The Most Dangerous Misconceptions about the 4% Safe Withdrawal Rate

The Money with Katie Show

Money with Katie

Self-improvement, Education, Business, Investing, How To

4.8 • 1.3K Ratings

🗓️ 4 May 2022

⏱️ 41 minutes

🔗️ Recording | iTunes | RSS

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Summary

So much of personal finance and early retirement #literature is predicated on the 4% safe withdrawal rate that it’s easy to forget that the “rule” was discovered in the 1990s by the original Freak in the Spreadsheets, Bill Bengen. And man, the financial media loves to splash sensational headlines about the 4% rule all over the place (“The founder of the 4% rule just changed it!”). You know the kind. But there are a lot of misconceptions about the 4% rule, including the recent criticisms that it’s no longer valid. If you ever want to retire, this episode is a must-listen. I welcomed Brian Feroldi onto the show to talk about the underlying assumption that makes the 4% rule work—over time, the stock market generally goes up. Brian's new book (aptly named Why Does the Stock Market Go Up?) is out now. Sources cited Historical bond returns Follow along Instagram Twitter Newsletter Learn more about your ad choices. Visit megaphone.fm/adchoices

Transcript

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0:00.0	Welcome back, rich girls and boys to another episode of The Money with Katie Show.
0:12.5	Today, we are doing a relative deep dive on the 4% guideline for safe maximum withdrawal
0:19.2	rates.
0:20.2	Now, if you're not familiar with the 4% guideline, it's become a bit of a cult-like principle
0:26.3	in financial planning that says you should be able to withdraw 4% of your total portfolio
0:32.6	value every year, and you shouldn't theoretically run out of money over a 30-year period.
0:39.0	Notice I said guideline and not rule.
0:41.8	That sentence alone required like 47 caveats and footnotes, which is why this episode exists.
0:48.0	We're going to get into all of them.
0:53.7	We will also hear from financial educator Brian Faraldi about the underpinnings of the
0:58.7	stock market in general, because I think understanding how the stock market functions and
1:04.6	rises and crashes and recovers and how it does it all the time is important context for
1:10.5	the 4% rule and why and how we should all kind of feel optimistic about it.
1:15.7	But let's begin at the beginning with Bill Bangen.
1:20.0	Bill Bangen was the discoverer of the 4% guideline and he never intended for it to be called
1:25.8	a rule.
1:26.8	He's clarified since then many times that this is not a science.
1:30.7	It's not like physics where there are these definable, observable laws of nature that dictate
1:35.8	what's going to happen.
1:37.0	It's really just the best estimation that we have based on how historical data played out.
1:43.6	But in the 1990s, there was really no guidepost for how much retirees could withdraw from
1:48.1	their portfolios each year.
	...

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