The 4% Rule and Some Historical Perspective: Two Thoughts For Our Clients
Written on November 03, 2023

The 4% Rule and Some Historical Perspective: Two Thoughts For Our Clients

The art and science of the 4% Rule.           
One of the most common financial goals our clients have is to be able to retire. We have clients at all stages of accumulating savings, preparing for, and enjoying retirement. And, one of the most basic questions for retirement is, “how do I replace my paycheck?”

Many retirees chose to take cash from their investments each month, similar to a monthly paycheck they have been accustomed to over their careers. For decades we have used a simple rule for thinking about what amount this monthly income could be – the 4% Rule. Ben Bengen, the father of the 4% Rule, famously did the original research in the 1990s. He arrived at the conclusion that if you withdraw 4% or less of your assets each year, those assets will be able to last for a 30 year retirement[1]. We also have used helpful charts like the one above from Morningstar. These are good guides, but only approximations. Every client is different, and a host of factors can cause a clients’ withdrawal rate to be higher or lower than 4%. For example, older clients may be able to withdraw more than 4%. Clients with goals to pass money on to the next generation may need a lower withdrawal rate. The 4% Rule is the beginning of the retirement conversation, certainly not the end. The focus for OFM is always on the client’s goals and experience, and OFM clients understand that what’s important to you is important to us. With tools like the 4% Rule (and a good understanding of the exceptions to the rule), and personalized plans we can provide guidance to clients looking to prepare for and enjoy their retirement years.

Investing through historic headlines.

 Occasionally I will ask clients to recall the major events that have happened in the last 5 years. After listening to their responses, I sometimes offer this reminder. The last 5 years have included a global pandemic, 2 bear markets, the worst bond market on record, and a devastating war. Any one of these events would have a place in the history books as a consequential historical event. Taken all together, they can feel overwhelming. Everyone’s life has been upended to some extent, and fast-paced change is now just a normal part of life. Another thing that has happened over the last 5 years. Stocks (S&P 500) had a return of 78%![2]

As financial advisors we spend our time thinking about the future and how to navigate it. What has always been clear to us is that global events are not in our control, but the portfolios we construct for clients are. The investment blends we recommend are intended to capture the upside of the markets and manage the downside risks of an unpredictable world.

¹ Source:

² Source: Morningstar Office June 30, 2018 through June 30, 2023

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