A Practical Guide to the 4% Rule

[00:00:00] Welcome to Two Quants and a Financial Planner, where we bridge the worlds of investing in financial planning to help investors achieve the long-term goals

[00:00:05] Join Matt Zeigler, Jack Forehand and me, Justin Carbonneau as we cover a wide range of investing in planning topics that impact all of us and discuss how we can apply them in the real world to achieve the best outcomes in our financial lives.

[00:00:16] Justin Carbonneau and Jack Forehand are principles at the Ldea Capital Management Matt Zeigler is managing director at some point in investments The opinions expressed in this podcast do not necessarily reflect the opinions of Ldea Capital or some point in investments

[00:00:25] No information on this podcast should be construed as investment advice, security is discussed in the podcast Maybe holdings of clients of Ldea Capital or some point in investment So Matt today we're talking the 4% rule And this is a really interesting discussion because this is all over the place

[00:00:39] You know whenever people talk about retirement and they talk about withdraw rates And we always come back to Bill Bangon's research and what he did in that paper And this idea of the 4% rule and I think a lot of people maybe get some things wrong about this

[00:00:52] Or maybe over rely on it relative to what actually happens in the real world So we're just going to talk through a lot of issues. We're going to go through the research first

[00:00:59] And then we're going to talk through how we think about this in the real in the real world managing money for clients It's a rule of thumb people that's it's a rule of thumb It might work

[00:01:10] We might find out it gives kids cancer in 40 years like who knows? It's a rule of thumb. It's actually a pretty good rule of thumb And that's why we hear it so often and that's why it hasn't gone away

[00:01:20] But much like wondering if eggs are good or bad for you or whatever It's just one of those things, you know, it's it's out there You should have an understanding of some of the nuances before you decide to make it your religion

[00:01:32] And what I think is good about rules of thumb like I was talking to one of my family members who's going to retire very soon recently And it's a good way to give people like a general idea like obviously everybody should go talk

[00:01:41] You know if they can't do the financial plan and then sell as they should go get financial planning because it's way more detailed than this In a general idea if someone comes you know if you're talking to someone and they're like well, I got a million dollars

[00:01:51] Like what can I spend the retirement? Well, you know around 40 grand is probably a good thing And you know it's a good rule for the perspective that if someone starts with that and then they're like well

[00:02:00] Actually, I need to spend a hundred. Well now you know you're not in the vicinity or if they say you know Well, I have to spend half that you know you're probably in really good shape

[00:02:08] So it's kind of like this barometer to see where am I relative to where I should be like at least in general terms before you start on the planning part of it the

[00:02:18] way that I like to explain exactly what you just said to people when they're encountering it for the first time When they've never done the math when they've never even or maybe they've heard of the 4% rule

[00:02:27] But they don't exactly know how it applies. They haven't even calculated 4% maybe yet It's in simplest terms. We don't know what the markets are going to do We're gonna talk about a lot about capital market assumptions and

[00:02:37] Realized returns and all that stuff I'm sure in this conversation, but if you take all the things you actually can't predict And you just go I'm just gonna neutralize all of them to start and I'm gonna imagine

[00:02:48] I took I had all my money and I put it in a piggy bank and I need that piggy bank to last for some period of time And just then pure simple math terms. It's like okay 25 years the 4% rule says

[00:03:00] If I'm just taking pennies out of my piggy bank jar And I do with the same quantity every year for 25 years at 25 years. There'll be none left

[00:03:08] And so the 4% rule is just a general concept says before we even get into any of the things that we can't predict That like this and a perfectly stable environment gets me about 25 years. I went bang and roll at the paper

[00:03:19] That was not all that far off of what the average retirement Life span was intended to be the average retirement period So as a rule of thumb, just passing that basic logical test of if I start with this and if all the things I can't predict

[00:03:36] Basically stay static That's a pretty good starting block. It's it's saying is the thing I did yesterday probably in okay strategy today If it's not causing me any problems which is where we differentiate like if I ate a reasonably healthy

[00:03:51] Diet and I exercised and I've had no health risks probably continue that into the future If I'm smoking a pack a cigarette today and I'm noticing I'm getting a little bit winded when I like get in and out of my chair

[00:04:01] Like that's probably a bad indication the 4% rule fits into this thing pay attention to what's going on around you and maybe won't I Think where people get in trouble was where they think this is like some hard and fast things

[00:04:11] So I'm gonna go to Matt basically I'm gonna say Matt. I'm got a million dollars You're gonna get out your HP 10B you're gonna multiply by 204 you're gonna divide by 12 my BA 2 plus Okay, sorry I got the wrong ones

[00:04:23] This is the business analyst edition. I was always an HP 10B But anyway So you're both a fly by 4% you're gonna divide by 12 Basically you're gonna be like all right here. You're mostly withdrawals call me back in a year

[00:04:33] We'll make your inflation adjustment go about your life. You're not gonna run out of money I mean if you think about it that way then that's not what it's intended to be doing

[00:04:40] It's it's not like some hard-and-fast thing where you're just like telling your clients to like start with drawing 4% Consistently every month You're in inflation adjusted every year and you're gonna move on with their lives

[00:04:49] When you use it that way, I think that's where you were when you think about it that way That's where you can trouble because the world changes There's all kinds of things that happen in retirement both from the spending in the market perspective

[00:04:58] That can change this thing. It's a good rule of thumb It can't just be implemented that way Yeah, we're describing calculator or spreadsheet problems and you can't Equate a spreadsheet problem to a life problem. I can take a life problem. I can describe it on a spreadsheet

[00:05:14] But I can't take a spreadsheet problem and just like a assume life is gonna follow the spreadsheet That's just unfortunately not how it works However as tools these things are incredibly useful because this is the kind of thing where we can understand

[00:05:29] Other versions of the language of those life problems and go, okay, I do have to make this work I am gonna stop working. I don't want to go to this job every single day for the rest of my life Whatever and what are some reasonable approaches

[00:05:41] Where I'm not hopefully not gonna shoot myself in the foot when I start to spend this money so Can't mistake one for the other as you just said but we do need the tools to help us with the language for thinking through something that

[00:05:54] It's not intuitive. There's not a lot of things in life where we get to go Oh, I can make a decision for the next 30 years no problem like how how many things in your life? Can you make a 30 year decision on with high levels of confidence jack?

[00:06:07] Basically nothing Yeah, I don't know what they say death in taxes or I don't know what you can do Even that taxes changes so you can't make a decision on that either Yes, but yeah, that really does really nothing

[00:06:19] So this is this is the the amazing part about these rules and all this stuff is they're good as Methodologies for describing the thing, but they're not gonna give you the answer

[00:06:30] They are just gonna help give you some guidelines and guide posts on how to think about a reasonable approach to Coping with the reality that yeah death in taxes all the way down

[00:06:42] So let's just look at this what bank and did it a high level so the idea is an he tested from 1926 to 1976 he assumed a 50 50 stock bond portfolio and a 30 year retirement

[00:06:53] And we'll get back to those because some of those are made may not be great assumptions given where we are today And then basically what he was trying to figure out is how much could you withdraw from your portfolio? adjusted for inflation each year

[00:07:03] Relative to your starting amount and not run out of money. I mean, is that basically a high level of what he did? That is basically a high level of what he did and Again in the 90s a great financial planning question and a great observation that

[00:07:17] You could use the 30 year period you had maybe not a ton of years in the real world to run this against But you had a decent amount of years. It's not like he was doing this in the United States of America

[00:07:29] I just declared independence and whatever else it was It was a great way to take a conversation that was happening in the financial planning community and actually put some numbers To it are there any of those nuances inside of those things that either like

[00:07:45] bother you or you go hey, I have thoughts on this inside of the assumptions. Yeah, just just curious like as a quant like how is any of this strike you when? Questionable ways it strikes me like we talked earlier like as a general rule

[00:07:59] And whenever you get whenever quants start digging in this stuff, I mean like the assumption of a 30 year retirement is probably not valid anymore

[00:08:05] You know, we're living longer. It's it's gonna be longer than that. You know the so at any time you get into those those details like as a

[00:08:12] Quant you know, you can find holes in it but again, I think as a if we think about this just coming on the scene relative to nothing being there before It's actually a big addition

[00:08:20] You know because now like going back to what I said before about my family member with the just the raw assumptions and a general guideline Like there's a lot of value in having that general guideline relative to just I have no idea like what's going on before

[00:08:32] I start doing modeling and stuff. I have no idea like giving someone just a rough guideline because You know when you talk to people and you do like this kind of stuff

[00:08:38] I do like the detailed analysis of everything like something we don't want to hear that like a lot of times people want to hear the very simple

[00:08:44] Like just give me something basic that kind of gives me a general idea what I should be doing before you break down all these other variables And I think that's that's why this was a really good addition when this came on the scene

[00:08:55] You're telling me people don't want to just hear about the numbers check I try to find friends and other other people who wanted to get this stuff with me, but you know You went to talk about bands and stuff when we do it like you know

[00:09:07] Yeah, yeah, I can't find too many people who were that excited about it Well, and so this is this is the part of it This is also like the translation mechanism of you have this idea. You have a rule of thumb

[00:09:16] You can go do math about it. That's why my entire job exists and that's why people like you exist to help us What about I'm curious on your perspective on this like the 50 50 mix

[00:09:27] Bengin comes up with this because in the 90s this is kind of the beginning of the acceptance of The 60 40 starting to be with basic mutual funds and soon to be fully implementable with with ETFs I feel like even the 50 50 mix is kind of a product of its time

[00:09:45] How do you think about can you put yourself in 90s brain and like things through that at all? Yeah, I don't remember too much about the 90s, but I mean, I think behind that is it's really important to think about what's going on behind that

[00:09:54] Which is there's this balance between growth and sequence risk to some degree at least so sequence risk is obviously the idea that I don't want to be when my portfolio is down I don't want to be with drawing money because that increases my failure rates a lot So

[00:10:07] If I invest 100% inequities and I have the major drawdowns and I get bad luck I start retired I retire in 2008. I'm pulling out money when the markets down my failure rate goes up dramatically

[00:10:18] But I need the equities because I need growth like a hundred percent bond before fully Oh, you there's been work around this like does not it also does not sustain a very high withdrawal rate

[00:10:26] You know bonds are aren't helping with the inflation the returns are lower so that doesn't work either So it becomes this balance between growth and sequence risk and the 50 50 was one way to do it I mean, I think people are more weighted these days towards equities

[00:10:39] In general. I mean, I think you see more 60 40 and 70 30 type stuff These days then maybe you did then. I don't know you can correct me if I'm wrong with that But that's the general idea is we're trying to get this trade off right in if I'm on lucky

[00:10:51] And I retire at the wrong time I need something to protect me where we can talk later about variables draw strategies and other things you can do for that But I need that but I also need growth

[00:10:59] And I can't go put the money in T-bills and sustain a high withdrawal rate I mean as much as people look at T-bills now at 5% and think oh, I could sustain a 5% that's not the way it works

[00:11:08] You know that those don't adjust for inflation T-bills aren't probably going to always stay at 5% So at some point in my retirement they're going to be 2% or something and they're not going to be paying me what I need

[00:11:16] So that's the idea is you've got to balance those two competing interests Oh great way to like think of this and this is a system and insert some of the math in it But that point you made about how did you just say it with the

[00:11:29] Balancing the sequence risk versus the withdrawal amount? Is that the way you just put it? Well, I was saying like balancing sequence risk remains growth

[00:11:36] It also like you think about as balancing sequence risk in terms of against like the ultimate value of my portfolio in the long run

[00:11:42] Like I think if I if I was going to run a bunch of simulations and I was going to look at just the ending value in my portfolio

[00:11:48] And I was going to take all those simulations and I was going to average out the ending values to say I just want to maximize The the average of what I'm going to get in the long term you'd want to have lots of equities in that

[00:11:58] But you'd also have a bunch of zeros that would be a part of that average The thing that would happen though is the really huge numbers in the best case scenarios would offset those zeros and your average would be drawn up

[00:12:09] So if I was really just worried about growth I would invest in equities But I can't just worry about growth because unfortunately zero is a bad outcome If I'm living off this money and I need this you know for my retirement

[00:12:19] Zero is a bad outcome so I've got to make sure I minimize to some degree the chance of that zero Maybe I can't make it 100% chance that I'm not going to get the zero

[00:12:27] But it's about balancing that against the growth that I think is the way I would look at it Yeah, this this concept and this will probably keep coming up over and over again is

[00:12:36] It's the surplus or deficit against the growth that's going to drive a lot of these results and so just the basic sequence of returns like math problems It's like you have the the 10% drawdown You need just over 10% to get back to even But you have the 50% drawdown

[00:12:53] You need to double your money to get back to even right and if I'm withdrawing at that same time That's where I'm really in trouble. Yeah, and like one of the classic failure examples out of these studies

[00:13:03] It's basically like if I'm drawing out 4% fixed against my starting values So $40,000 against my million dollars a year So now I have the 50% drawdown some my million dollars turns into 500,000 dollars But I still took 40,000 out which is in a 4% withdrawal now. It's an 8% withdrawal

[00:13:19] And so now I'm at 460,000 dollars or whatever going into the next year and I don't just need a hundred thousand dollars to get or a hundred percent to get back to break even

[00:13:29] I need 117 or 120% or something like that to get back to break even against the drag of that 40,000 withdrawal going forward That's not only a tall order. That's that's all the sudden a lottery ticket to get me there

[00:13:44] So this idea of like the surplus or deficit against growth becomes kind of the fundamental question in all these strategies and how we translate them from like rule of thumb To real life Another part of this that I think counts for

[00:14:02] For you in particular and you can explain this probably better than I is is this like failure rate thing? So put the quant hat on for a second. Can you walk me through like what a failure rate is in these how you would define them?

[00:14:13] Yes, so the idea is we're doing we're doing money Carlos simulation here So what we're doing is we're looking at a bunch of variables You know, we're looking at all the different market returns in history We're putting in different orders

[00:14:22] We're just doing a bunch of simulations and saying like what happens in this simulation and so what I'm trying to avoid failure rate effectively

[00:14:28] Like most people defined is is I don't have any money. Uh, which is not a quant concept that's a pretty easy concept for people understand Like there's nothing left in my bank account. So I'm trying to minimize that failure rate

[00:14:38] But for people like you that are planner is it's like To do that to like 99.99% confidence well I've got a lead I've got to take the pedal way off the growth

[00:14:48] To do that and that's probably not an optimal portfolio. So I have to live with some degree of failure rate like living with and also We don't know if the pass is gonna predict the future so even if I got to 100% success rate

[00:14:59] Something could happen that never happened before and I fail anyway So you you almost have to accept some degree of failure rate and retirement planning and then it becomes a question

[00:15:08] Of how much I want to accept and again this gets gets to what we're gonna talk about a little while Which is my ability to adjust is also going to play into this like I can accept a higher failure rate

[00:15:16] If in the case of failure or where things don't don't not failure But things don't go my way initially I can make adjustments to prevent that failure

[00:15:24] So I think that's the idea and I think a lot of people. I don't know how you guys do it, but I think a lot of people like Like this idea of like 90% confidence that when they do these money Carlos simulations

[00:15:33] I want to have you know no more than a 10% failure rate, but you could probably explain better than me on that one Go to the grocery store Pick out your hamburger or your whatever and you do that thing where you're like okay

[00:15:46] It's 90% fat free or 85% fat free or whatever. This is not a judgment on your the healthiness of your your ground meats But it is the say like 90% fat free is 10% fat and a 90% success rate is a 10% failure rate

[00:16:01] And that's a pretty great thing to aim for but there's also the reality of like an 80% success rate with a 20% failure rate Those 20% failures what really under you've to understand is like the grading of those failures

[00:16:16] Just like you might want a stake that's got some really great marbling in or something So then do you want higher fat content for what you're doing or you're cooking or you're making

[00:16:25] The difference between whole and skin and something is a big difference and it has to do with these things So when we're talking about growth We're talking about portfolio survival ability against a plan A larger failure rate and again not larger like 80% failure

[00:16:42] But a larger failure rate like 90 to 80 might be the difference in saying funding a more desirable lifestyle but Those failure rates what we're trying to do and this is generally true once you get like north of like the fifth

[00:16:57] Honestly north of 50% but really north into the 60s where you start to go that failure rates probably not all gonna happen at once So the question is is we get higher and higher up where the failure rates get smaller and smaller and smaller

[00:17:08] You tend to get closer to that point of time where you go The failure won't occur all at once most likely it's gonna occur in stages and so as I start to see those failures Starting to stack up or the things that could be problematic

[00:17:23] Do I have what amount of time do I have to actually start to make adjustments around that because at the core of all this stuff It's Planning for more things to happen then actually will happen and in many cases planning for more things that

[00:17:37] I don't want to say that can happen or could happen but planning for those things and go if we start to catch ourselves off this track How are we in a course correct and that can mean a million different things it can also mean good things too

[00:17:49] You can course correct on spending in the good way or you can go all I have a giant windfall because I was willing to accept that higher failure rate to start How can I how can I make some hay out of this yeah?

[00:18:00] You're you're example to meet was good because like the severity of what the failure is like we can talk about failure rates all day But the severity of what the failure is is a huge thing like for instance with the meat if I told you there's a 1% chance

[00:18:09] There's flesh eating bacteria in the meat. You're not eating the meat like a 99% success rate is pretty good

[00:18:14] But it's not that good when then when you something like that on the other side of it so it really is what's on the other side of the failure is like a huge thing I It's the whole like don't eat the batter thing and my entire life like

[00:18:28] You know, you make something with like delicious batter. You're gonna eat some of the batter And probably like two or three years ago for the first time in my life. I ate some of the batter making I don't know a banana bread or something like that

[00:18:39] But I ate some of the batter and it ruined me. I think it was like 24 hours of oh Oh, I thought I've had like food poisoning or whatever before I had never experienced that and I got I gotta say I haven't eaten the batter since so

[00:18:56] Yes, you need to understand what these things are in the severity of the outcome And you can't talk about failure rates without it That's one thing in the financial planning process. That's really important talking about

[00:19:09] In somebody might have that reaction of showing them the initial analysis where they are like a 65% success rate or an 80% success rate Like why is it this 100 like I have to get it 100 and it's like well, no

[00:19:21] I mean we can we can show you what we think gets you as close to that point as possible But more importantly is like understanding what opportunities what are the trade-offs both positive and negative that come along with that thing Eating the banana bread batter is delicious

[00:19:37] But now I am uniquely in tune with how negative that The negative failure rate can be on that experience and I want to talk about the things people can change because I think that's important

[00:19:47] But first I did in researching this. I did find out one thing. I didn't know which is I asked you before about this idea of

[00:19:53] How how does taxes play into this like because we talked in a previous episode about somebody who had their money in a taxable account so they didn't have to pay

[00:19:59] Taxes on the withdrawals and Ben get actually did do a little research around this and he he revised the safe with draw rate to 4.5% if the portfolio was tax-free

[00:20:07] So he did he did do some further research in account of the fact that if if you do have money that you're not paying tax on the withdrawals You could probably get a little bit higher with draw rate, which I thought I thought was interesting and again

[00:20:18] This is like it's a fairly intuitive thing. It's 4.5 for tax-free and 4.1 for taxable, right? So that's yeah, that was his revised research so I guess he knocked the other one up a little bit as well Yeah, so remember he's talking about that over the whole time horizon

[00:20:35] So it's it's funny you're like, oh okay like 40 basis points 4.5 to 4.1 like what that doesn't seem like that much But he's also talking about like the average realized tax rate over a multiple year time horizon

[00:20:46] So there's there's a different shading to that but again, obviously if there is the friction of the money coming out before him consuming it Yeah, it's gonna be you at least know intuitively. It's gonna be a different number

[00:21:01] It's interesting in the study that that numbers probably smarter than most people would guess in the sense that it's It's about a 10% differential as opposed to like a 20 or 30% differential when people think about normal income taxes

[00:21:14] It gets back to the idea this is a rule of thumb so everybody has different mixes between raw IRAs, traditional IRAs, taxable accounts and that whatever that mix is impacts this to some degree

[00:21:23] But it doesn't impact it's so much that it's like you know your withdrawal is now 8% instead of 4% It affects it a little bit around the edges so the rule of thumb still works pretty well

[00:21:32] Like obviously if I if I said to my family member what you can withdraw and the real number is 4.5 and said a four

[00:21:37] That doesn't really change much it's still a good rule of thumb but like when you get in the details then then you can refine this more

[00:21:44] Yeah, and a lot of this stuff shows up at the end of the thing too. This is where we know from the data That a lot of people who have followed a version of the 4% rule whether post reading this paper or just because

[00:21:57] Have they spent their money over there their time horizons? We've We work with a ton of these people. We've met you've probably met a ton of these people too Where it's like they've just have a council of balloon over time

[00:22:08] They've earned more money on their savings than the money they've took out her spent and now somebody's getting in here In inheritance or something else and this is the other reality if you consume Below what is actually done?

[00:22:22] You end up with a with a gift either as an inheritance or something else, but it's a gift that has to go somewhere And if you err on the side of conservatism

[00:22:32] I want to say caution, but like you err on a slightly more conservative measurement of your risk appetite Then guess what the chances of a ballooning Gift at the end of this this become more and more real because this is where those basis points can really add up

[00:22:47] Let's talk about some ways we can adjust this because obviously as you said in the real world It's not just take your 4% and move on with your life like if you can make some changes If you get the bad outcome then you can actually sustain higher withdrawal rate

[00:22:58] And one of the things we found in the research here is this study by Jonathan Gaiden who said that over a 40 year retirement even a hundred percent stock portfolio Could sustain 5.8 percent withdrawal rate with a 90 percent success rate by using decision rules to adjust with roles

[00:23:12] And so this is where we're getting into variable withdrawal strategies and at a basic level it's if the market goes down If I get the bad outcome, can I take out less money?

[00:23:21] And so the person who's relying on this to pay their mortgage to put a roof over their head to feed themselves and has no

[00:23:27] Leeway in there is a different person than the person who has to swap out the Maserati for the Honda or something if things go wrong

[00:23:34] The person who at least in theory at least they consider that an essential part of their lives the person who has to sell the Maserati is still going to be fine

[00:23:40] They have the ability to adjust their withdrawal rate. You know, they can sustain a higher initial withdrawal rate The person who absolutely needs the money and cannot adjust their withdrawal rate can sustain a lower initial withdrawal And I think that's can you make changes?

[00:23:52] Is an important question to ask yourself when you think about what your initial withdrawal rate's gonna be The question of can I make changes to the withdrawal rate always comes back to what are my needs for this stuff?

[00:24:04] So now we're talking about like the consumption problem and if there are expenses or things you can cut If the difference is do I keep Netflix or cancel Netflix, you know, no big deal if it's can I afford to

[00:24:16] Pay for this school or that for my kids or can I afford the house I live in like the stakes The stakes change on the side of these things What's really interesting about the guidance study

[00:24:27] Is that yeah taking more risk probably doesn't blow you up because most of the time equity markets don't have 20 or 30 year periods That actually suck. There's some interesting data Wadefou did remarkable work. I'm looking at this around the world so there's some US bias

[00:24:42] There's definitely some historical average bias. There's a bunch of things inside of these numbers that are problematic But The reality here is if you take more risk and you don't have that 10% failure were over a very short period of time You blow yourself up

[00:24:58] Which is largely dependent on if I can change my lifestyle around these things if I can have some decision rules to help adjust my consumption It the odds of an upside skew are just that much greater

[00:25:11] Kind of remarkable too because if you think about it crude math here, but just like 4% to 60% That's a 50% increase in your spending That's the difference between being able to spend $40,000 a year and $60,000 a year and that million dollar portfolio

[00:25:25] Those are real dollars. That's that's a real difference in lifestyle multiply that up by a couple orders of magnitude and you go like oh that's That's how people can do this What's cool about these variability rules is like you said they work in both directions

[00:25:38] So it's not just like if I get the bad outcome, I've got to be willing to cut like if I get the good outcome If I retire at the beginning of a massive bull market as time goes by

[00:25:46] You know the sequence risk becomes less and less. I've got more and more money than I expected Now I'm actually getting a race like I'm taking more and more money than I thought I could take

[00:25:53] So it's cool that it kind of works both ways. It's not it's not just one of these things that you're only worried about the downside

[00:25:58] You can think about these and this is like on the failure rate side of this from it's always can I spend less or where am I going to take it from So one of the common

[00:26:06] Conversations we really like to have in the years leading up to retirement is number one how many how much money do we need in? Sometimes I call it the war chest sometimes they call it basically it's like it's not the piggy bank

[00:26:22] The market can't come and break this thing. We need it something where we're gonna probably accept little to no return Kitsus is written a lot about this too But it's the place that basically when the markets suck what are we comfortable with pulling from

[00:26:36] Because depending on the degree we can adjust lifestyle great, but the other with the variability is like Is there a place we can take it from so that we can give the market stuff time to recover?

[00:26:46] It's a big part of like at some point we talk about everything in terms in like risky stuff and risk mitigation stuff That is the beginning of separating this thing

[00:26:54] It's very much like endowment or a pension or a liability driven investing type world where these words come from but it's this idea of going

[00:27:02] Okay, can I either spend less or can I choose a different place to take it from to give my risky stuff time to recover That is a massive ramifications on Retaining that upside skew over time because back to the guidance study again

[00:27:19] If I'm taking more risk, but I have variable which Strategies to not have to Consumism much during a downturn I actually keep a lot of that right tail Still on the table even when I go through some ugly periods and

[00:27:35] The luscious pretty impressive numbers in that study not gonna lie Yeah, you know and kids just found found that if you were willing to do that you could sustain a five to six percent withdrawal Right so again going back to the same thing

[00:27:46] Dighten found in a different way by by being willing to adjust or being willing to not sell equities in the downturn I'm sustaining higher Initial withdrawal right's nice to if you were willing to both of those Maybe you could sustain this sustain even a little bit higher

[00:27:59] With drawing and I have to assume I was gonna ask you this but I have to assume like in the real world This is how it works now. I don't think you're going to people and being like for your retirement

[00:28:06] We will be using the gait and cling-ler, you know guard real rule or something But in the real world you're just doing it like you're looking at some of the situation you're getting it saying

[00:28:14] You know what you could probably take a little more money now or you know You might have taken a little bit less money Yeah, I think that you know the this whole like where we're drawing the same amount every month is probably not what's happening

[00:28:22] Not not to even consider things that can happen some of the life you know a medical issue or something But also I would assume we're looking at what's happening over time and we're saying to a client

[00:28:31] You know you might have to withdraw more. You might be able to withdraw less whatever it is I know it's a moving target the the key thing and yes, we're never gonna like talk about the

[00:28:41] The gait in whatever we're never citing three researchers just in the same way like I want my doctor to say Take the Tylenol or whatever don't give me the acedametaphine blah blah blah Like don't give me the Latin derivation of the day

[00:29:00] Like the sort you know ratio or whatever. No, nobody want to hear about that Nobody knows what that is nobody want they want you to explain in the real world What that actually means and not use the terms and it's important for you as a practitioner

[00:29:12] To be the person to know that stuff and have the understanding It's not important for them to understand what actually has to be implemented the reality of in the real conversations and Make this point very clear

[00:29:26] When words when somebody five years out from retirement or having the conversation about shifting from a Accumulation to decumulation about shifting from being able to save balance assets onto the balance sheet versus the need To consume off of the balance sheet without that money going in

[00:29:41] We talk about both sides of the skew we talk about Guess what well like I met people I worked with people like in the financial crisis who had just retired or Actually a lot of people who got laid off in that period and

[00:29:55] Oh crap, what do we do? forced into this spot or in this thing I've got a downturn and I need money So try to talk people through these two stale scenarios if we make this decision We start this process and we get punched in the face right away

[00:30:11] What are we gonna do about it? What are some realistic things to talk about? That's the Negative event especially quick on the other event though that I will Regularly have people psychologically work through with me is okay now on the good side

[00:30:26] We get the positive skew you're spending this much money, but you're not spending more and the account balances are actually booming and Ballooning what are the other things we need to know is it the midlife crisis car you never got to buy Is it the extra beach house?

[00:30:40] Is it is it is it the other stuff when you get a series of Above average results directly in a row. What do you want to do about that? Do you want to bank more safe retirement years and know that that's for the profits

[00:30:53] Need to come off the table and go to those risk mitigation assets or into the word chest or whatever else? Or is that the thing where you're like you know what we always

[00:31:01] Skip done buying the cap house or whatever it is and now has that positive growth actually Funding that thing that gives me some greater sense of You know satisfaction because Money's not just there for the

[00:31:16] Not just the points on the scoreboard like it acts like winning the game means something not just like tracking the points How do you how do you how do you see them in the real world like do you do most clients have like an

[00:31:28] Automated amount that comes out of their account every month and then they'll talk to you if they want to adjust that Like we we have some people that are like that

[00:31:34] We have some people who tell us at the beginning of the quarter how much they want for each quarter like an every quarter going forward

[00:31:39] And if it's something outside of what we plan for we talk about it then like how do you see like the withdrawals in the real world? So there's layers and I think

[00:31:49] The industry loves the the 4% rule glosses over the reality of the layers 4.5 versus 4.1 depending on if you have tax free or if it's you know Attacks a bull account and all the all these things are a taxed for account We gloss over the layers

[00:32:06] So the reality is and let's just say you're a I don't know you're a mid 70s like retiree You're already in RMD agent all the stuff you're getting Social Security so just think think about like this for a second So somebody says I need

[00:32:20] 100,000 hours a year to run my household So first off we want to understand the fixed versus variable expenses on what it takes for them to run it But then we start to layer in the different types of income because a lot of this is outside of the 4%

[00:32:35] Just to apply is the one part of the portfolio per second She got Social Security coming in and you go okay now I'm starting to match up

[00:32:42] Liabilities or the stuff I have to pay stuff I need for consumption and income I have coming in so it's like I This much I need to spend here's what's coming in. Okay Social Security well, that's a fixed amount indexed for inflation. I know what that is

[00:32:54] RMD well that's a fairly like we can at least run the numbers out on the life expectancy tables with the IRS says and now that gets us to hear

[00:33:02] Then we might have dividends interest and other stuff and we can look over the prior tax returns in 1099 hours and Eyes and all that crap and we go like okay this gets us to hear

[00:33:12] Before we even get to the actual proactive distribution of an amount and what that percentage should be We have to stack all these things against each other the fixed and variable expenses and the fixed and variable pieces of like income in those sources

[00:33:26] Most people we work with like have some amount of assets and this part actually fills up pretty fast And then we get into the reality of how how far is that gap how much do we have to close or In the other direction how big is that gap?

[00:33:39] And do we need to consume more or rethink the gifting strategy the layers in the real world is where all the actual work happens and most people it's a Is settle into some routines around this stuff

[00:33:54] So the other reality is like most people and this is where the retirement conversation really needs to happen 3 to 5 years in advance because you got to be rethinking what those new routines look like once you understand those new routines in most cases

[00:34:07] People are going to play those out Over like three to five year stretches on average before stuff starts to happen part of our job than is the planner Is the sit back and go like okay?

[00:34:18] I'm observing this routine is changing you're going to floor to more often or you're doing this other thing You had the giant windfall in the markets, but then you bought the the second home or whatever else now

[00:34:28] How is it that gonna change those fixed and variable expenses and then is this a This is a five year phase or is this like a 15 year new way of life that's gonna upend the entire thing

[00:34:39] The layers is everything that RMD points really important because if RMD is not something you have to take So if RMD plus social security is more than you need then there's really not much discussion to be had around the drawn rates

[00:34:52] Or whatever if that's above what you need then you're getting more than you need You know just through with a law saying you have to do you don't have to worry about like all this other very messed up Yeah, and you know the IRS they're not

[00:35:03] I don't want to say they're not dummies, but they're not dummies like there is actually areas who come up with these tables and do this stuff

[00:35:09] And it kind of rhymes with this reality the RMD math is historically pretty favorable and that most people on the RMD schedule will still Die pass on whatever with a balance in those and those accounts the required minimum distribution does not incur inform exhaust

[00:35:25] The amount in a retirement account so social security plus RMD plus your dividends and interest gets you further than that fixed and variable expense like Sure, you can go calculate the four percent with your right to your hearts content it might not matter that type of

[00:35:42] It's almost a variation on the way people think about Don't touch principle to spend your dividends in interest like social security plus RMD's plus dividends and interest another any other

[00:35:54] Quite a go a passive income that you don't have to do anything for but is automatically gonna happen or is forced your compelled to have happened in some way That can be a really great rubric for just right setting your Your expense profile for your retirement years

[00:36:09] Works for most people Pretty darn well if they can get their lifestyle in line with that amount Yeah, and you think you know, but by its nature the government has to be conservative in these RMD things because what the last thing

[00:36:19] They want is like a bunch of people like you know 80 year old people exhausting their retirement accounts because the government You know forced them to take too hot too much money out so by by definition

[00:36:27] They're gonna be conservative in terms of what they're gonna force you to get out of there They'd much rather have a situation They want you to have a balance at the end versus like trying to draw every dollar of tax out of there that they can

[00:36:37] Which is exactly why they decided to predominantly put the 10 year rule in the distributions for inherited accounts because The math is deliberately conservative on the front end and this is not in defense of

[00:36:50] Paying or not paying taxes on retirement money, but the reality is the 10 year rule that's predominantly enforced for most inherited Uh, inherited retirement accounts so like non-spousal inherited IRA accounts now have a 10 year rule applied to them

[00:37:06] And we've covered this in another episode, but it's based on this idea Most people if they follow the normal rules will not exhaust the account That means that account was not distributed but met the purpose of the person having enough money in the retirement thing

[00:37:21] That is by design to help offset the retirement crisis which has been a Vering levels of crisis in the last 15 years and that's the reality of it The 10 year rule is basically to address that and say great you save for this money and your lifetime

[00:37:37] It got you through your lifetime now that it's not going to a spouse or somebody immediately that you You know that the tax code is not basically designed to like have you helped them anymore than then a spouse

[00:37:48] So now whether it's your parent or whether it's your kid who passed away and you're the beneficiary those rules apply to basically say This is outside of the scope of the otherwise conservative nature of addressing the retirement situation in our country

[00:38:01] So there's two more things I want to ask you about one the first one is kind of rare I mean we've we've seen it very rarely and you probably do too. I mean most people who come to us or you are doing probably fairly well

[00:38:10] In terms of saving for retirement, but I want to ask about this idea of unsustainable withdrawal rates So you know what happens if someone comes to us and says, you know, this is what I need and that's 10% of their portfolio or something

[00:38:21] You know that's not something in good faith We're going to see here and just say all right fine take your 10% and we've we've got to understand You know that that has a pretty high failure rate or

[00:38:29] Assuming exceptionally high failure rate like how do you think about that situation and how you handle that? our job is to have hard conversations as much as our job is to

[00:38:42] Put the cherry on top of the easy conversations so if somebody comes and they have a 10% with draw rate or more They have a 20% with draw rate and And they're just aren't the assets to support it our job is to say

[00:38:54] This bridge is probably not safe to drive your car over That's not always a fun conversation it happens Probably more regularly and I think more people would probably be surprised With how many wealthy or high earners actually have unsustainable

[00:39:13] Savings rates and then that produces unsustainable withdrawal rates as they get near retirement That's not to say these things can't be fixed the more money you have or the more money you make the easier it is to basically have your

[00:39:26] O crap I need to fortify this moment but The amount of people who have unsustainable lifestyles and therefore translate to unsustainable withdrawal rates like that's a That is a hard and very real conversation that many people get into sometime in their 50s and

[00:39:43] I say it this way because I think it's really important that we normalize this It's very very common and we've had episodes where you've talked about like peaker in English and everything else so

[00:39:51] The average American is going to get married have kids those kids are gonna grow up go to school

[00:39:57] Oh, they're gonna buy a house the kids are gonna grow up and go to school and usually sometimes in like the mid to late 50s into the mid to early 60s

[00:40:06] You start to have most of the kids are through school out of the house and if you haven't moved 18 times and refinance because rates were zero Ideally you've got some equity in the house and you're in your peak savings years

[00:40:21] This is that part where people start to go like holy crap life is pretty good and the question becomes life is pretty good Am I refocused on saving or making it to retirement or is life really good and

[00:40:35] Yeah, we're taking three times as vacations at three times in the expense and now we're taking all four kids with us to You know South Africa on the private jet to do whatever That lifestyle and figuring out if it's sustainable

[00:40:49] It's our job to say no if it's not in an honest and empathetic way and then it's our job to also say like What are some constructive ways that we can pull this in line?

[00:41:00] And that means we're taking what we have to work with on this side against what the variable and fixed expenses of what's reality are on this side We're saying where do these things cross and then you mister and Mrs. Klein it's your money

[00:41:13] How do you want to think through this thing Lifestyle creep more expensive life You have windfalls like people spend money especially when you're younger and you're not thinking about this stuff It's super super real and it could lead to very hard conversations

[00:41:29] But they are critical and important conversations I like to think that's a big part of why the financial planning and streets exists not to have the easy Conversations just take this much out and here's when to turn on social security

[00:41:39] But that's actually say like okay. Yeah life is life is actually kind of complicated and Momenty mode problems Yeah, and I think that's where we can add value I mean I think like some advisors will shy away from that. They'll be like 10% with draw rate

[00:41:50] That's not gonna it's not gonna work long-term I don't want to be a part of this like train wreck that's going on but the reality is like you said you could help

[00:41:57] You know we actually had like we had an 8% with draw rate the kingdom as at one point that we we took as a client And you know we were able to help first of all like you said what can you do in your life?

[00:42:06] You know, do you have things you're spending money on that you don't need to spend money on where we can cut that down You know what can we do with your portfolio to help you and you know in this case

[00:42:14] Talking through the potential future things this person ended up having an inheritance that came eventually That cut that with draw rate and half So we were able to help them along the way

[00:42:24] Eventually they get the positive outcome that you know with somewhat foreseeable in terms of you know in inheritance The team it made the thing better so I mean my view has always been like

[00:42:32] Let's try to help along the way versus saying you know like let's look down on this person How could you possibly have this 8% with draw rate? We want to know part of that. You know that that's the way I've always looked at it the

[00:42:43] Same periodicity because I don't know better word news for this right now You know it's a horrible rule in the podcast man. I'm finding it in heavily Because when I get for reading a bunch of academic papers before each of them record the

[00:42:56] idea of like we have again these phases so the There's some really important life transition literature her many a barra is like the The gold standard on this stuff for her work and it basically says it takes three somewhere between like

[00:43:11] Five years on average but five years to change anything in our life about three years to do it with an identity shift Retirement things like that are definitely identity shifts and as people we can kind of look at these things and

[00:43:23] Understand how we go through phases and usually a phase is something that lasts a little more than a year Maybe two years at on the shorter end and like five years to make any big changes on the broader end

[00:43:34] It's not uncommon especially with people who are higher earners for deciding to retire early or There's certain things well we see those The point you just made we see those higher withdrawal rates Frequently and I see this in the profession people are like oh you can't do that

[00:43:52] You can take a percent out that's crazy our job is not to be the wall That says long dumb Paper and spreadsheet like beat you with the calculator or all well their job is to say like

[00:44:06] Okay, like what are we gonna do with that it's it's the whole like well you got some duct tape and a pencil In some tin foil how are we gonna fix the rocket

[00:44:18] Something you don't know how it's gonna get fixed. You don't know if that inheritance is gonna come in or not What's something you have to say like we're gonna make as good a go with this as possible?

[00:44:27] I know I've told a couple of these stories before around this thing But a lot of times you're planning for something that then doesn't happen the same way or you're planning for something

[00:44:37] And that could be an inheritance that could be a change in tax policy that changes your health care costs and all of a sudden You've got a balloon savings account that was supposed to pay for one thing, but now it's just there

[00:44:46] And how you get to use it for something else and let the risk assets run or whatever it is These pivots and how the world actually unfolds in front of you the sequence of returns and everything else good or bad

[00:44:57] Can sometimes mean you did something with an unincending consequence somewhere else or another thing comes in and halves it Our job is not to be the wall where we're all spreadsheet in no real life our job is to actually be the There's a wall there

[00:45:11] If you're running into it, we need to address it and say what can you do to be smarter with this or how many times can you survive running into the wall

[00:45:18] But then also like how do you make best use of it when when that client came in to you guys? Was it just a hard no this is stupid? What are you doing or was it well? If we keep on this path this is when you run out

[00:45:29] But will help you the best way we can till it runs out. What was that? The first thing is you know the front thing has to be education you first have to make them understand that

[00:45:37] In theory this is not a sustainable draw rate. I mean you don't want to just like start doing stuff and like have them think that's fine But by the same token you've got to say right how can we work together

[00:45:46] To make this better you know this might not be something sustainable for 30 years But it is what it is right now how can we make this better like in this case they had the inherent is what might happen in the future

[00:45:55] That'll make this better you know what can we do with your spending? How can we allocate your portfolio in the proper way? There's so many things you can do to help someone like that and and like you like you said

[00:46:03] I don't think we want to live all of us live in practice not in theory like it's great for me In the quantum world to be like in theory all this stuff happens and people

[00:46:10] You know stay the course in 20 years of value drawdowns is stuff, but that's not the way it works in practice You know if not our job the judge people. I mean I have my own certainly behavioral issues in my investing

[00:46:19] I'm sure you do it's like we're not perfect either like there's no new judging people It's like how can we take the sort of chances we're dealt with how we've been dealt?

[00:46:27] How can we make it better? How can we do the right thing from where we are versus saying like I want no part of this I mean to me that's always been the right way to do it this job is only fun because nobody knows the answers

[00:46:37] That's that's the best part about this even the person who comes in with the unreasonable withdrawal rate You have to add the honest conversation about why this is unreasonable and start with education. I agree with that wholeheartedly, but then

[00:46:50] The important part is you don't do the the other side of thing. It's not like This client came in with this thing and that's the IUL policy that bought me my boat like that's

[00:47:00] That's the thing the interest are the practical side of we have to solve this problem not the theoretical side of This is some hard and fast rule Because at the end of the day it's gonna boil back down to is this a surplus or deficit against growth

[00:47:15] And there's more paths out of this stuff than usually we give credit So last thing I want to ask you about is leaving on this part. It's on leaving money to kids because we just did a podcast that came

[00:47:24] out today with Rick Ferry and he was talking about this like he talks to some clients who were like You know what I want to make sure I don't run out of money. That's my priority

[00:47:31] He talks to other clients you say you know what I'm getting you two million dollars like I want to Try to leave that two million dollars to my kids so you know that might you know that might dictate a little more of a growth mindset

[00:47:41] Or might might not or some people say like I might really go is I'm willing to live with you know some losses on my own I really want to give a lot more money to my kids

[00:47:50] Then I come like did you see that a lot in terms of like that balance between on one hand I've got a it was sustained my own lifestyle but on the other hand

[00:47:57] I do want to leave money to my ears and I want to grow it for that purpose Consumption in gifts The peer millennia episode from however long ago that was like rule number one is

[00:48:08] You're either gonna consume the money spend it on something you're gonna gift you're gonna give it away And so when it comes to kids when it comes to charitable foundations when it comes to all these things

[00:48:18] There are lots of totally viable things that are not part of your consumption plan Where you draw the line on do I still need access to consume this if I have a healthcare event if my spouse does if something else happens

[00:48:31] Where you draw the line on is this earmarked for consumption or is this earmarked for gift has a lot to do with this exact purpose And the question is gonna become if

[00:48:42] 10 years down the line into this commitment to I want to make sure each of my kids have a million dollars or something like that The commitment to

[00:48:50] Giving that gift is the question then if I'm committed to that and something else changes in my own expenses my own lifestyle Am I willing to Take some of that back and by willing to say that's no longer a gift anymore or is this important?

[00:49:05] We see this a lot This is a big part of More advanced to state planning Because you're actually starting to plan for multi-generational wealth and what gets passed on and how Especially around like tax rules and other things as well

[00:49:20] You know just stuff that takes more advanced planning you get into this The key part for most people though is just understanding the rigidity that you're gonna apply to this Is this truly something that has to be defended at what priority stake against everything else

[00:49:36] And do I really understand those priorities so that when The crappy thing happens when a spouse dies young or a spouse needs an advanced directive for care or whatever else

[00:49:46] Can we afford it and still do the other thing and do I understand that prioritization so it's not a Torture so bad so last thing won't ask you that is this idea of capital market assumptions or you know Obviously if I'm starting retirement at different times

[00:50:01] The valuations of stocks can be different the yields on bonds right now can be different my expected returns going forward can be different And the question becomes

[00:50:09] Like I think it's kind of a balance like how much do I take that into account on one hand you could say well there is research that shows You know if I'm if it's 1999 and the cape on the S&P is 45 my forward expected returns are lower

[00:50:22] But then there's also the idea that you know a lot of these expected returns deal with you know a seven to 10 year time frame And a lot of times I'm retiring for a 30 to 40 year time frame so some of that's gonna you know Go into oblivion over time

[00:50:33] So I may not want to care about those as much. So how do you think about that when you're building when you're thinking about 4% It's sustainable withdrawal rate how do I think about where the market is today what bond yields are today like how attractive the assets are

[00:50:45] Long-term so for us Number one you need capital market assumptions to build any portfolio to actually do the portfolio Math you need capital market assumptions. You need to know your expected returns You need to know your average returns. You need to have some assumptions about correlations

[00:51:00] This is how much when that zags You have to have an understanding about like why you're building a diversified portfolio or why you're not If you don't want one or if you don't think if you think all the math is crap, but like okay

[00:51:14] I am in of the camp that you should at least have a logic even if that logic is flawed For putting together an asset allocation strategy and doing this a big part of that is

[00:51:24] Understanding the assumptions inside of what you own for what do I need this to do? Gifts consumption if I'm consuming this thing and I'm applying some type of 4% rule for it The first thing I really need to know is

[00:51:41] When in my failure scenarios the thing that I'm pulling from if it's not gonna earn me at least a 4% That I need to sustain the withdrawal how much into the negative of I gonna go and this goes back to that

[00:51:53] Example I gave like early run if I have a 50% drawn out in my equity basket and I was taking 4% before so now I'm taking 8% And I need 120% to get back to my break even before that event is my withdrawal

[00:52:09] Gonna hamstring my ability to have that recover because I have no other means of recovering it I want to know that stuff up front Now likewise the more complicated the portfolio the more capital market assumptions the more what do we think about different

[00:52:22] Valuations and things do we have to get you can go chew I'm gonna pick on black rock because it's publicly and freely available But I'm pretty sure you can find black ratchek if I'd find vanguards you find all the flavors of vanilla ice cream for this stuff

[00:52:34] You want if you just go on the internet and google it or Companies like ours we have this stuff. It's built in the financial planning software It's built into our portfolio construction stuff we have an investment committee that merits and ways all this stuff out every single year

[00:52:48] And then multiple times ongoing to say where are we at and where did we go with this? You have to understand In those assumptions

[00:52:56] The withdrawal amount against the mix of assets that you own and you have to do that test of like how reasonable is this because even if and spoiler like Black rock in 2024 here as I think like private credits like the top is the most attractive thing

[00:53:12] It's like okay great. You have private credit well you got liquidity rules you got taxation rules You got some assumptions that may or may not be lofty dependent on the current environment in depending on you know what

[00:53:23] Products are for sale out there in the marketplace so you got to look at this stuff and ask the question Yes, this gets me no I withdraw rate but whether risks of my taking on to get there even if some of the assumptions in the marketplace are

[00:53:34] Are really low Things are either good enough or too good to be true in most cases So yeah, I think also the educational part is really important too here like getting away from modeling and assumptions and all that like you're saying to a client

[00:53:47] Listen, you know, it's Japan in the 1980s You know the market is treating it a cape of a hundred the odds are you're not gonna get the 10% return here And I think in that case for 30 years you didn't get but that's an extreme example

[00:53:59] But the idea of just saying to a client like it does matter to some degree what our starting point is this this may change What happens in the long term? You know even though we could model it out and stuff But just understand the market's expensive

[00:54:09] We've had a really good run here. You know that may change what we get in the future in terms of what we can't just assume like the whatever the average return of the stock market has been over over history

[00:54:19] We're gonna get that because we are at a very expensive period here and when we when the market has been a very expensive historically Traditionally expected returns had been lower in the future I think we see that over and over again

[00:54:29] Wade Fow did a great study on this too where he basically took the 4% rule applied it Multinationally or internationally and said I think it's like four of 17 countries Four percent rule hurts and it fails in the rest and you can take a valuation less than out of that

[00:54:46] You can take a wars and Political events and other things less than out of that the reality is You could have the hundred times cape and stuff maybe works out

[00:54:58] But you probably need a lower you probably need a lower look with throw right you could also have the

[00:55:04] What what was rushes cape going into the hole like invading a Ukraine like you could be an ultra cheap and you get screwed even worse than Japan got screwed because at least you can still survive the withdrawal rate

[00:55:15] This is more the best for your work in Russia. It's it's not hold yeah, it didn't work in Russia It didn't work in Japan if you started it rate at like in the peak boom

[00:55:25] However could the person leaning up to the boom have actually put enough in their risk mitigation and their piggy bank and their war chest assets To get them through because then you needed the 1% withdrawal or whatever it was in Japan to survive like going forward conservatively

[00:55:38] Yeah, yeah, you probably could have and it might have even still held up and that like 80% stock basket Even with those negative returns for sake of consumption the math is gonna bend your brain when she once you start stretching it out over all these years

[00:55:52] You have to have a strategy you can stick to just like everything in quantum messing So we're 55 minutes so we'll wrap up here, but I think the the big takeaway from this is You know rules of thumb or rules of thumb all this calculations and data

[00:56:05] It's just calculations and data like we all live in the real world We're human beings we make choices like a lot of this is the guidance and I think that's what I've learned in my quant career

[00:56:14] The most is like when I could use all these numbers and everything to guide us in the right direction That's what it works really well when I get wrapped up in the numbers and I start showing ratios to clients

[00:56:24] They don't care about like that's where we get ourselves in trouble So and that's true the 4% will you want it? It's a great guide like I talked about the beginning with a family member to say yeah, I'm roughly in the right spot

[00:56:34] It's a good it's a good thing for that, but behind the scenes there's so many details We talked about here that actually translate in the real world that it's not something where you can use it as a hard and fast rule

[00:56:44] So in the 90s when I was playing in a like a wedding and cover band One of the songs that was a big hit in the late 90s was this Brian McNight song back at one are you familiar with this I'd be slow jam classic man

[00:56:57] We played that in a lot of weddings in like the year in two fifth three that were that was the breakout song That's a tough song to sing out. I don't know noise that's an insanely hard-telling to safe

[00:57:09] I'm perhaps somewhat not emotionally scarred by like even just like doing the count off as the backup vocal is a funny thing But yeah, no, that's a it's actually a great song It's got one of the great like skip measure like

[00:57:23] Changes in it this phenomenal. I still have a sauce pot. I will listen that song of it comes on the radio But in that song, if I can I'm gonna apply Brian McNight to the 4% rule for all the lovers out there The 1% would draw rate

[00:57:37] Definitely that's dream come true if you've saved enough money to not care and all you need is the 1% would draw rate back at one Fantastic you're winning 2% I just want to be with you

[00:57:47] You being my principal still that's like I haven't drifted that far from not having to disrupt you too greatly 2% conservative withdrawal rate you're still winning the game of love with your portfolio there 3% it's plain to see that you're the only one for me because yeah

[00:58:00] You need to actually spend your portfolio to make your money this also works because that's like that like 3 to 5% sweet spot which for percent repeat steps 1 through 3 exactly because 3 to 5% about the same in the outcomes and results in the failure rate

[00:58:14] Then 5% make you fall in love with me. Okay, that's spending on my habits That's okay. You might be getting a little bit manipulative when you're getting over 5% in your expectations That's where you got to step back If you spend the money this is the fact

[00:58:31] You're gonna need to go back to saving some money at the end So if you press it too hard, you're in trouble But Brian McNight I know you were writing about banging or the 4% rule even if it was about the same time period

[00:58:43] I got to say back at one I'm taking all the financial lessons and advice from you Mr. McNight Thank you. Yeah, and what other podcasts are you gonna get the 4% rule in Brian McNight for altogether Still I think that's a great thing to wrap up on

[00:58:56] Thank you every for joining us. We'll see you next time Hi guys. This is Justin again. Thanks so much for tuning into this episode You can follow Jack on Twitter at at practical quant you can follow me on Twitter at JJ Carbono and follow Matt on Twitter at

[00:59:11] Cultisch creative if you found this discussion interesting and valuable Please subscribe and either iTunes or on YouTube or leave a review Or a comment also if you have any ideas for topics you'd like us to cover in the future

[00:59:24] Please email us at access returns pod at gmail.com We would like this to be a listener driven podcast and would appreciate any suggestions. Thank you