RIP the 4% Rule?

I was at an industry event last week where an expert dismantled the 4% rule.  Supposedly.

There are a lot of dissenters when it comes to this rule, a rule which has been held steady as the benchmark for post-retirement, inflation-adjusted, sustainable withdrawal levels which many claim the retiree can put aside any fear of running out of money.

If you’ve been retired for a while,or have been in the financial advice business for more than two decades you probably have experienced periods of time where 4% seemed ridiculously low while at other times 4% annual withdrawals seemed unrealistically optimistic.

For many in the financial advice-giving business the perspective of the advice giver is firmly rooted in one of two things: what their employer has told them will work or what their personal experience (including education) has been.

So at this industry event the speaker scoffed at 4% (he was a younger guy in his thirties) while citing research by a known, published authority.

For the retiree however, the idea of + or – 4% inflation-adjusted annual withdrawals has to be considered individually with regard to the retiree’s propensity for risk, hands-on management and true need.

The speaker at the event made a meaningful error in his presentation in that he referred to the withdrawal rate while excluding some of the other available assets in the example he was using.

That is, the 4% withdrawal rate has to be considered with regard to all of the clients assets, whether or not they are currently being withdrawn from.

He cited the use of a lifetime income annuity.  Which is fine.  The distribution from many lifetime income annuities (the fixed variety) has, in my multi-decade professional life) generally been about 6 – 6 1/2% per year.  That of course includes principal and interest which is important to understand, but the speaker ballyhooed the withdrawal rate of the annuity while excluding the sample client’s other assets.

The withdrawal rate overall, including liquid but as yet untouched resources, would bring the cash flow rate to much less than the 6- 6 1/2% quoted, nearer to the maligned but generally accepted 4%.

In reality, more than 4%,inflation adjusted, is achievable.  Very achievable.  One of the issues with these blanket recommendations is that results vary greatly and are very specific to a multitude of variables, not least of which is sequence of returns.

Average rates of return on investments have little value when withdrawing money from savings over many years.  I won’t bore you with charts but understand that you can achieve a target average return and still fail.  The retiree that earns more than his target in the earlier years of retirement can have the same average return as a retiree that earned less than  his withdrawal rate at the beginning of retirement but the early-year victories will enable the retiree with early success to sustain his withdrawals for longer than the retiree who struggles to match his withdrawal rate early on.

This all makes sense, and if you are a pro then this should be all to familiar for you, but for investors, our clients, this is not obvious even after explaining it to them.

But it is important.  And unpredictable.  That’s why many pro’s, myself included, believe that a retiree should have her essential expenses (food, housing, medical etc) covered by lifetime sources of income (pension, social security, annuities) and everything else covered by non-guaranteed withdrawals from savings.  This way, sequence of returns be damned, if your investments fail to keep up with your withdrawal rate you won’t be without income and you will always be able to at least keep yourself fed, clothed, housed and healthy.



The Myth of the Unbiased Advisor

It’s true.  It’s true.

There is no such beast.  Sure, you think your advisor is the one, but I love to break it to you – NOT!

There is no such thing.  And I’m not word-playing here.  It is impossible for any advisor to not be biased and the reality is that all advisors have limitations which impinge their unbiased-ness based upon the organization(s) they associate with, are employed by or employ themselves.  Yes, even you, you fee-only phonies.

Obviously, the commission, product-centric salesperson is biased, and quite frankly, doesn’t spend much time hiding it.  He’s only got to convince you that his firm, and product, or process or philosophy is better.  And then you buy.  The pitch and the product or service.

But those guys get the most heat, often deservedly, from the competition, the media and the regulators.  But are you really being threatened by them, ma’am?

You shouldn’t be.  If you were in the market for a new car, would you walk into a Ford dealership, ask for the best car for you priced at $40,000, and be appalled when the salesperson doesn’t show you a Toyota?

Sure, Toyota may have the best product for you, but you walked into a Ford dealership? Stop your whining, do a little research, and shop at the right store!

The same goes for you, all of you.  Don’t complain about your advisor’s recommendation.  Get a new one if you’re unhappy.  If you walked into the financial services equivalent of Ford expecting Lexus-like quality, shame on you.  That’s your problem.  Not Ford’s.

But it goes a little deeper.  Let’s take “fee-only” financial planners.  Now, there’s nothing wrong with fee only.  And for some of you the imputed bias doesn’t affect, but for many others it does.

Yeah, I get it.  Fee Only.  No product sales.  Makes you feel good, like the advisor is only interested in telling what is the right thing to do.

But after you get that beautiful, $5,000, bound (and gagged) cookie-cutter, customized financial plan with lot’s of big words, pretty pictures and fine print, what are you gonna do?

Where do you turn to implement the plan?

Do you go to Ford, or Lexus, or do you go to Ford expecting a Lexus?

Many fee-only customers (and I’ve done fee-only, and what I am about to describe happened a lot) don’t know where to go.  Or are with the fee-only advisor because they are not happy with their existing one.  Do they go back to the guy they don’t like to implement the plan?

Do they grab their Magic 8-ball and hope that one side of the white, plastic, icosahedral die floating in alcohol dyed dark blue would magically display the name and number of a new advisor to implement the plan and put their trust in?

Nope.  The client is going to ask the fee-only advisor to help implement the plan.  Conflict of interest number one.  Does the advisor implement the recommendations, collect additional commissions (and maybe waive the plan fee if she’s on the up-and-up) or does the advisor refer the client to his favorite attorney, insurance agent, wealth manager, et al.?

Sounds fine and dandy until you wonder aloud, in your car, after having signed reams of paperwork for legal documents insurance policies and asset management accounts, did I just get screwed?

Put another way, even “independent advisors”, those who purportedly work for firms that don’t restrict what products they can sell have conflicts of interest and biases.  What product wholesaler is scratching the advisors back most frequently in order to motivate the advisor to use the wholesalers product or service?

What trips are being offered, trips awarded for “sales excellence” – aka “Selling the shit out of it”?

And what does the advisor know, or believes he knows, or think she’s an expert regarding, and on and on.

There is no firm, compensation plan, fee arrangement, restriction, regulation, oversight or anything to prevent conflict of interest or bias.

I could go on.  I can get even more creative.  And dig deeper into the reality of it.

I once worked for a company that claimed it didn’t give advice.  That’s right, “Didn’t give advice”.

Now, that may have been the corporate line to tow, but everybody in the company knew it’s non-advice giving advisors, or whatever we were called, were giving advice.

How could we not, when a significant portion of our compensation was related to product sales?

It was a joke.  A joke I even shared with my clients.  But this firms particular corner of the market was designed around the idea that we were cheaper (in theory) because we didn’t give advice.

We certainly weren’t pitching stocks like I did early in my career, but we were influencing our clients decisions, directing their dollars into mutual funds, managed money wrap accounts, life insurance policies, annuities and on and on.

And this hypocrisy was not limited to my employer, either.  And quite frankly, despite the somewhat misleading above-board corporate line, our clients were well served, disguised bias and all.

The reality is that not all bias is bad.  Not all conflict of interests are counter to the clients best interest.

I’ve worked for several firms in an advisory capacity where I was biased toward proprietary products but was not conflicted by it because I knew I was providing among the best, and often times the best, products and services available.

But I have a conscience and I take pride in my work.

What you, dear reader, need to be concerned about is the Ford salesman (and I have nothing against Ford.  I’ve owned a couple and been very satisfied) who sells you the newest micro-death machine while swearing up and down it’s safer than the full-sized SUV Expedition.

The financial services equivalent of that does exist, and that is where bias and conflict of interest get their bad reputations.

But please take this seriously, there is no situation I can think of, whether I’ve worked in the capacity or competed against it, where a conflict of interest or bias does not, or can not, exist.

So stop fooling yourself.  A Ford can be just as good as a Lexus.  But it might not be.  And don’t expect the Ford salesman to show you a new Lexus.   But don’t blindly accept the Lexus’s salesperson’s opinion that Lexus is the best.

I’ll delve more into this topic in the future.  With much more specific examples.  Please leave a comment, and share this post.  I’d love to hear stories from investors who have experiences like those I described, and others that perhaps I haven’t even thought of.

Your pal,


Watch the Wolves.