This Faith in Finance podcast is underwritten in part by Sound Mind Investing. For more than 30 years, do-it-yourself investors have relied on SMI for proven strategies and trustworthy guidance. SMI helps people build wealth so they can provide for their families, prepare for the future, and give generously. Learn more at soundmindinvesting.org. How much can you safely spend in retirement without running out of money?
I am Rob West. It's one of the biggest questions retirees face, and for years, many have looked to the 4% rule for answers. But what if that rule isn't as simple or as reliable as it seems? Today, Mark Biller joins us to revisit this widely used guideline and explore a more flexible, thoughtful approach to retirement withdrawals. And then it's on to your calls at 800-525-7000.
This is Faith in Finance, biblical wisdom for your financial decisions.
Well, our guest today is Mark Biller, Executive Editor and Senior Portfolio Manager at Soundmind Investing and a longtime underwriter of this program. Mark, great to have you back. Thanks, Rob. Good to be back. Mark, in your latest newsletter, you tackle an important topic in an article titled Revisiting the 4% Rule.
And it really gets to the heart of a question many of our listeners face as they approach retirement. How much can I safely withdraw from my savings?
So what's the core issue you're helping readers think through here? Yeah, that's really it, Rob. We're trying to answer the question: how much can you withdraw for living expenses and other spending without depleting your retirement savings too soon? You know, as people get close to retirement, it really catches a lot of folks by surprise that figuring out how to withdraw their money from their nest egg is actually a lot more complicated than saving it was in the first place. You know, saving for retirement is pretty straightforward.
You invest steadily year after year, you pick your investments, and a lot of that ends up going on autopilot for a lot of folks. But then when you hit retirement, you're suddenly faced with this period of unknowable length, which is really the big problem: you don't know how long you have to make the money last. And so, new retirees and those approaching retirement really have to grapple with this question of how long their money will last. Yeah.
Well, that's where the idea of a safe withdrawal rate comes into play. But it's not quite as straightforward as it might seem, is it?
So for many people, it can quickly start to feel a bit overwhelming, right? Yeah, it really does, Rob. It's not especially simple. It definitely can feel overwhelming. You know, trying to find a simple formula for a safe withdrawal rate is really one of the biggest brain teasers in financial planning.
And that's because there are so many unknowns. You don't know the rate of return you're going to get from your stocks or from your bonds or other investments. You don't know what the rate of inflation will be or what interest rates will look like. And then the big one that we mentioned a moment ago, you don't know how long you're going to live and how long that money has to last. Yeah, that's well said.
So, where did the well-known 4% rule originate? Take our listeners into how that became such a widely accepted guideline. Yeah, well, it started with a financial planner named Bill Bengen, and he tackled this problem by looking backward instead of forward.
So, in the early 1990s, he analyzed decades of historical financial data, and starting with retirees in the mid-1920s, his original research identified a withdrawal rate that would have sustained a retirement portfolio for at least 30 years. And this is the key, Rob, even under the very worst historical conditions. Yeah, that's important. What did the research actually show? Because this is where I think a lot of the confusion really starts to set in.
Yeah, that's exactly right.
So, what Bengen found was that an initial withdrawal rate of about 4.15%. Followed by annual inflation adjustments, it would have allowed every single retiree's portfolio in his study to make it through a full 30-year retirement without running out of money.
So, what that really means, Rob, is that 4.15% figure was really the floor. That was the lowest common denominator that would get every single one of these portfolios through safely. Yeah, that's helpful.
Well, when we come back from this break, we're going to talk a bit more about the research. We're also going to talk about how we should think about this moving forward. Mark and his team really unpack a thoughtful approach for how you can think about your own withdrawal rate in retirement. And rather than anchoring to a single percentage, they're taking a more holistic view of the financial picture. If you'd like to read it for yourself, head to soundmindinvesting.org.
The article is titled Revisiting the 4% Rule for Retirement Withdrawals. More with Mark Biller after this break. Don't go anywhere. What we do is very special and it's very unique. This is Bethany.
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I'm Rob West. With me today, my friend Mark Biller. You know that 4% rule, that withdrawal rate that's kind of accepted for retirees to safely withdraw in retirement? Where did that come from?
Well, before the break, Mark Biller was shedding some light on a gentleman named Bill Bingen who did research that became what we commonly accept today as the 4% rule. Is that the appropriate withdrawal rate moving forward? And how should you think about that?
Well, the team at SMI wrote an incredible article on this topic that you'll find at soundmindinvesting.org. But, Mark, before the break, you were sharing that this research showed that an initial withdrawal rate of 4.15%, followed by annual inflation adjustments, would have allowed every retiree's portfolio in his study, even under the worst conditions, to make it through a 30-year retirement. But really, this was a simplification of what he found, correct? Oh, yeah, absolutely.
So, two things really happened there, Rob. First, the financial press, as they often do, kind of oversimplified this, turning it into the 4% rule rather than his 4.15% finding. But more important than that is a lot of people saw that and came to believe that this 4% was the optimal. Withdrawal rate for just about everybody. And really, that was never the point of the research.
The point was the 4% was the safety floor. And so, when people kind of seized on that 4%, it meant that a lot of people were being probably more conservative than they needed to be. And also, I think it gave a lot of folks really a false sense of security in that this was some kind of optimal planning tool. And it's really not. I mean, as you know, Rob, a lot of these financial rules of thumb, they have a very useful purpose.
And in this case, the very useful purpose for a 4% rule or a 4.15% rule is for someone who's maybe 10 years out from retirement, they're kind of eyeballing what they think their nest egg might look like in 10 years, and then they're kind of eyeballing what a safe withdrawal rate might look like. And when you're that far away from the actual number that you need to plan with in retirement, that probably works okay. But as you get close and you really need to dial in, what is my spending plan going to look like in retirement, this really is not a great planning tool. It's a very rough planning tool. Interesting.
Well, I know your team at Soundmind Investing took a fresh look at this.
So let's dive into what your research uncovered. Yeah, so back in 2012, so almost 15 years ago, SMI's founder Austin Pryor went through similar analysis. And so he looked at a lot of historical data. We used some other conservative assumptions using a 50-50 stock bond portfolio and then gradually shifting that to make it more conservative over time.
So basically, we changed a few of Bengen's inputs. But based on our approach, Austin found that a 5% initial withdrawal rate, even with those annual inflation adjustments, would have supported a 30-year retirement even under those difficult conditions.
So that's a pretty big difference from 4% to 5%. It really is, and it might not seem like it is, but it absolutely is. Just curious, Mark, did your research also explore what happens if someone pushes withdrawal rates even higher than that? Yeah, it did.
So what we found was that a 6% withdrawal rate worked in almost all of the cases, but there were some where the money ran out towards the end of that 30 years. And then as we moved from 6% to 7%, that's where people really started running into trouble. Significant risks came in there with a lot of the portfolios running out of money before they hit that 30-year threshold. Yeah, that's helpful.
I'm just curious, you mentioned that he used a 50-50 mix of stocks and bonds. Was that constant during the 30 years or did it get more conservative over time? Yeah, we made that more conservative over time.
So, of course, that glide path will impact a little bit how those numbers play out. Yeah, interesting.
Well, as you point out, there's a lot more nuance behind those findings that you unpack in the article. By the way, you can find this, folks, soundmindinvesting.org. But let's bring it forward to today. Bill Bengen actually revisited his original research, right? He did.
And he recently came out with a new book, which is why this topic has kind of come back up a lot in the financial media.
So what Bengen did is he improved his tools. He used a broader mix of investments. And his updated research now says 4.7% is a more appropriate floor for a sustainable 30-year retirement.
Now, in most cases, he acknowledges, kind of like our research showed, that retirees could have withdrawn more. He says 5.25% or 5.25% is kind of the sweet spot where most of those portfolios. Would have still been successful. Really helpful. It seems like the idea, then, at the end of the day, here, Mark, given everything you've just said, of a single fixed rule is really giving way to a more flexible, personalized approach.
Is that right? Yeah, it's exactly right. You know, Bengen's most recent work explores adjusting those withdrawal rates based on market performance or changing lifestyle needs over time. He emphasizes that past performance certainly isn't a guarantee of future results as well.
So, flexibility and ongoing evaluations are really important, which really, Rob, I mean, that's exactly what any financial planner would say. Yeah.
You want to use the rule of thumb for what it's good for, but you really want to drill down into the personalization of each individual client's situation to get a much better picture of what they can afford. Yeah.
That's helpful.
So, how should our listeners think about this beyond just focusing on withdrawal rates alone? Yeah, I think the big picture is that just picking a starting rate and then making an automatic inflation adjustment, that's not how we'd recommend approaching this task. You know, I think an individual approach that considers all of a specific retiree's income sources, their own social security rate, their own social security situation with their spouse, comparing those things to their specific expected expenses and goals. Taking that level of personalization is going to be a much better approach. Ideally, from there, a person would use some kind of planning software that can run retirement simulations that estimate the likelihood that their plan is going to succeed.
You know, that type of approach has the benefit of being able to stress test different scenarios and making the ongoing adjustments. the person's retirement actually unfolds. Really helpful. Mark, about thirty seconds left. Tie a bow on this for us.
Yeah, well, I think the key is to hold these rules of thumb loosely. They're useful guidelines, but much better is to personalize this with either a planner's help or some good financial planning software that can help you to hone in on what you need for your retirement. It's a great reminder that wise planning requires both diligence and flexibility. Mark, thanks for your time, as always. I always appreciate it, Rob.
When it comes to retirement, folks, it's not about finding a perfect formula. It's about practicing wise, flexible stewardship over time. Our guest today has been Mark Biller, Executive Editor and Senior Portfolio Manager at Soundmind Investing. Check out this article: Revisiting the 4% Rule at soundmindinvesting.org. We'll be right back.
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Well, we're taking your phone calls today. If you have a question, we've got room for you. Call right now, 800-525-7000. Any financial topic, we'd love to tackle it. In fact, let's do that now to Naperville.
Steve, go ahead. Yes, sir. I have a question. I'm retired. I have about thirty thousand dollars I could invest.
And how is it to invest in the market with gold and silver compared to in do you can buy gold coins? Which one is better to do? Yeah.
It's a great question. I like gold as an investment, but I don't want you to overweight there. And this comes up a lot, especially during times of uncertainty and where there's geopolitical tensions. The big idea with regard to gold and silver is: you know, they're less about growth and more about stability and diversification. And here's why.
Number one, they don't produce any income.
So there's no dividends, there's no interest paid. And the long-term returns typically lag the market, the overall stock market.
Now, you might say, well, wait a minute, Rob, look at the last couple of years. And I would say, you're right. But when you look over the last 20, 30, 50, 100 years. Historically, gold and silver do not do as well long term as the market.
So, what do they offer?
Well, they're what we would call a hedge against inflation. Uh because it's a store of value. They hold their value typically during times of crisis, and they help to diversify you, like we read about in Ecclesiastes 11:2 from King Solomon. Is right now a good time? I wouldn't make this decision based on market timing.
Gold and silver often spike when fear is high, and that can mean you're buying at or near the highs.
So I think the better question is, do I have the right Allocation to gold more so than is this the right moment to buy it.
Now, how much should someone have in their typical portfolio? I would say a 5% allocation is right for most people. And I would buy that in physical gold and silver.
So, you know, you might buy the coins or the bars, maybe the one-ounce gold piece could be great. You buy it, you store it securely, you keep it forever, and you pass it down. And then, if you want to go up to a full position, which I would say is a full 10%. I'd probably use that second 5%, and I might consider using one of the gold ETFs like GLD or IAU, where you're essentially buying a gold tracker that moves in lockstep with the spot price of gold, but you don't have to take an additional 5% of physical gold that involves you buying it at a premium and storing it and just all the insurance costs and the other things that come with you taking on gold. I think the mistake to avoid is going too heavy.
You know, getting up above that 10% allocation, 20%, 30%. I think that would be a mistake. But let me stop there and get your thoughts. I'm just learning. I'm just listening.
I understand what you're saying. What is the gold tracker again? Yeah, so essentially a gold ETF. ETF is an exchange traded fund. And basically, it's a way to invest in gold without physically owning it.
So the gold ETF is a fund that tracks the price of gold. And it trades on the stock market like a stock.
So instead of buying gold coins, you're buying shares that represent gold value.
So you'd buy it in a brokerage account, just like you would a stock. And the fund that you're buying, in my example, GLD, which is the iShares, the biggest one, or IAU. With either of those, the fund owns the physical gold and they store it securely in vaults. And then the price of the investment, the fund, moves up and down with the price of gold.
So if gold goes up 5%, the ETF roughly goes up the same amount. And they're easy to buy and sell. You can, it's you have ultimate liquidity because you can trade it as long as the market's open. You don't have the storage and the security concern.
So it's lower, it's a lower cost option than buying coins, and it's very liquid. What's the downside? The downside is you don't physically own the gold, and there is a small annual fee that you have to pay the fund company, and it's still subject to market fluctuations, but it does have its place. Does that make sense? Yes, sir.
That's GLD. That would be one of them. And then the other one is IAU, would be the other ETF.
So the IAU is the iShares Gold Trust. And then GLD, which is the largest, is the Spider Gold Trust, and that's the biggest one in the world. Hope that helps, Steve. Thanks for your call. All right, quickly to West Virginia.
Rick, you've been waiting patiently. I've got just about a minute left. How can I help, sir? Yes, Rob. I'm 63.
I've got a 401k. In a previous company that I worked for, approximately $200,000, and I've been really wanting to. Change it so that it's invested in a biblically sound company. Yeah.
And they're telling me that I can't do that because it was set up through the company I work for. And I was just wondering, do I need to pull that out and reinvest it in another direction until I know it's Bad bird's going in, but good chance. Yeah, the good news there, Rick, is because it's a previous employer, you can absolutely roll it out to an IRA at Fidelity or Schwab or wherever you'd like to go. And then you've got unlimited investment options, including those faith-based options. You'll find a list of them on our website at faithfy.com.
Click on the show and you'll see some great asset managers like Timothy and Eventide and One Ascent and others that really are building some incredible mutual funds and ETFs that are faith aligned.
So yeah, you would need to roll that out. You could also find a CKA that could help you with that and then roll it to their firm that they work with. But you've got unlimited options as soon as you get out of that 401k. Hey, God bless you, Rick. Thanks for calling today.
Folks, thanks for being along with us today. Hope you'll come back and join us tomorrow. We'll see you then. Bye-bye. Faith in Finance is provided by FaithFy and listeners like you.
