Why advisors shouldn't fret over the 4% rule

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By now, most advisors have gotten the memo: the long-held conventional wisdom about 4% annual withdrawals from retirement accounts no longer reigns supreme in the face of longevity projections and predicted long-term stock market returns.

Retired clients may have planned and even started 4% annual withdrawals, adding 3% each year for cost of living adjustments (COLAs), since the theory behind such a strategy developed a following among financial advisors in the early 1990s. But their financial advisors may have told those clients to reconsider and those clients may be planning to withdraw less than 4% this and each succeeding year, based on revised estimates about their longevity and stock market volatility.

But hold the phone: not all advisors subscribe to downward revisions of that 4% mantra.


Roger Kruse, who owns FFP Wealth Management, a Minneapolis-based firm, downplays the entire 4%-versus-3%-annual-withdrawal debate. Kruse doesn’t fret too much about which percentage his clients use for their retirement-income projections. He remains relaxed about the precise figure because he believes the other figures used to calculate retirement-income projections, such as those typically entered COLAs, invariably overestimate increases and, as a result, overstate projected retirement costs. By allowing his clients to use 4% withdrawal rates, and knowing they won’t always need the 3% COLA, he believes on balance, the projections will cover the ultimate outcomes of clients’ retirement budgets.

“I have got 25 years of experience” and “my average client is nearly 60 years old,” Kruse says. With that kind of time helping clients, many of whom who have lived out most of their retirement years, he has come to recognize that –and “this is incredibly obvious,” Kruse says, “people spend less money as they age.” Why? “You travel less, you drive less and your out-of-pocket spending decreases,” Kruse says.

3% OR 4%?

Like many of his peers, Bob Lamse, president of Talis Advisory Services in Plano, Texas, continues to run simulations of what a retired client's portfolio means in terms of lifetime income. He has, since 2008, reshaped most people’s view of long-term stock market performance, reducing the percentage that retired clients may annually withdraw from 4% to 3%. Like many advisors, Lamse has based those revisions both on predictions about increased longevity and lower market returns.
But for most clients, however, the downward adjustment has caused little alarm. “We were already very conservative,” Lamse says, so his clients had not been pushing their withdrawals to as high as 4% anyway.

A few clients have decided, due to the revised retired income projections and, with Lamse’s gentle prodding, to reduce their withdrawals and reduced their retirement income. Of course, that has also required a reduction in expenses. “One of my clients was traveling all the time, she still travels, but not as much,” Lamse says.

But, Lamse, like Kruse, believes fixating on 4% isn’t the solution. Instead he recommends looking at the big picture and applying common sense, so one year or so of a percentage withdrawal above or below should not trigger alarm bells.

Miriam Rozen, a Financial Planning contributing writer, is a staff reporter at Texas Lawyer in Dallas.

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