Million Dollar Journey

Building Wealth through Saving and Investing

Welcome to Million Dollar Journey! If you're new here, you can learn about me, read our user guide, and even follow my net worth updates. A great place to start reading is with the popular articles located in the right side bar. If you would like to join thousands of others and keep up with the free daily updates, you can subscribe to the RSS feed via reader or E-mail.

On your way out, make sure to check out the exclusive Million Dollar Journey Freebies and Deals.

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.





19 Comments, Comment or Ping

  1. I plan on taking less because I won’t need it. I will retire at 71 years old and expect to live 30 years in retirement. My withdrawal rate will be 3%. I am about 5 years away from retirement, but that is my plan.

  2. @krantcents – sounds like you’ll be more than safe :)

  3. 3. Avrex

    Yes, it’s all about controlling your emotions. I’m slowly getting better at it.
    It’s good to be a contrarian. Buy when others are selling.
    Great post, Mark

  4. 4. SST

    @krantcents: what makes you think you’ll live to 101?

    Don’t get me wrong, I hope you do, it’s a pretty awesome achievement, but the factual odds are very heavily stacked against you: ~2% of your age group will hit 100. Current 100-year olds make up only ~0.6% of their birth group.

    Why not plan to live to 90 with a 5% withdrawal rate? REALLY enjoy those golden years!

    (Interestingly enough, centenarian population growth rate averages ~2.2% per year, almost identical to the long-term millionaire population growth rate!)

  5. 5. Goldberg

    I agree with SST. You don’t need as much income when you are 100 since you don’t move much or eat much, and are afraid of everything at that age. Plus, if you incurred no debt until then, and need more than CPP and OAS, a reverse mortgage can help.

    Retire at 71? You are 66? If you love your job, fine, but personally, I can’t wait to retire. Your health starts to go in your 70s, no matter how careful and healthy you might have been before. Enjoy retirement. Stop now. l would. lol.

  6. 6. Jimmer MCJimer

    @krantcents give me all your money and keep working! I’ll spend er right good!

  7. 7. Ed Rempel

    Hi Mark,

    I’m not sure I understand your point. Are you saying that by staying invested in equities and avoiding behavioural mistakes, you can build up much more than the $875,000. So that is why the 4% rule does not matter?

    Ed

  8. 8. SST

    @Mark: “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.”

    Yup, it is a very big number.
    Wouldn’t worry, though, Mark, the annual expenses of the average retired Canadian household (aged 65-74) is ~$30,000, with ~$18,000 of that money coming from government transfers (CPP, OAS, etc.).

    Your “needed $35,000″ is three times more than what the current average retiree HOUSEHOLD — ie. two people — spends. They have a need for a paltry $300,000 nest egg.

    Considering the long-term savings rate for Canadians is ~9%, an average couple earning average wages could easily save this amount over a 40-45 year working life time. More importantly, they can save it all in cash without ever paying for one single stock or shred of “professional” advice.

    It is well-documented that wages always increase in-step with official government reported inflation, so that is a non-factor.

  9. @Ed,

    My main point is this – investors working today should not worry about any retirement withdrawal rules. Chasing a magic number is futile. Chasing some artibrary retirement number can be scary.

    Investors in their accumulation years should focus on what they can control in the here and now, since this is only place where they can live. In the here and now, I encourage investors to control their behaviour when the market tanks…i.e., don’t sell equities on a panic. Rather, look at market dips as buying opportunities. If you repeat this cycle today, in the here and now, and potentially going forward, you can get into a habit then you’ll have much more capital to withdrawal from in those retirement years when you do stop working.

  10. @SST,

    You raise some good points…

    Unlike what TD and other financial institutions want you to believe, I would argue most retired Canadian households (aged 65-74) are not travelling world and walking on beaches in some new foreign land every few weeks. I suspect a retired couple, with about $18,000 from government transfers (CPP, OAS, etc.) only need another $18,000 or so per year to live rather comfortably – this is only true if you have no debt whatsoever.

    Your point about saving over a 40-year career, investing modestly and continually over that period, is more than enough time to get to your $300,000 egg is quite true.

    I wonder if folks who are retired could chime in? Did they fret about safe withdrawal rates during their working careers, decades into the future or did they put more focus on what they could control in the here and now, controlling their investment behaviour? Controlling their spending habits so they could invest?

  11. 11. SST

    @Advisor: “I encourage investors to control their behaviour when the market tanks…i.e., don’t sell equities on a panic. Rather, look at market dips as buying opportunities.”

    This is probably a very diametric behaviour for a great many stock market speculators — putting money into stocks hoping they will increase in price, but at the same time socking away cash hoping stocks will crash to buy them at a discount.

    And yes, it would be great to hear from retirees from every age, as generational forces would most likely be the most significant investment influence (ie. war, Depression, easy credit, etc.).

  12. 12. Goldberg

    The key point to keep in mind is that the whole concept of retirement in 25 years will be significantly different than it is today.

    Many people work in their 80s in places like Walmart… this was not as prevalent 20 years ago.

    This trend may reverse… or it may not…

    Same with the trend for more private health care in Canada… in the US, many use their home equity for health care expenses or simply go bankrupt…

    Same with the trend to changes to CPP (Chretien increased worker contribution while Harper pushed the age…) Remember the ratio of 4 workers to 1 retire will be down to 2…

    Same with the trend to health care cost being 2x inflation….

    In other words, none of these trends are sustainable or positive for our ‘current’ idea of retirement… these things and many more will change drastically the concept of retirement.

    But enjoy the now! Because you don’t want to have regret either…

  13. 13. nobleea

    MOA: “Unlike what TD and other financial institutions want you to believe, I would argue most retired Canadian households (aged 65-74) are not travelling world and walking on beaches in some new foreign land every few weeks. I suspect a retired couple, with about $18,000 from government transfers (CPP, OAS, etc.) only need another $18,000 or so per year to live rather comfortably – this is only true if you have no debt whatsoever.”

    I’m sure that most retired Canadian households are not travelling the world either. But is that because they don’t want to? Or because they haven’t saved up enough to do so?

    I’m sure that a retired couple could like rather comfortably on 36K per year as well (with no debt). Just depends on your definition of ‘rather comfortably’ and how it relates to the lifestyle you had for the previous 30 years.

  14. 14. Al

    @krantcents

    3% per year over 30 years leaves you with 10% at the end – and that is with no interest earned… you can safely go large, enjoy and be sure that the last cheque you write bounces. Or give it to worthy causes (not the tax man)!

  15. @Goldberg,

    Retirement is going to look very different in 25 years, for sure.

    I think if folks are still working in retirement, it’s not really retirement, but that’s an entirely new blogpost.

    I like the terms financial freedom or financial independence. I hope in another 20 or less, to choose when and how often I work thanks to a retirement portfolio that churns out steady income.

    I totally agree with your comment, to enjoy the now :)

  16. @nobleea,

    Maybe, maybe some retired Canadian households are very well off and don’t want to travel the world. In that case, they should have extra cash flow. Unless of course, they are like some retired couples I know, who have a mortgage in their 60s. Nuts.

    Of note: “According to the Survey of Household Spending, 2009, the average senior couple spends $54,100, while median spending for senior couples is only $39,400.”

    http://www.canadianbusiness.com/article/81114–how-much-do-you-need-to-retire-well

  17. @krantcents,

    You don’t want to retire now? Why?

  18. 18. SST

    @Advisor: “I like the terms financial freedom or financial independence. I hope in another 20 or less, to choose when and how often I work thanks to a retirement portfolio that churns out steady income.”

    Those former terms being industry manufactured complete misnomers.

    If you are relying on something for “steady income”, be it work or a portfolio, then you have neither freedom nor independence.
    (eg. think back to “The Halloween Massacre” and all the retirees who were reliant on Canadian income trusts…)

    The closest you can come to either of those two terminologies (ideologies?) is to posses an enormous pile of cash in your own residence.

  19. Hi Mark,

    This ties in nicely with story I wrote for you on your blog.

    Using insurance the withdrawal at retirement can be much higher than 4% and much safer.

    In a nutshell, one can have more money to spend have better protection and pay less taxes as well as less risk…which is important at retirement.

    The problem is too many people are dependent on higher rates of return and many people have not saved enough. Insurance helps bridges the gap somewhat.

    Cheers,

    Brian

    Trackbacks

Reply to “Not Retired Yet? Ignore the 4% Withdrawal Rule”

Subscribe without commenting



Get the Latest

      

Money Tips Newsletter

Premium Sponsors



Recent Comments

  • My Own Advisor: @SST, thanks for the links above. I would agree, many underestimate the cost of mortgages and home...
  • SST: re: “If a person is not a disciplined investor or is not comfortable investing in the stock market, then...
  • SST: @David — how does the recent sale effect your business, if at all? Interesting that Timmy’s started...
  • Ed Rempel: Hi Mark. From seeing the full finances of thousands of people, I can tell you in practice there is a clear...
  • Ron: What do you think about the MARRIOTT REWARDS PREMIER VISA CREDIT CARD. it has NO FOREIGN CURRENCY TRANSACTION...
  • Michael: Even with today’s low mortgage rates around 3%, you have to consider risk and taxes. Paying down a 3%...
  • S: SST, If a person is not a disciplined investor or is not comfortable investing in the stock market, then the only...
  • Banjopete: hey MOA: end the debates…. hardly but nice try, as we can see from comments it’s a personal...
  • canadianbudgetbinder: Great post Mark, We did the same as Mark paying down the mortgage and investing at the same...
  • Brandon: I’ve stopped prepaying the house and switched to investing. I have a higher return and if a job loss...
 css.php