Not Retired Yet? Ignore the 4% Withdrawal Rule
As an investor, you’re probably already aware there are things you can control and things you can’t. In the list of what you can control, your investing behaviour is critical.
You can also control your investment costs and your taxable income but nothing compares to your behaviour when it comes to managing money. If you learn to control your reactions to falling markets, learn to invest when others are panicking (thus probably selling), you’ll be much wealthier for it.
For today’s post, I’d like to help you understand the 4% retirement withdrawal rule at bit better and dare I say it, for those of us in our asset accumulation years, why it doesn’t matter now.
The 4% rule
Based on research conducted by certified financial planner William Bengen who looked at various stock market returns and investment scenarios over many decades, the 4% rule is a percentage of your portfolio you should be able to withdraw from per year while keeping the capital largely intact.
This rule assumes you keep about a 50/50 equities/bond asset mix during retirement and you stay invested close to that allocation during retirement. Bengen’s math noted you can always withdraw more than 4% of your portfolio in your retirement years however doing so dramatically increases your chances of exhausting your capital.
Why the 4% rule shouldn’t matter to most investors
Depending on the income you need in retirement, the 4% rule can lead to some rather frightening calculations. If I determined I needed $35,000 beyond my Canada Pension Plan (CPP) and Old Age Security (OAS) payments to live from that means I would need a balanced portfolio of $875,000 to withdraw my 4% “safely”. That’s a big number.
However, if you’re in your 20s, 30s, 40s or even early 50s, I suggest you forget focusing a “safe retirement withdrawal rates” and start focusing on what you can control, your investing behaviour in your asset accumulation years and specifically how you behave when stock markets slump. Learn to celebrate slumps as opportunities for equities.
I suspect some people are annoyed with the stock market performance of late. Stock market gyrations over the last few years have caused many investors to panic and sell equity investments. If you’re feeling this way, especially the next time markets are down a few hundred points in one day I suggest you avoid selling your equities – find a way to buy some equities instead. Why? Anyone not in retirement is in there asset accumulation years and for me personally, I’ve got about 20 more years of those. When the stock market slides, it signals a buy time for me, either equity Exchange Traded Funds (ETFs) or dividend paying stocks.
I acted on this approach earlier this year with a purchase in Royal Bank (RY) when the price was under $50 (Royal Bank is now trading close to $56). But before I pat myself on the back, I must disclose I didn’t always act this way – I sold equities when things got a bit rough. Only over the last few years, I’ve learned to correct my behaviour. I’ve got more room to grow but stock market dips are really great opportunities for folks in their 20s, 30s, 40s and 50s to accumulate more equities at better prices for retirement years down the road. To illustrate my point, consider this analogy. Wouldn’t you rather buy your brand name groceries on sale?
For the next 20 years or so, instead of worrying about metrics like safe retirement withdrawal rates focus on things you can control – like your investing behaviour especially when equity markets drop. Consider falling markets to be great times to buy more equities to balance out your portfolio to build that retirement nest egg. If you take advantage of similar opportunities, I suspect you won’t worry about the 4% rule either, and maybe not even in retirement. This is because you’ll have more capital to withdraw from built from today’s good work.
About the Author: Mark is a 30-something do-it-yourself (DIY) investor working his way to financial freedom by investing in Exchange Traded Funds (ETFs) and dividend paying stocks. One of his retirement objectives is to earn $30,000 in tax-efficient and tax-free dividend income, and he is well on his way. You can follow Mark’s journey to financial freedom on My Own Advisor.