After a lifetime of saving for retirement, spending what we’ve saved can get pretty messy. Even a flock of pros would all come up with a different, at least slightly, spending plan for each of us. We don’t want to go broke too early. But we don’t want to make our retirement miserable by not spending enough either!

While it’s not actually a rule, the so-called “4% Rule” is often used as a guideline for determining a safe withdrawal rate over a 30 year retirement timeline. The rule suggests we can take out 4% the first year of retirement & take out inflation adjusted amounts (i.e. 4% + inflation adjustment) every year thereafter. And we can do that for 30 years, with a high degree of probability that the portfolio will make it all the way to the end. Bill Bengen originally used a portfolio of US stocks & bonds to develop this strategy. In recent years, he created a more diversified portfolio that he calculates allows a higher withdrawal rate of around 5%. Other experts point to the greater capability of an all-equity portfolio to deliver improved lifelong results. And still other experts in the space present models that suggested we might have to drop down closer to a 3% withdrawal rate to ensure portfolio survival. What gives?

There are a few things to consider here. The markets, particularly the US market, have produced great returns over the past decade & a half. An investor, convinced of the strength of the US market, who retired in 2010, might be looking like an investing genius today! Since 2010, a million dollar portfolio, all invested in the SPDR S&P 500 ETF Trust (SPY), being drawn down at an inflation-adjusted rate of 4%, would have a portfolio value of over $5m today. Not a typo. Using the 4% withdrawal methodology for more than 15 years, the portfolio would still have grown to a value of over five million dollars today. This retiree could have withdrawn a whopping 12% for year one. And, even after increasing that far bigger income by inflation every year, the portfolio would still be worth almost a million bucks today. That is an amazing outcome, eh?

Yeah, it is. But we can’t always take big withdrawal rates to the bank!

Let’s jump back another 10 years & look at a retiree who quit working in 2000. Exactly the same scenario as above. This retiree also has a million dollar portfolio & starts out with a $40k withdrawal the first year, or 4%. By today, the portfolio is only worth just under $340k. Even less in inflation adjusted value. What happened to the five million bucks from the previous scenario? The lost decade, including the dot-com crash & the great financial crisis, is what happened! Early poor returns damaged the future value of the portfolio.

If this “Year 2000 retiree” had used the 12% withdrawal rate from the other example, the Year 2000 portfolio would have gone to zero by 2006. Yes … zero. Nothing left after only 6 years. This is not a good outcome. In fact, just blindly following the 4% guideline in this example would have been a cause for worry by today. And withdrawing much more than an inflation-indexed 4% would almost certainly have resulted in a portfolio that died before the investor did!

Those examples are from the past. But the big lesson is that there is no guarantee that the future will be all rainbows & sunshine. We need a plan that handles grey skies & storms too. As we progress through retirement, financial plans must be reviewed & revised on a regular basis. To account for changes in the markets & in our lives. There may be the potential to increase our income for greater enjoyment during some years. Or there may be a requirement to reduce spending, to ensure we have income to the end of our days. Flexibility may be required en route.

And that’s what makes retirement planning so challenging. Financial planning is not a set it & forget it deal. As we saw above, we can’t depend on a financial plan that was created in 2000 or 2010 delivering the same results all the way to today. Modifications along the way are warranted. Similarly, if we were to start retirement this year, it is very unlikely that a financial plan created in 2025 will see us, cleanly & smoothly, all the way to the end. Will our asset allocation selections & portfolio choices allow us to spend way more than 4% every year? Or will we get trapped in a scenario where even 4% might be too aggressive? If we don’t use the 4% Rule, how do we handle the added burden of inflation through the years? There are a few challenges there, eh!

Some investors put their trust in dividend growth portfolios to sustain a growing income stream for a lifetime. And a plethora of new high income funds are proving very popular with investors who see early retirement calling via funds with huge distributions. Can these alternatives work? Some of these new funds offer distributions of 10 or 15%, some even more than that. Imagine you need a million dollar portfolio to produce 4%, or $40k, of annual income to retire on. If you’ve only got $400k saved, how about building an ETF portfolio yielding 10% & calling it quits? This might work. Or it might not. We’ll have to look at how we might compare, & perhaps even combine, these different strategies. However, that’s a whole other bunch of numbers & I’m getting grumpy now, so we’ll leave those questions for another day.

Meantime, take care out there & make sure you have an up-to-date financial plan.

If you want to learn more about saving & investing from the ground up, I’d like to suggest that you check out Double Double Your Money, available at your local Amazon store.

Important – this is not investing, tax or legal advice, it is for entertainment & conversation-provoking purposes only. Data may not be accurate. Check the current & historical data carefully at any company’s or provider’s website, particularly where a specific product, stock or fund is mentioned. Opinions are my own & I regularly get things wrong, so do your own due diligence & seek professional advice before investing your money.