skip to Main Content
Retirement Income

Retirement Income: Some rules are meant to be broken!

For many of us who are still in our working years, the word retirement doesn’t resonate. We know it’s a goal that we save for, but the reality is, we don’t think about the nuances until we’re close enough to it happening.

I’ve assisted many clients with their retirement planning, and one often overlooked reality is determining how they will produce income once their salary goes away. 

Cue “The 4% Rule”

One frequently used rule for retirement spending is the 4% rule. Simply stated, you add up your total investment portfolio, then withdraw 4% of that amount. You hope to earn more than a 4% investment return, therefore you only touch the earnings in your portfolio rather than your principal. Doing this will, in theory, preserve your principal and provide an income stream for your lifetime. To put this into context, if you had $1,000,000 in your investment portfolio, this rule tells you $40,000 of income can be taken in any given year to statistically not run out of money.

Sounds easy right? Unfortunately, if you follow this rule you may be doing yourself a disservice in the long run.

You are more complex than a rule!

There are many studies online that debate whether this rule holds true. Like with most things on the internet, you will find some individuals that argue the 4% rule works well, others that argue against using it. By focusing on whether statistically this rule works, I believe both sides are missing the true point.

The fact of the matter is your financial freedom is the single most important financial reality you will work towards in your life. To attempt to streamline this into a simple rule is an injustice to the complex individual that you are.

What should be factored in?

One of the flaws of the 4% rule is that it does not take into consideration what you have going on in your life away from your investment portfolio. Are you planning on taking Social Security? Do you have pension income or annuity income? Perhaps you have other sources of income away from those traditional sources. You also must take into consideration how your spending changes over time. For example, most people’s spending habits changed during the COVID pandemic. A simple rule does not account for those types of factors.  By not looking at other income sources or spending habits in your financial planning, and only focusing on the 4% rule, your portfolio withdrawals may be disconnected from your reality.

There is also the topic of taxes. If you have a brokerage account, an IRA, and a Roth IRA (as an example), distributions from each of those vehicles are treated differently from a tax standpoint. Although the 4% rule attempts to give you a guideline regarding how much income you can take, it falls short of assisting you in coming up with a dynamic and tax efficient strategy that works alongside your other income and potentially limits your tax bill.

You also need to consider how to generate income from your investment portfolios. Thinking through this, your portfolio can be invested in an allocation mix of stocks, bonds,. Given what the economic environment looks like at the time of your withdrawal, it may make more sense to take from one piece of your portfolio versus the other. This is another factor in designing your retirement income stream that is dynamic and cannot be justified using a simple static rule.

Parting thoughts on retirement income

You have saved your entire life for this moment and you want to be sure you are able to enjoy your lifestyle to its fullest potential. The 4% rule is designed to give you a simple solution to a complex challenge. A decision of this magnitude deserves more attention than relying on a simple rule. At RegentAtlantic, we take your entire financial picture into consideration, then craft an income strategy for you.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

Back To Top