Skip to content

On Retirement Income, Part 1: A 4% Rule Fable

“On Retirement Income” series:

  1. A 4% Rule Fable
  2. More to come…

Consider the following scenario…

At the start of 2022, Bob, a healthy 65-year-old man, decides he is ready to retire. To help him manage his finances in retirement, Bob hires Rule of Thumb Investment Advisors (a.k.a., “ROT IA”). He has $1 million to invest, so ROT builds him a portfolio that is 60% stocks and 40% bonds—the classic “60/40” portfolio. Per the famous “4% Rule,” ROT informs Bob that he can safely withdraw $40,000/year (4% of $1 million), adjusted annually for inflation.

A year later, compliments of unusually high inflation contributing to double-digit declines in both stocks and bonds, the value of the portfolio has declined to $796,000.[1] ROT rebalances back to 60/40 and, noting the 6.5% inflation rate over the prior year, instructs Bob to withdraw $42,600 ($40k + 6.5%) the following year. At the same time, Bob’s identical twin brother Fred decides he too is ready to ride off into the sunset. By uncanny coincidence, Fred also has $796,000 available to invest. His brother convinces him to hire Rule of Thumb Investment Advisors as well. Following their formula, ROT IA builds a 60/40 portfolio and instructs Fred to withdraw $31,840 (4% of $796,000) plus inflation throughout retirement.

Here is summary of the situation at this juncture: Bob and Fred are the same age, have the same life expectancy (or at least the same genetics), and hold the same nest egg in the same basket of investments. Yet merely because one of them retired a year earlier, his projected “safe withdrawal rate” in retirement is 34% larger ($42,600 vs. $31,840).[2] Does this make any sense?!

Bob and Fred are the same age, have the same life expectancy, and hold the same dollar amount in the same portfolio. But Bob’s “safe withdrawal rate” per the 4% Rule is 34% larger than Fred’s.
Does this make any sense?!

“On Retirement Income” Series Intro

In future articles in this series, we’ll attack this thought experiment from multiple directions, looking into why the 4% rule has held up as well as it has, contemplating whether its historical success makes it a sensible guideline for the future, and mulling alternative methodologies.

But for now, I’d like to offer the more high-level observation that a quality financial advisor should go far beyond rules of thumb, tailoring a financial plan to your specific needs and goals, and then tailoring your investment portfolio to your financial plan. And on the off chance your situation looks identical to that of another client (we have yet to encounter this, by the way), a reliable advisor should not offer the two of you wildly inconsistent advice!


[1] Here’s the math: First, Bob took out $40,000, leaving $960,000. Using the S&P 500 Index (2022 return = -18.11%) and the Bloomberg Aggregate Bond Index (2022 return = -13.01%) for stock and bond returns, respectively, the 60/40 portfolio returns -16.07%. Assuming another 1% for ROT’s fee means -17.07% return overall. $960,000 * (1 – 17.07%) = $796,128.

[2] Since both figures will be adjusted by the same inflation percentage each year, this means Bob’s income is projected to be 34% higher than Fred’s for the rest of their lives. Assuming inflation is generally positive, it also means the differential between their dollar incomes will grow even wider over time. But clearly it also means Bob is at much greater risk of running out of money in retirement, so-called “safe withdrawal rate” notwithstanding. Conversely, it also means Fred is much more likely to pass away with a huge hoard of assets he could have spent.


Image by Freepik

DISCLOSURES: All content is provided solely for informational purposes and should not be considered an offer, or a solicitation of an offer, to buy or sell any particular security, product, or service. Round Table Investment Strategies (Round Table) does not offer specific investment recommendations in this presentation. This article should not be considered a comprehensive review or analysis of the topics discussed in the article. Investing involves risks, including possible loss of principal. Despite efforts to be accurate and current, this article may contain out-of-date information, Round Table will not be under an obligation to advise of any subsequent changes related to the topics discussed in this article. Round Table is not an attorney or accountant and does not provide legal, tax or accounting advice. This article is impersonal and does not take into account individual circumstances. Reading this article does not create a client relationship with Round Table. An individual should not make personal financial or investment decisions based solely upon this article. This article is not a substitute for or the same as a consultation with an investment adviser in a one-on-one context whereby all the facts of the individual’s situation can be considered in their entirety and the investment adviser can provide individualized investment advice or a customized financial plan.

The data shown in this article is for informational purposes only and should not be considered as an investment recommendation or strategy, or as an offer to buy or sell any particular security, product, or service. Past performance may not be indicative of future results. While the sources of data included in any charts/graphs/calculations are believed to be reliable, Round Table cannot guarantee their accuracy.

Accessibility Toolbar