retirement planning worksheet

Death of the 4% Sustainable Withdrawal Rate?

January 4, 2022

Recently, the well-known 4% withdrawal rate rule of thumb has come under fire. For those not familiar, the 4% withdrawal rate comes from research by William Bengen, which demonstrated that, based on a historical analysis of stock and bond returns, retirees could withdraw up to 4% of their portfolio’s value each year over a 30-year time horizon without fear of outliving their money.

A new study by Morningstar has made a lot of headlines by challenging the research asserting that because of low bond yields and high equity valuations, future portfolio returns will be lower than in the past resulting in a lower retirement sustainable withdrawal rate of 3.3%.

So, what was William Bengen’s response to Morningstar’s findings? Interestingly, he redid his research based on Morningstar assumptions and actually increased his expectation for a sustainable portfolio withdrawal rate to 4.7%.

What’s the right answer then? Honestly, probably somewhere in between, which happens to be 4%.

That said, from our perspective, there are a few key considerations that we will share from our experience in helping clients navigate their financial plans over the last 30+ years:

1. Over Time, Averages Play Out – For most clients, we plan for a 30-to-50-year time horizon. While averages can be skewed in the short-term, over 30-year+ time periods making drastic changes to long-term return or retirement assumptions tend to be short-sighted.

2. Tax-Efficient Portfolio Management – While there have been many studies on the 4% withdrawal rate, all admittedly neglect the impact of good portfolio tax planning. Two examples are…

      • Tax Loss Harvesting – monitoring for the opportunity to sell investments at a tax loss seems simple but is often overlooked. The key to tax loss harvesting is not only selling and recognizing the loss but simultaneously buying a similar investment, so you don’t sacrifice investment exposure and return. A recent study by George Mason University’s Business School found returns could be increased by 1.1% to 1.42% annually through this strategy1. 
      • Asset Placement –Asset placement is optimizing the tax characteristics of your investments with the unique taxation of different types of accounts (taxable, retirement, etc.). While more complex to implement, according to Vanguard, executing asset location well can result in additional return of up to3%2.

3. Proactive Annual Tax Planning – Outside of the portfolio, annual personal tax planning is key to increasing retirement success and withdrawals rates. Your tax situation will evolve over your lifetime and present various opportunities to act quickly in order to set yourself up for long-term tax savings and flexibility. For example, for many, from retirement until age 72 (the start of RMDs), there is a good chance you will be at your lowest lifetime tax rate, creating opportunities for Roth Conversions or IRA withdrawals at a very low tax rate that exponentially saves taxes over your lifetime.

4. Strategic Philanthropy – If you have charitable intent, there are numerous strategies – donor-advised funds, gifting of appreciated securities, giving your RMD to charity that can save thousands in taxes if done wisely over time.

5. Staying the Course Has the Biggest Impact on a Financial Plan – According to the Dalbar study on investor behavior, over the last 20 years, the average equity investor has gained 5.96%, while the Global market equity index has returned 8.29%. That 2%+ gap, according to Dalbar, is almost solely due to investor behavior – overconfidence, failed market timing, short-term focus, etc., reiterating the importance of staying the course.3

When calculating long-term withdrawal rates, it’s impossible to look in a vacuum of only market returns because your goals, tax situation, investment makeup, and emotions are unique. That’s why, in our experience, a disciplined investment strategy and comprehensive financial plan are the best indicators and predictors of retirement success and withdrawal rate!

1 Just How Valuable Is Tax-Loss Harvesting? By Dr. Horstmeyer
2A study by Gobind Daryanani estimated the added benefit of optimizing asset location to be between 0.1% and 0.3%. This was reflected in Vanguard’s study “Asset Location for Taxable Investors”
DALBAR’s Quantitative Analysis of Investor Behavior, 2020.

No representation is being made that any strategy shown will or is likely to achieve results similar to those shown in this presentation. BDF does not provide legal, tax, insurance, social security, or accounting advice. Clients of BDF should obtain their own independent tax, insurance, and legal advice based on their particular circumstances. The information herein is provided solely to educate on a variety of topics, including wealth planning, tax considerations, insurance, estate, gift, and philanthropic planning.