Blog

I was recently speaking with an estate planning client about retirement. The client mentioned that he planned to follow the 4% rule, meaning he could safely take 4% from his savings/portfolio every year and have his money last long enough to support him for the rest of his life. The client has a money manager who said the client could safely take 6 or 7%.

Let me say this at the outset. I don't know the money manager and he/she may have a crystal ball. The financial advisors I know are more conservative. But considering that outfits like JP Morgan Chase and Fidelity have infinitely more resources and high IQ talent available than any independent financial advisor, made me skeptical of the claim.

So here are my thoughts (Disclaimer: I am not giving you financial advice). During the stock market runup something more than 4% may have been possible. However, what should be considered is growth and income over the remainder of your actuarial life expectancy. In many years, a 4% withdrawal will be too much. Consider that dividend income, interest income, and bond income will be taxed. Generally taxes paid need to be subtracted from the 4% you withdraw.

If you have to sell assets to maintain a 4% withdrawal rate, then you will have to subtract taxes on the capital gains realized. Also, many people pay a money manager or financial advisor 1% a year to "manage" their money. In addition, you will pay 1/2% to 1% as investment expenses of mutual funds. A small fee disappears as broker fees on every trade or sale.

If you strictly follow the 4% rule (or whatever percentage, you feel comfortable with) the amount you can withdraw from your assets is a calculation is based on your life expectancy. That means your portfolio is completely exhausted at your actuarial year of death. If you live longer, you will be broke. Also, there will nothing left to transfer to the next generation, if that was you intention.

Be skeptical of any claims. Make decisions with your eyes wide open. Consider whether it is wise for you to make the down payment for your granddaughter's house purchase. Factor in other gifts, large expenses (re-plastering the pool, new car, etc.), or events that might prematurely reduce your assets.

Another important consideration is the health of you and your spouse. Will either of you need skilled nursing? Is it prudent for you to get Medicaid asset protection planning?

- Donald Lowrey, Esq.