Transcript
Apple Card Advertisement (0:00)
This message is brought to you by Apple Card. Apple Card is a no fee credit card that gives you daily cash back every day. That's 3% back at Apple and 2% back on every purchase made with Apple Card using Apple Pay. Apply for Apple Card in the Wallet app on your iPhone today subject to credit approval. Variable APRs for Apple Card range from 18.24% to 28.49% based on creditworthiness rates as of January 1, 2025. Apple Card issued by Goldman Sachs Bank USA Salt Lake City Branch terms and more at applecard.com.
Krista Dibias (0:37)
Welcome back to ASK AN Advisor where we go deeper on all things investing. I'm Krista Dibias here with the Wes Moss.
Wes Moss (0:45)
Hi Krista.
Krista Dibias (0:46)
Great to be with you again, Wes. Great to be here. Very much looking forward to today's show. I understand you're going to talk about, first of all, can we withdraw 5% a year from our retirement account?
Wes Moss (0:56)
5%.
Krista Dibias (0:57)
People are like, no way listening right now.
Wes Moss (1:00)
We're gonna talk about that.
Krista Dibias (1:01)
And then also what happens one year after we have a market correction?
Wes Moss (1:05)
We've had our first official correction of 2025, down 10%. And the question is, where do we go from here historically? What do markets look like?
Krista Dibias (1:14)
And I have a lot of questions for you. If you want to ask a question to either Wes or Clark, you, you can go to clark.com ask and Clark will be back tomorrow with a brand new show. So let's go ahead and start with that 5% rule.
Wes Moss (1:27)
So it's really, it's a financial heresy. 5%, that's a crazy number. And this is the great debate within financial planning. And we'll never know the exact number today because we don't know what the world's going to throw at us. We don't know how long we're going to live. We don't know what our rate of return will be over the course of our retirement or at any point in any period of time. Wouldn't it be nice to know exactly what our rate of return would be, what inflation will be? So when we're doing financial planning, we've got a dozen at least really important variables that make up a cash flow plan, a long term plan to make sure that we're safely not ever worrying about running out of money. It's still a top fear in the United States. Running out of money is a very scary thought for any, anyone. But we go through this long period of time, 20, 30 years of 40 years of saving. But if you were to boil down all those variables. When you're running a financial plan, it comes down to one. I would say the most important variable is your rate of withdrawal, because your rate of withdrawal is saying, okay, how much of the savings that I'd spent 30, 40 years accumulating, how much can I use in any given year? Which means how, how much can I spend? What's my standard of living going to be when I'm in retirement? So that is the crux of all financial planning. What is, for the most part, been agreed upon is this 4% withdrawal rate. William Bengen, the kind of the godfather of the 4% rule, ran a bunch of studies, ran market studies all the way back to the Depression and looked at different withdrawal rates. Because what we're all trying to do, and I think of it this way, is max out without running out. Max out what? We're withdrawing from our portfolios without having the fear of that going down to zero at some point when we still have a lot of years left on this planet. So there's got to be some sort of optimal number. Now, anytime either market returns look as though they're not going to be good. Anytime interest rates are low. Because part of most people's withdrawal strategy needs to be a balanced portfolio. The 4% rule says you've got to have at least 50% in equities. That's the engine that allows us to increase our spending for inflation over time. So if we assume that Bangin's original work, which I've redone his study over and over and over again and kind of brought it up into the 2020s, and it still works, and I actually call it the 4% plus rule. But this past fall, Barron's made a big splash and it came out with an article that said you may be able to do, or really they said, you can do 5%, you can have a 5% withdrawal rate. Now, the counter to that, and there's several financial folks in the financial planning community that'll come out and say, no, no, no, no, if you really want to be safe, just pull out two and a half percent or that's your max withdrawal rate. And when that starts to happen, that, that kind of frustrates me because of course, if you barely take any of your savings out over time, of course you're out. But then what's the point of the savings? So there's got to be this happy medium. So Barron's comes out and says, 5%. You can do that? Well, how do they get to that point? One, they say that recently, some of the big Wall street firms have come out and said because interest rates were higher at the end of last year, that means your bond should produce more over time. Those expectations are higher. The equity market should do 8% a year, according to, I think it was JP Morgan or Morgan Stanley, one of the Wall street firms. So those return assumptions are pretty healthy. And if both sides of your equation, stocks and bonds both do well, well, then maybe you can pull out more money the way Bengen said. And this is from a year or two ago, he said you could give yourself a retirement raise by adding in some small companies that typically have a higher rate of return over time. So he's suggested that 4% is even too low. So I wanted to go back and see what makes this possible. And we ran the numbers. So I'll look historically. I'll share with our listeners and our viewers. What does it look like if we start out with 5% and withdraw 5% plus inflation every year over time, what's our probability of never running out of money? The first point in all of this, whether you subscribe to 4% or 4 and a half or 5 or even higher, is about flexibility. Because in the real world, Krista, we don't turn on our financial spigot from our accounts and say, okay, I'm getting my four and a quarter percent and I'm going to going to perfectly ratchet that up exactly for CPI or inflation every single year until the end of time. That's just not how it works in real life. So flexibility is the key, meaning that we may go through a period of time where markets are really good and they're really strong and they're beyond our expectations. And you can say, gosh, I think I can take out a little bit more money or we can go on an extra trip or two that I hadn't thought I could budget for. Same thing. When we go through a protracted stretch of not great markets and really low interest rates, we want to be able to be flexible to say, well, maybe we spend a little bit less. That's the real world when it comes to managing your withdrawal rate. But what do the numbers say? Our team has run every single calculation that you can think of. 4% with different portfolio allocations, 5%, we've looked at 6%, which money does run out pretty quickly at a higher percentage of stretches. That one I think is probably a little bit too aggressive. But if we're just looking at the numbers and we look at a 5% withdrawal rate now, what's interesting if you look at 5%, your best opportunity to not run out, at least for 30 years, actually looking at an all stock portfolio. Now a balanced portfolio works as well. But here are the numbers. If we're looking at a 30 year period of time, a 5% withdrawal rate plus inflation, using the same metrics of this rule, money still doesn't run out 83% of the time. So 8 out of 10 times you turn on the 5% withdrawal rate and this is going all the way back into 1927. And imagine you retired in any given year over that entire stretch of history. So 8 out of 10 times 5% rule actually works based on history. Now you're going to say, wait a minute, well, I don't want to go into retirement thinking I get an 8 out of 10 chance that I'm going to be okay and not run out of money. So. So it is riskier, but that's where the flexibility comes in. And I think that if you start out with a higher percentage withdrawal rate, you just know you have to be flexible if things turn and we go through really rough stretches. However, here are the scary numbers and why you may not want to subscribe to 5%. Is that there, if you go and look over that almost hundred years of data, you do have some rough outcomes. And there were the worst outcome is money ran out in 12 years. That's no good.