Capital Investment Advisors

#205 – A 6% Withdrawal Rate: Crazy or Possible?

Running out of money may be retirement’s most frightening concern, so it’s not surprising that people want to know how much of their nest egg they can safely spend. The 4% rule, identified by William Bengen, states that retirees who draw down 4% of their portfolio in the first year of retirement, adjusting every year for inflation, will likely see their money outlive them, assuming the portfolio has a 50-75% allocation to stocks. But what about people who want or need to spend more than that? Is 6% too high?

On today’s episode, Wes breaks down the pros and cons and estimates the probability of success for a 6% withdrawal rate rather than 4%. With careful consideration and planning, he looks for a way to help listeners max out spending while planning to not run out of money.

Read The Full Transcript From This Episode

(click below to expand and read the full interview)

  • Wes Moss [00:00:00]:
    A 6% retirement withdrawal rate? Is that crazy? Or is it possible? What if the 4% rule just doesn’t work for you and your planning? Does it mean you got to keep working forever? We’re going to run through the numbers and try to answer that question here on today’s episode of the retire Sooner podcast. I’m Wes Moss. The prevailing thought in America is that you’ll never have enough money, and it’s almost impossible to retire early. Actually, I think the opposite is true. For more than 20 years, I’ve been researching, studying, and advising american families, including those who started late, on how to retire sooner and happier. So my mission with retire sooner podcast is to help a million people retire earlier while enjoying the adventure along the way. I’d love for you to be one of them. Let’s get started.Wes Moss [00:00:57]:
    What if the 4% rule just doesn’t work for you? What if you need more than that? What if you need more money, like 6% of your assets? Today we’re going to talk about finding the right mix of assets for your withdrawal rate needs, 4% versus 6% withdrawal rates. We’re going to explore that here today. There’s a reason we spend a lot of time here on the retire sooner podcast, talking about withdrawal rates and what it takes to make your money last. When it comes to retirement planning, barring getting to your savings and all the sacrifices we need to do that, Jack and Jill went up the hill. Who’s the one that ends up with the most? It’s Jill, the investor, not just the saver. But when it comes to making your savings last, it has to be the most important topic in all of financial planning and investing. The whole point of saving and investing is to be able to live off what you’ve sacrificed for and for the income and the withdrawals you take from your retirement assets to keep up with the insidiousness of inflation, aka protecting your long term purchasing power. So when we’re talking about money, it’s hard to find a more important topic.Wes Moss [00:02:08]:
    And it’s not black and white, and that’s why we spent a whole lot of time around this. It’s not a one size fits all conversation. Some families I work with have super low spending needs. Thus they have super low withdrawal rate needs. They’ve got two healthy Social Security payments. They’ve got two pensions, sometimes three or four pensions. And they have eight grand a month coming in. They have no mortgage.Wes Moss [00:02:33]:
    They have $8,000 a month coming in from all their different income sources. And they don’t need anything from their retirement savings. Now that’s a relatively rare situation but I see it a lot. And you end up in a situation where families really the only money they ever pull out of their accounts are the required minimum distributions and they don’t even really need those. So I see people that use 1%, 2%, 3% and that’s totally fine as a withdrawal rate from their assets and that’s great. They’re not worried about the 4% plus rule because their rpms are way lower than that. They don’t need to try to figure out a way to max out what they can take out from their investments without running out. But most people do need to worry about it.

    Wes Moss [00:03:22]:
    Then of course there’s lots of other families that need a 6% withdrawal rate from their retirement savings and they need it every year and they need that just to cover the bills. Now sometimes this may only be for a short period of time. Maybe it’s a year or two or three interim until they have a income stream like Social Security kick that maybe kicks in because they retired sooner and then they can drop back to the 4% where there’s low lower ebb on your retirement withdrawal rpms. And when I say rpms I’m visualizing the rpm meter in your car. You don’t want it. And it’s ironically very much like retirement planning. You can run at three or 3000 rpms or 3% withdrawal rate. Pretty, you do that all day long and you could drive across the country, your engine’s going to be fine, 4%, you can still do it but you’re starting to run the engine.

    Wes Moss [00:04:09]:
    But once you get to five and six 6% withdrawals or 6000 revolutions per minute on your car it’s revving the engine. But again for some families those low rpms or those low withdrawal rates, they just don’t cut it. 2% doesn’t cut it, 4% isn’t going to cut it. And they really do need 6% let’s say in order to live the lifestyle they plan on living. And remember when it comes to finances, when it comes to money no one is crazy. Your situation is what it is. You decide when to retire and then you simply have to make the best of the cards you’ve been dealt or that you’ve dealt yourself. So today let’s say just hypothetically the 4% withdrawal rate just doesn’t cut it for you and you need 6%.

    Wes Moss [00:04:58]:
    What can you do? What should you do? Our research team at CIA Capital Investment advisors spent a whole lot of time around this recently and studied what kind of asset mix might work best if you need to extend your withdrawals beyond that 4% range all the way up to 6%, is it ideal with no risk? No way? Of course not. But it is possible. And there are moves that you can do that increase the probability you won’t run out of money over your lifetime, even at a 6% withdrawal level. A couple of important points about when we’re studying this. Remember, this is based off of stock market and bond market history. So all we can do is go back and look at what has happened over a really long period of time. We’re going back to 1928 in most of these studies, and we’re looking at the cadence of how stocks or bonds did in any given year and how inflation did in any given year. So when we run these probabilities and say we need this percentage withdrawn with this inflation rate, starting at this time, it’s all based on history.

    Wes Moss [00:06:15]:
    So when we say you have a, let’s call it 90% probability that you don’t run out of money, if you take this amount per year and you have this asset mix, that in itself isn’t necessarily a hard and fast rule. That’s just based on what’s happened over the last, call it almost 100 years. So all of this is probability planning. We want to increase the probability relative to what’s happened historically that our money lasts 303-54-0455 years. And that, to me, is still a very smart way to think about planning. We, of course, can’t see the future, but if you look over the course of market history, stock market, bond market inflation, economic history, we’ve learned that it tends to repeat itself. Maybe not in any given year or two, but the longer the period of time we look at, the higher the probability that markets continue a similar path over time. There’s a couple of ways I want to look at this, and this is a way that we’ve never talked about here on the show before.

    Wes Moss [00:07:20]:
    I want to start with this is a new fidelity study that looks at withdrawal rates and does it almost in an inverse way. I’ve always looked at it. I’ve always looked at this as if I’m going to take x percent. How long, historically has my money lasted? They do it the inverse of that, and they asked, what withdrawal rate can I use at what asset mix between stocks and bonds and cash to reach different confidence levels? That money doesn’t run out and that money doesn’t run out. And in their study, it’s for 25 years or more when we get to our studies. And if you want to skip this fidelity study commentary and just skip to the four and 6%, feel free to do so. But we’re starting with this. So in the fidelity study, they just title this.

    Wes Moss [00:08:09]:
    As I look at this table here in this graph, it’s just titled appropriate withdrawal rates. So what if I want appropriate withdrawal rates and they’re looking at different confidence levels. So what if I want a 50% chance of success? How much can I pull out versus a 75% chance, a 90% chance at a 99% chance? And just intuitively, it makes think of it this way, when you want a 99% probability that money doesn’t run out over a certain period of time, of course, those withdrawal rates would be naturally lower. If I’m okay with a 50% probability that my money won’t run out over 25 years, then naturally those withdrawal rates will be a whole lot higher. So that’s how this study works. So let’s start with this. What if I want a 75% chance of my money to never run out? What rates? What withdrawal rate, though, could I then use? See how this little inverse of how we normally talk about it? For example, if I was okay with a 75% probability of success, success here again is money lasting at least 25 years. The fidelity study shows that if I use a balanced mix of essentially half stock, half bonds cash, then I would be able to take out at maximum 5.6% per year and still have a 75% confidence level that I don’t run out for at least 25 years.

    Wes Moss [00:09:29]:
    That’s again in a 70 75% of the time that would work or has worked over the course of history. But if I used an all stock portfolio still targeting the 75% confidence level that I’m not going to run out, I could actually take a little bit more. Not a lot, just 5.7% though, as the max with the same confidence level. But it’s very different if you want a 99% confidence level. And I’ve done a lot of retirement planning over the years with families, and most people are looking for a 95% confidence level. Rarely have I ever heard someone say, you know, I’m good with a 50% confidence level. But remember, everyone is different and nobody’s crazy. So here are the numbers.

    Wes Moss [00:10:17]:
    If I want a 99% confidence level that I’m not going to run out for at least 25 years, and I want to use all stocks. Remember, we’re also trying to figure out what’s the asset mix that changed these probability levels. So if I use all stocks in this example and I still want a 99% confidence level, then I could only take out 3% per year. Only 3%. And we know that’s because there’s some really rough periods of time. There’s huge drawdowns in equity markets. So if we’re 100% in stocks and we get up almost 50% correction, and you’re pulling money out and you never, and you’re not stopping, those are the scenarios where you tend to run out of money. Also in periods of time when inflation’s super high and your spending need goes up a lot.

    Wes Moss [00:11:09]:
    Because remember, in all these tests, we’re starting with a withdrawal rate number, and then we’re increasing that nominal number amount for inflation, whatever it is prevailing in history over time. Here’s where it starts to get a little more interesting. If I use a more conservative mix, 60% in bonds and 40% in stocks, then I could count on a 4.1% withdrawal rate. That’s a higher max withdrawal rate than if you used all stocks. Again, remember, targeting the 99% confidence level. Let’s go back to our 75% probability that we talked about earlier. If we use Fidelity’s conservative mix, the max long term withdrawal rate is only 5.2%. Remember, 75% confidence.

    Wes Moss [00:11:59]:
    But if I use their heavy stock mix, then the maximum withdrawal rate goes to 5.7%. What this study is really telling us is that as your withdrawal rate needs to go up from four to five to, let’s say, 6%, you actually need more in stocks to increase your probability of success. Even though in the 99% confidence part of the study, it was better to use a more conservative mix. So very simply, higher withdrawal rate needs call for more in stocks and less in bonds and cash. Lower withdrawal rate needs with higher confidence levels require a much more balanced approach of stocks and bonds. We keep hearing that inflation is coming down, but the past three years, the common man inflation gauge is still up over 20%. Thats necessities like food, gas, utilities and shelter. How can you possibly keep up? Well, one option is income investing.

    Wes Moss [00:13:06]:
    Thats using a combination of growing stock dividends, bonds for more cash flow, and other areas that can be a hedge against inflation. Look, inflation is tough. Let us help you overcome it. Schedule a time directly with our Dot thats your dot. Now, I’m not going to spend a lot of time on this next part because I think most of our retire sooner listeners have already gone through this, and we have a whole show. We have a couple different shows that explain the 4% rule, but I’ll just do a quick recap of that. In our 4% study, we’re simply looking at the 4% confidence level.

    Wes Moss [00:13:43]:
    We start with 4% of whatever retirement balance is called a million dollars. 4% is $40,000 a year. And then that gets increased for inflation every year according to CPI. And when we’re looking at the data, using a 60% stock, 40% bond approach points to a 99% level of success not running out of money for at least 30 years. In fact, the five worst outcomes. This is something also new that we’re sharing today. We looked at what are the worst periods of time? When does money run out the soonest? Over the course of history, utilizing 4%, the five worst outcomes for that balanced mix were the following. The worst was it ran out.

    Wes Moss [00:14:28]:
    Money ran out in 30 years. Then 31, 37, 38, and 39 years. Those are the worst five. Now, looking at a 4% withdrawal rate with 100% in stocks still gives you a high probability of success. It gives us a 97% success rate, or 97% of scenarios lasted 30 plus years. Remember, now we’re talking about data we did with our CIA team and the retire sooner team. So it’s a little different than the fidelity study. And as great as 97% is, the 3% of scenarios, 3% of the time, they don’t look so good.

    Wes Moss [00:15:09]:
    And in those worst instances, we’re looking at the worst outcomes. Money only lasted 1617 and 26 years. So again, most of the time, things worked out great. But in the few cases when we had really bad stock markets, really bad inflation, money didn’t last nearly as long as we wanted to. So you can deduct from this that a conservative balance again wins if you’re looking to maximize your probability of success, aka not running out of money. All right, now let’s look at 6%. Now, I’m not recommending that you should use a 6% withdrawal rate. I don’t want another Dave Ramsey fiasco out there where I think he said something like 8% and the whole world got nuts.

    Wes Moss [00:16:03]:
    So about it, we’re looking at data here, and of course, this is a much taller order. We’re using all the same historical parameters, adjusting for inflation and looking at different asset mixes. 60% stocks, 40% bonds, 40% stocks, 60% bonds, and then 100% in stocks. How does that change our probability of success? If we were to say, I’d like to start with 6% and ratchet that up every year for inflation, again, of course, it’s a much taller order. We’re using more of our money in any given year in perpetuity. And remember, that’s the other catch here, is that these studies are also linear. It’s as though you start on this track of I’m taking x amount per year and I’m ratcheting up for inflation every single year, and your foot is on the gas pedal and there’s no brakes. There’s never any pumping of the brakes when it comes to these studies.

    Wes Moss [00:17:05]:
    So it’s assuming that even though, let’s say you have a bad market and your balances start to go down, you’re still taking your 6% plus inflation, and then you do it again the next year. The reality of all of this, and I guess I’m maybe skipping to the bottom line, is that when it comes to real life retirement planning, we’re going to adjust. You may start with a number that’s a withdrawal rate, and if it’s too taxing on your portfolio, you know that you really need to slow it down. And you start with a number maybe that’s really conservative and inflation’s low, and the market is in a wonderful, glorious period of time, and you’re thinking, wait a minute, my portfolio has grown way more than I thought, even with taking out my starting withdrawal rate. And then you adjust with that. So all of this is couched with when we’re looking at these probabilities, we’re on a direct line foot on the accelerator. We never slow down. And in real life, we’re certainly going to adjust.

    Wes Moss [00:18:06]:
    But again, I think this is still a very helpful guide when we’re trying to contemplate, well, how much can I spend? So we’re looking at 6%. As you can imagine, mathematically, money just won’t last as long here when we run this over the course of market history. But it also doesn’t mean that it hasn’t worked or been possible. In fact, we’re looking at a balanced portfolio here, 60% stock, which we’re looking at S and P 540% in bonds, which is the aggregate bond index over history, what I would say a healthy 62% of the time funds lasted 30 years or more. Think of it this way. Nearly two thirds of the time, over the course of economic and market history, that balance, 60% stock, 40% bonds, allowed someone to start and stick with a 6% initial withdrawal rate, ratcheted up for inflation every year, and money still lasted more than 30 years, almost two thirds of the time. Now, it doesn’t give us that 99% confidence level that the 4% data shows, but it puts the 6% rate in what I would call the decidedly possible camp. Now, how do we increase our chances? If you say, look again, 4% rule doesn’t work for me.

    Wes Moss [00:19:33]:
    I need to withdraw 6%. What’s interesting, and maybe now intuitive at this point, is that the probability of success using this higher, heavier withdrawal rate goes up, not down, when you switch to a 100% stock allocation. In fact, the probability jumps to 71% from 61% when we’ve gone from a balanced portfolio to 100% in stocks. So 71% of the time money lasts more than 30 years using a 6% withdrawal rate in a 100% stock portfolio, and 69% of the time using 100% stocks with a 6% withdrawal rate, money lasted more than 35 years. Compare that to the balanced or more conservative portfolio, where only 51% of the time money lasted 35 years or more. Now let’s also go back and look at worst outcomes. The worst outcomes using all stocks remember, worst refers to money running out quickly. Weren’t all that different between the hundred percent stock approach and the balanced approach.

    Wes Moss [00:20:52]:
    In the three worst case scenarios using 100% in stocks, money ran out in 1011 and 14 years. It’s pretty quick. Using the balanced portfolio 60% stock 40% bond, the three worst outcomes were all 16 years, not all that different. So if you really sat on these higher withdrawal rates, knowing that your confidence levels would be much lower than using lower withdrawal rates. So bottom line, using a 4% withdrawal rate is of course much better for your probability of success than 6%, especially if you’re looking to have money left over at the end of retirement. But according to history, and we’ve looked at this from a data perspective, 6% isn’t impossible if you want the highest confidence level, maxing out withdrawals without running out, you want to get to a 99% confidence level. You can get there using the 4% withdrawal strategy and a balanced 60% stock 40% bond portfolio if you want to increase your confidence levels when using 6% again if you have to, history suggests you’re largely better off again, a higher probability of not running out of money by simply being a 100% stock investor.

    Mallory Boggs [00:22:22]:
    Hey y’all, this is Mallory with the retire sooner team. Please be sure to rate and subscribe to this podcast and share it with a friend. If you have any questions, you can find dot. That’s dot. You can also follow us on Instagram and YouTube you’ll find us under the handle Retire sooner podcast. And now for our show’s disclosure. This information is provided to you as a resource for informational purposes only and is not to be viewed as investment advice or recommendations. Investing involves risk, including the possible loss of principal.

    Mallory Boggs [00:22:53]:
    There is no guaranteed offer that investment return, yield, or performance will be achieved. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions for stocks paying dividends. Dividends are not guaranteed and can increase, decrease, or be eliminated without notice. Fixed income securities involve interest rate, credit inflation and reinvestment risks and possible loss of principle. As interest rates rise, the value of fixed income securities falls. Past performance is not indicative negative of future results. When considering any investment vehicle, this information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investment decisions should not be based solely on information contained here.

    Mallory Boggs [00:23:38]:
    This information is not intended to and should not form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment tax, estate or financial planning considerations or decisions. The information contained here is strictly an opinion and it is not known whether the strategies will be successful. The views and opinions expressed are for educational purposes only as of the date of production and may change without notice at any time based on numerous factors such as market and other conditions.

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