3 Mistakes Retirees Make Implementing the 4% Rule

Retirement is a phase many look forward to, but it often comes with the fear of outliving one's savings. The 4 percent rule is a guideline to help ensure retirement funds last, but misapplying it can lead to financial insecurity. Here are three major mistakes people make with the 4 percent rule and tips to avoid them for a secure retirement.
Mistake 1: Misunderstanding Required Minimum Distributions (RMDs)
Some retirees misinterpret how RMDs affect the 4 percent rule. RMDs are mandatory withdrawals from retirement accounts starting at age 73. Many fear exceeding 4 percent of their pre-tax account value invalidates the rule. However, the 4 percent rule applies to the entire portfolio, not just pre-tax accounts. If you withdraw more due to RMDs, reinvesting the excess in a taxable account can maintain your portfolio balance. Additionally, as you age, your remaining life expectancy decreases, allowing for a higher withdrawal rate.
Mistake 2: Misconstruing the Value of Annuities
Annuities might seem attractive due to higher initial withdrawals compared to the 4 percent rule, but this can be misleading. Many annuities don't adjust for inflation, reducing purchasing power over time. While annuities provide a fixed income, the 4 percent rule allows for adjustments based on inflation. Annuities also cease payments upon death, leaving no funds for heirs, whereas the 4 percent rule often results in a residual portfolio for beneficiaries. Additionally, the 4 percent rule offers more flexibility and control over withdrawals.
Mistake 3: Ignoring Variability in Income and Expenses
The 4 percent rule assumes a consistent withdrawal rate, but income and expenses fluctuate. Retirement spending typically follows "go-go," "slow-go," and "no-go" years, with higher expenses early on and reduced spending later. Planning for these phases can prevent overspending early and underfunding later. Retirement income sources also change, such as Social Security benefits starting at age 70. Adjusting withdrawals to account for these changes can help maintain a balanced financial plan. Managing taxes on withdrawals, like using tax-free Roth IRAs in high-expense years, is also crucial.
The 4 percent rule is a valuable starting point for retirement planning, but it's not one-size-fits-all. Understanding and avoiding common mistakes related to RMDs, annuities, and income and expense variability can secure your financial future. A well-rounded approach that considers your unique circumstances and adjusts over time will provide peace of mind in retirement. Stay informed, consult financial advisors, and regularly review your plan to ensure a comfortable and secure retirement.
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⏱Timestamps:⏱
0:00 - Understanding RMDs
1:40 - An example
4:19 - Life expectancy
5:31 - Understanding annuity values
8:38 - Assumptions about spending
10:27 - Fluctuations
13:10 - Summary
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[@beanbean321]

I like this guy because he doesn't try to sell me anything .

[@johnbrown1851]

Unless you have more than 2 million schmackers, he doesn't want your business..... nice guy though!

[@goneretired7030]

Just because you have to pull out more than 4% of your IRA, that doesn’t mean you have to spend all of that money….

[@michaelhuene561]

If my biggest concern is that I'm forced to withdraw more from my IRA than I actually need, I feel I've won!

[@philiptornelli3477]

Good point. I think the same goes for insurance, whether car, home, health, etc., The winner is the one that never needs to collect.

[@janethunt4037]

Thank you for sharing this. It's similar to our situation. Also, if someone gives a lot to their church, RMDs can go in that direction and not be taxed.

[@enonknives5449]

The 4% rule always included increasing withdrawals by the rate of inflation. Not an issue.

[@lmelior]

You touched upon it a couple times but it might be worth being explicit: the 4% referenced in the 4% rule is only calculated in the first year. The following years, you might take a smaller percentage if the market goes up enough (by 4% + inflation), otherwise you'll take a larger percentage. So no, any plan where you get more than 4% doesn't invalidate it at all, because in the Trinity study, that percentage stopped mattering the moment they implemented it! They always just adjusted the previous year's amount by inflation, no matter what the market did, and that's how they calculated the success rate that led them to suggesting starting out at 4%. I mean, it's fine to check what percentage your current withdrawal is going to take from your portfolio, but if you're going to adjust it based on that, you're no longer using the 4% rule. You might as well read up on and implement the guardrails strategy or one of the various bucket or barbell strategies.

[@markb8515]

Thanks James for another informative video!

[@sebastiaanthijn7982]

Making good money before you retire is super important. It can boost your social security benefit and give you a stronger retirement portfolio. Basically, the more you earn now, the better off you’ll be later

[@KyleKuyat]

The 4% rule is far from perfect, but can be used as a guideline. I've seen many clients that have the ability to withdraw more and others that need to dial back. What often gets overlooked with the 4% rule are taxes & fees, but health, lifestyle, etc. all make an impact. Great video!

[@clbcl5]

I'm not at the rmd time but I want to withdraw from my IRA up to the point of having 0 taxes and put it in my brokerage

[@williamrogers1219]

If a retiree can do their income taxes using tax preparation software, they can create a projected income tax return for the next year. This would allow the retiree to see if they have space in lower income tax brackets where it may be better to take out more and reinvest the proceeds to mitigate future income taxes. As for fees, one can use low-cost investment products. As for advisory fees, those would be included in the budget. For affluent retirees, healthcare costs can be budgeted by using Medigap policies, which can close up to five of the six Medicare holes and provide for more level budgeting.

[@123moof]

Indeed, it is just a guideline to start ballparking with, but gets treated as both gospel and heresy. I see a lot of folks who triple count their safety margin (margin their spending, use 3-3.5% WR, and assume SSI will disappear). Others do the opposite, planning to retire at 30 with a bare bones budget, ignore taxes, ignore healthcare, ignore long term things like vehicle replacements, etc, and figure 4% is infallible.

[@silversurferhi]

If your RMD is more than 4% you don't have to spend it all

[@edwardloizides5415]

Stay away from Annuities. You really should say that. Rip-off as are most insurance products ESPECIALLY long term care insurance.

[@paulseidel5819]

Good summary. I get it. I started the go go. I gotta go spend 😂

[@thomasedwards629]

A 6% withdrawal if I happen to live to 85 would likely be the least of my problems.

[@jeffgehman8344]

Hi - In your examples, curious as to why you include the person's / couple's home value and net worth figures? Is it just because it strikes a chord with people, even though it doesn't actually pertain to the situation?

[@Thomas-mh6ib]

if the idea is to build an income stream to use as complement for retirement, or at any given point if needed, then building a dividend growth portfolio always buying adding to it could be a good and peaceful path. On the long run consistency and perseverance could guaranty the desired income stream goal with little worries

[@williamrogers1219]

During years when the RMDs are lower, it may be prudent to take out more if there is space left in lower tax brackets and place the excess money in a low-risk asset such as high-yield savings, a CD, or money market fund. The retiree would then rebalance the portfolio to their desired asset allocation. Another method to reduce taxes is using asset location, where asset classes with lower expected returns in a tax-deferred account and asset classes with higher expected returns in taxable and/or Roth accounts. Taxable accounts should contain tax-efficient asset classes to mitigate capital gains.

[@PatriceThibodeau-l8b]

Can you explain your last sentence? What are examples of tax efficient asset classes? TY!

[@dnaej11]

James I agree with your premise , But. in your example the Annuity pays out 60k a year for more than 15 years. What if you invested 4% of your annuity payout to keep up with inflation. What were the numbers look like?

[@williamrogers1219]

I enjoy your videos, but one thing I don't see is stress testing of portfolio returns. For example, most examples you provide have 6% to 8% returns. These returns are not linear and there can be long periods of lower expected returns from both bonds and stocks.

[@blueberryma]

At 13:55 you reference a new video and point, but it didn’t show up. Can you please share the link?

[@debilish8451]

What if you are paying close to 1% in fees to investment firm? Doesn’t that mean I can only take out 3%?

[@rodgertim2881]

Absolutely love it!!! I'll have to be financially stable in every sense before purchasing my first supercar. The best thing to do with your money is to invest rightly because money left saving will end up with no returns

[@johngill2853]

To me and annuity provides psychological benefits I've been a saver for decades and spending in a down market (hopefully it wouldn't be from equity) would eat at me. I'll by a SPIA and invest the rest very aggressively

[@jdmulloy]

The idea of handing over $1 million and having nothing to pass on if I died 2 years later would eat at me. I think most people would rather have a pension or annuity where they just get a monthly paycheck and don't have to think about it, but I'd prefer to retain control. If you have investments you can always rebalance how you like. Putting money into an annuity is a one way trip, you can't undo it.

[@Toomanydays]

My property taxes will increase 7% next year since the county says it’s value is up 7%. If you apply the 4% rule to my property taxes, I need $200K to service that expense next year. Of course the $200K needed will go up every year as the county continues to raise the value of my house. Just an idea. Break up your expenses, apply the 4% rule to it, to see what you need for that expense.

[@clbcl5]

Does the software you are using have a version for personal use?

[@pearleelife]

Try NewRetirement software. Love it. Affordable

[@DallinBunnell]

If you could get 40k on $1M or 60k with an annuity, you could also split the dollars between the two. Say you guarantee the same 40k with only 650k in an annuity, then you still have money to invest in growth assets to keep up with inflation down the line. And you can get FIAs with GLWB riders that pass on a death benefit in the case of premature death.

[@bossqueen_lala3098]

It is benefiting Social Security and will continue to benefit Social Security, but what we really need is immigration reform. With immigration reform, employers will now be required to comply with legal requirements, preventing individuals from receiving illegal payments and avoiding FICA contributions.

[@mckinneysooner]

Is income from investments a withdrawal. You are not taking out your investments instead getting income from investments

[@johngill2853]

IRA it's income Roth it's income (but not taxable) Taxable it depends

[@AbeFroman-zx5hs]

Bucket strategy.

[@edwardloizides5415]

For crying out loud you could’ve explained the required distribution in one sentence . Yes you’re required to withdraw perhaps more than 4 % but not spend it… just reinvest like you said 5 minutes into the video. Loquacious!

[@mrswilbert]

🤣🤣🤣 a child giving retirement advice

[@oscarromero3874]

A smart child with useful ideas and information.

[@mkmac9539]

Thanks, James. The Ruby scenario is the one I have been waiting for. I don't know if you made Ruby up or if it is real with a fictitious name. For this scenario, if it is totally made up, may I suggest a stepped down travel budget rather than a cliff from $10,000 at 63 to $0 at 73. I use NewRetirement. I have suggested that instead of 3 steps (go-go, slow-go, no-go), they allow the software to set the high point of travel expense ($10,000 in Ruby's case), then associate a percentage of that high point with each year of retirement. In reality, a retiree will travel the most early on and gradually taper off as they age.

[@janethunt4037]

Another thought is that you might want to spend more to travel as you age. Travel fewer times, but in organized groups that cost more.