Nathan Hoyt Takes on the 4% Rule

While a 4% withdrawal rate in retirement can work for some, flexibility is key.

Reviewed by: Staff
Edited by: Ron Day

Nathan Hoyt is the chief investment officer at Regent Peak Wealth Advisors, an Atlanta-based advisory firm.

We talked to him about the classic retirement withdrawal formula popularly known as the 4% rule, representing how much of a portfolio should be withdrawn for living expenses annually.

Jeff Benjamin: What is this 4% rule?

Nathan Hoyt: The 4% rule is a general guideline that advisors use as a sustainable portfolio withdrawal rate in retirement. Investors want to know how to generate more wealth, and how to avoid outliving their money.

JB: Where did this idea come from?

NH: The idea is generally attributed to a paper in the early 1990s by William Bengen who tested various rates of withdrawal across multiple portfolios, adjusted for inflation over time. Generally speaking, a 3% withdrawal worked over the time period he tested in every instance, and a 5% withdrawal rate caused about half of the portfolios to run out of money over 30-year time periods. But, 4% worked out for the vast majority of portfolios.

JB: How is it supposed to work?

NH: Using the rule, if you have a $2 million portfolio at retirement, you would plan to withdraw $80,000 a year, assuming portfolios consisting of stocks, bonds and cash in various risk profiles. Rebalancing the portfolio annually, and adjusting upward or downward for inflation each year, you keep the rigid 4% baseline rate to spend each year.

JB: Why isn’t it the perfect solution for everyone?

NH: While the 4% rule may allow a retiree the peace of mind of being confident to not run out of money, it is sub-optimal for maximizing a client’s outcomes. Life is not rigid, and the way you access your wealth should not be limited by the possibility of running out of money using assumptions that were accurate 30-plus years ago. Investors’ goals will change, their appetite for risk will change, and their portfolio will look dramatically different over the course of their retirement. What is generally correct is almost never specifically optimal.

JB: What are some alternatives to the 4% rule?

NH: Without a toolkit, investors fall into one of three categories: Those who overspend, those who won’t spend no matter what, and those who accidentally spend the right amount of money, which is never 4%.

Markets will surprise investors on the upside and downside. The optimal withdrawal rate then, should be a flexible one, balancing the risk of outliving your money with the risk of leaving too much money behind. While one or two years of returns shouldn’t impact the way you live, sustained periods of positive returns should allow you to enjoy the good times, while longer periods of down markets should cause you to tighten your purse strings.

As advisors, our job is to monitor the highs and lows in an uncertain market, and guide clients in decision making that allows for high probabilities of success in any market outcome, with opportunities to thrive when we see surprises on the upside. 

Contact Jeff Benjamin at [email protected] and find him on X at @BenjiWriter     

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