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The Four Percent Rule

| November 01, 2021


The Four Percent Rule with Charles Hinde

I want to spend a couple of minutes talking about retirement spending. One of the classic rules when it comes to retirement spending is the four percent rule. What does that mean? The idea here is you can take four percent from your portfolio on an annual basis, continue to maintain your principle and give yourself a slight raise every year to keep up with inflation. It is all based on a diversified portfolio that has a six percent average return with a two percent inflation rate. So, the idea there is that if I get six percent in return, I can take four percent out of my portfolio, give myself a little bit of increase in that portfolio value on an annual basis, and then continue that throughout retirement.

Obviously, this isn’t guaranteed. This is based on historical returns. When we look forward, that’s kind of when it becomes an issue. We think about the idea that we might have higher inflation, we might have lower long-term returns. So, how does an investor make that work for the future? For a lot of people entering retirement right now, they’ve had really strong returns the last ten years, and it’s increased the value of the portfolio to a level that they might not have to take out that four percent anymore.

For the other investors, if they’re looking at their numbers, looking at the future, and they’re thinking, ‘things might be a little tight here.’ It might be an opportunity to reassess where you’re at. To think about, ‘Hey, if I have the opportunity to take on more risk,’ or conversely ‘Do I have a portfolio that’s actually built for me, that’s built to last — a portfolio that has the right types of investments, that has high-performing investments?’ For those investors it might be a time to step back and say, ‘Hey, let me get a second set of eyes on this thing.’

I would love to sit down with you and have that conversation — are you ready for retirement? Is your portfolio built to last? If you would like to have a conversation with us, please reach out. Give us a call here at 816-364-4900. We look forward to meeting with you soon.