then , in addition to that , in 5 years from now , they're going to be forced to take required distributions and their withdrawal rate is going to be at 3-4% , which they don't even need , meaning
their withdrawal rate . What's happening is , at the beginning , most people go well , 4 or 5 , 6% . That's not a sustainable withdrawal rate . Then social security gets turned on and now , because you have social security , let's call it making up 3,000 a month .
Maybe you have another pension of 3,000 a month and then you want another 1,000 or 2,000 to come from your portfolio . Your withdrawal rate is very low . And so now , all of a sudden , you have a high withdrawal rate because you're retiring and these income sources aren't quite on yet . Then all of a sudden , social security is turned on .
You have a really low withdrawal rate and then it shoots back up again once . All of a sudden you're forced to take out more than you even need . So the idea here is how do you have a dynamic withdrawal strategy to make sure you're actually optimizing the way you are creating income and not paying any more taxes than you need ?
So for one of my shorter episodes , I try to keep it under 15 minutes . More often than not , you can see I do go 20 , 25 minutes . Hopefully this did make you think a little differently .
Regarding early retirement , I'm fully aware I don't get to work with all of you , so my only request is if you did learn something different today or if this was helpful at all . Please do drop a comment on YouTube or leave a review on iTunes , and I appreciate it more than you know . Love you guys .
Thank you for listening to another episode of the Early Retirement Show . If you have a question that you want answered in a future episode , you can always go to my website , earlyretirementpodcastcom that's earlyretirementpodcastcom and you can go ahead and submit a question that I'll look to answer in a future episode . Thank you all for listening .
Please do rate it , review it and share it with someone who you think would benefit from this information . If there's anyone out there that you know , I certainly appreciate it and I will see you all each week . Hey guys , it's me again . Please be smart about this . Nothing in this podcast should be construed as financial , tax or legal advice .
Consult with your tax preparer or financial advisor before taking any action . This podcast is for informational purposes only .