How to Invest in Retirement using the 4% Rule [Video #3]

While the 4% Rule is a popular approach to retirement spending, many don't know how important your asset allocation is. Invest too much or too little in stocks, and the 4% Rule stops working. In this video, we explore this issue as part of our series on the 4% Rule.
Resources in this video:
✅ 4% Rule Series: • The 4% Rule Explained ...
✅ Bengen 1994 paper: www.retailinve...
✅ Bengen 1997: paper:www.researchga...
✅ Guyton-Klinger 2006 paper: citeseerx.ist....
0:00 How to Invest in Retirement using the 4% Rule
2:23 4% Rule & Asset Allocation
9:27 Adding small cap stocks
19:15 Guyton-Klinger Spending Rule
23:23 4% Rule & Target Date Retirement funds
TOOLS & BOOKS I LOVE
📚 My Book (of course): amzn.to/3by10EE
💡 Personal Capital: go.robberger.c...
ABOUT ME
While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I'm the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
I'm also the author of Retire Before Mom and Dad--The Simple Numbers Behind a Lifetime of Financial Freedom (amzn.to/3by10EE)
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DISCLAIMER: I am not a financial adviser. These videos are for educational purposes only. Investing of any kind involves risk. Your investment and other financial decisions are solely your responsibility. It is imperative that you conduct your own research and seek professional advice as necessary. I am merely sharing my opinions.
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[@ericjuli6576]

Excellent information! I always find it amazing how many people quote the 4% Rule but actually don’t even know how your supposed to implement it, much less take a deep dive into allocation! Really enjoyed this one!

[@BrownRiverBoy]

Many thanks. These three videos on 4% rule are very informative and helpful!

[@Carltonprice3]

Amazing information! Very diligent and detailed.

[@johnbrown1851]

I like having some of my allocation in a reit ...VNQ in particular to balance the stock allocation. From a supply and demand perspective, the population is growing, but they aren't making more land, so even though there could be a housing bubble, it will recover soon.

[@alanzuckerman3972]

Great piece as usual. I wish you would have mentioned the drag of fees that many Americans encounter in their 401k, s. One of my employers offered some vey good index products with ultra low fees, however the ancillary fees were 1%. What I think also needs to be addressed is that if you follow the 4 % rule with let’s say a million dollar pre tax 401K or traditional IRA, the $40,000 withdrawal will be significantly reduced by taxes.

[@ichephren]

This series is gold!

[@CaptainBenjamins]

I feel comfortable having 80% stocks and 20% bonds. The reason I am is because I have a paid off house, paid off cars, and college funds secured for my children. You have to really consider how much risk you can handle and when you don’t owe banks money anymore, you can retire and sleep easy at night.

[@DianeCarroll111]

Grateful. You explain everything so clearly. A wonderful tutor. Thank you

[@frankofva8803]

I have two questions about the 4% rule: first, how different would your portfolio look if you took just 4% from your year- end balance every year, whether it’s up or down and not consider 4% initially and add inflation? Second, with the 4%+ inflation scenario is that usually enough by age 72 to cover RMD’s if your portfolio has significantly grown?

[@rob_berger]

If you just take 4%, the problem is your spending each year could vary substantially. You'd have to be able to live off of a lot less in a down market. The Trinity Study looked at this. As for RMDs, that's an interesting question. My GUESS is yes, based on the RMD formula, but I'll research that for a future video.

[@johnbrown1851]

@@rob_berger great question. The studies don't look at RMDs , the difference in actual take home money could vary wildly. One might want to withdraw more or convert to Roth prior to RMDs kicking in depending on the size of the pretax account.

[@timb6985]

Hi Rob, you pointed out that the vanguard target date fund (that you referenced) started at about 50% stock and that if you went to even a earlier year retirement account the percent of equities was even less. You said that this is not consistent with the Bengen strategy. However, one of us (you or I) is not interpreting Bengen's second paper strategy correctly. The TITLE of the Chart 6 (when he uses Small Cap as well as Large Cap) it reads, "Probability of Portfolio Lasting 30 years... 1% PHASE-DOWN OF STOCK". I assumed that meant that each year he rebalances his portfolio and what started at 63% stock at retirement (65yo) will decrease 1% in equities EACH YEAR THEREAFTER. Thus after 20 yrs the portfolio will be 43% stock and 47% bonds. Sort of using the old 110 - your-age but instead using something like 128% (in stock) - your age. Did I misinterpret?

[@gk_filer]

Great Dig Down!!

[@lw9936]

Great info! That is what I am looking for! Thank you!

[@MultiformeIngegno]

Fantastic video. Extremely clear! Thank you.

[@MultiformeIngegno]

Something to consider is also perhaps the fee of a small cap fund. That might eat up the increased withdrawal rate…

[@MrHardrock]

Great information. Thank you 🙏

[@kevincondit9649]

Awesome info!

[@Bobventk]

The vast majority of retirees spend significantly less (inflation adjusted) at 70 than 60, and 80, than 70, so on. 4% is EXTREMELY safe as a starting withdraw

[@franticzenster8140]

5:13 I don't understand how it's less risky to have more bonds in a retirement portfolio when the study shows that it'll have less longevity than a stock-heavy portfolio. It sounds like a bond-heavy portfolio is more risky to me. I really dislike the idea that being part owner of the great American companies is reasonably riskier than owning their debt.

[@bobsandone3108]

I assume he included market turndown years during that period, such as we had in 2001 and 2009. I was not retired in '01 and '09 and had stock allocations of over 75% and got my butt kicked, but made no withdrawals and was back in good shape within a short period of time. Now that I'm retired and with the average PE of the market as high as it is, I'd be a little leery of going even as high as 50% in stocks. Comments?

[@trave7644]

What about just investing in total stock market in retirement? John Bogle says not to mess with such a variety of allocations. certainly not international stocks.

[@allychan9756]

Thank for the video! It's very helpful. Can we invest in the bond fund for the bond portion of the portfolio?

[@lw9936]

Hi Rob, what is your insight for near retirement people on investment portfolio in current market? thanks a lot

[@rollypolypress]

So if you do a 100% stock allocation but make sure you diversified it with blue chip, emerging companies and bonds I think you would be doing just fine

[@tonyreddy7535]

Your videos are excellent. Thank you. My IRA of course will require ever growing RMD. Currently 60/40. At this point I don’t need RMD. should I keep that in 60/40 typical account and withdraw more so IRA RMD’s will bee more predictable?

[@girliedog]

This needs to be revised to reflect current interest rates on bonds.

[@junsilver650]

Is my understanding correct that even if your portfolio drops by half you would still withdraw 4% of your original portfolio value plus inflation adjustment?

[@asht9193]

Any views on Gold asset class being part of allocation

[@bakntheday]

Great video! Thank you. Say you were 5 years into retirement following the 4% rule and you inherited $50000 and added that to your portfolio. Or had a medical emergency and had to withdraw a $50000 lump sum. Would you then adjust your withdraw rate the next year based on the new balance? I assume so. Thanks in advance.

[@pdxmojo2577]

I suspect most who watch your content rely on 401k + Social Security as their primary retirement source of income. Let’s forget about SS for the sake of this question. First, thank you for discussing target date funds. However, can we get a lil creative with TDFs for simplicity sake to determine what dollar amount we HAVE per month (in retirement) instead of the dollar amount we WANT per month in retirement? Let’s assume retiree has $1,000,000 in a 401K at age 60. Allocate $200,000 increments to 5 different Vanguard TDFs equalling $1,000,000: - 2025 57/43 stock to bond exposure - 2030 65/35 - 2035 73/27 - 2040 80/20 - 2045 88/12 I don’t care about exposed stock risk in later date TDFs because I won’t touch that money for decades. The only fund I withdrawal from is the 2025 at a monthly increment of $3,333 (before tax)…WHICH IS 4%* *sum divided by 5 - 5 different target date funds - creates a 25 year span. *$1,000,000 divided by 5 TDFs = $200,000 (25 year span) *$200,000 divided by 5 years = $40,000 max annual withdrawal…WHICH IS 4% *$40,000 divided by 12 months = $3,333 monthly MAX withdrawal *Rebalance/reallocate 20% to all 5 TDFs once per year *latter up to next TDF (2050) every 5 yers Rob, thoughts? THX!

[@liisaelts7522]

We have it by government, that 4 percent goes to retirement fund. It sounds GREAT on paper. Unfortunately finding work here is often on minimum wages, so the reality is, the 20 years I've had it, it has accumulated little over 7,5k in the bank for my retirement fund. It is scarier, when you read the fine print and find out the government has reduced your gov pension by that 4 percent and has invested it as conservatively as possible (40 % stocks, 60 % I bonds)! So it's poverty all the way to the grave for most of my generation here, who are just now finding out how little this scheme has offered for their futures as their only job options tend to be on minimum wage. There are thankfully other options to try and rectify this nowadays, but if it weren't compulsory, I would have gone with 20 percent minimum for retirement from the start and tried the 90 stock to 10 bond ratio. Oh the irony of dreaming.

[@sawyerm345]

Hi Rob. Throughout my career I didn't receive a raise every year. What if we adjust for inflation every 5 years. Could we start with a higher withdraw rate than 4%

[@rob_berger]

Yes, you could. The trick will be figuring out how much higher. And I'm assuming that when you adjust for inflation on year 5, you are only adjusting for the current year's inflation.

[@tatsumakisempyukaku]

Hope you respond: Ray dalio’s all weather portfolio I believe does 30% stocks. How’s does Ray’s portfolio compare when it comes time to withdraw?

[@kennethkloby2726]

why not look at it yourself?

[@glamoc0000]

Rob, If I want to convert as much of my 4 million 401k to Roth IRA as possible, so my high earning children won't be hit with a large tax bill when I die, how much per year am I allowed to roll over into a Roth IRA?

[@rjared4894]

I presume you are aware the beneficiary gets an inherited IRA in their name and with Required Minimum Distributions based on their age so taxes are not dramatically increased.