Early Retirement - Financial Freedom (Investing, Tax Planning, Retirement Strategy, Personal Finance)

The 4% Rule: Is It Still the Key to Early Retirement in 2025?

• Ari Taublieb, CFP®, MBA • Episode 254

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The 4% withdrawal rule does not apply to early retirees since it's based on a 30-year timeline, not the 40+ years needed for early retirement. Guyton's guardrails approach offers a better alternative, allowing for 5.2-5.6% withdrawal rates by adapting spending based on market performance.

• Guardrails approach uses flexible withdrawal rates that increase when markets perform well and decrease during downturns
• Traditional 4% rule based only on S&P 500 and intermediate US bonds, while diversification across asset classes can increase safe withdrawal rates
• First years of retirement often have high expenses (healthcare, education, travel) when your portfolio is most vulnerable
• Bowling analogy: retirement planning with guardrails is like bowling with bumpers to avoid gutter balls
• Business analogy: like a business owner, spend more when times are good, cut back when they aren't
• Creating a "war chest" of safe assets reduces pressure on your growth investments during market downturns
• Stress test your retirement plan against worst-case scenarios: market crashes, reduced Social Security, high inflation, living to 100

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Ari Taublieb, CFP ®, MBA is the Chief Growth Officer of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients retire early with confidence.


Speaker 1:

Please stop relying on the 4% rule if you want to retire early. It does not apply to you. Now, what I'm going to talk about today is a new approach Now. This was developed by someone named John Guyton, who uses what's called Guyton's guardrails approach. This is what we use for our clients. It's a whole lot more applicable. You can actually generate up to 5.2% to 5.6% of income from your portfolio, meaning that's what you can withdraw, and it's designed to last for 40 plus years, not 30 years like the traditional 4% rule. So if you want to retire early one day, or you're in retirement trying to understand how much income could I possibly support, then you're in the right spot.

Speaker 1:

These are the types of videos I love making. This is all I do every day is early retirement planning, and I wanted to know when did this 4% rule really go into effect? Why are people relying on this? And you can see here Bill Bangen, william Bangen in 1994, he started with this 4% rule and if you invest your retirement nest egg in 50-50 of large cap stocks so S&P 500, egg in 50-50 of large cap stocks so S&P 500, and intermediate term US bonds, you can be rest assured you will not run out of money for 30 plus years, and this 4% is 4% of the total in your first year of retirement, and then each year thereafter you increase the number of dollars you draw by the prior year's inflation rate. So the idea is how can you make your nest egg last for 30 years? That doesn't apply to a lot of you. A lot of you want to retire in your 40s or 50s or early 60s going. I want to retire early. And what if I'm in good health? I don't want to run out of money when I'm 85 or 90. And I don't think you do so. That's what this episode is going to be all about. If you're listening on the podcast app, awesome. If you're watching on YouTube, awesome. I want to make sure that you digest this content in whichever form makes sense to you. I will say today will be a little bit more number heavy, so if you want, I encourage you to follow along on YouTube.

Speaker 1:

My name is Ari Taublieb, I'm a certified financial planner, I'm the host of the Early Retirement Podcast and I'm the chief growth officer at Root. So here's how I explain it to clients. I have two analogies that I'll use. One of these might resonate more than the other. It's a quick one, I promise. Then I'm going to give you an example so that you get the information you need and you are on your way Now. I love getting to do this and this is why.

Speaker 1:

So there's a bowling analogy we'll talk about with our clients. Imagine you're going bowling and you're trying to hit over as many pins as you can. That's the objective of bowling. Now, I'm not a big bowler and I'll ask my clients if they're big bowlers. Most of the time they say no. I'll say look, you might be really good and you can hit over a lot of pins. That might be because you're a great bowler. It might be because the way it left your hand was really fortunate on that one attempt. But when you're bowling, you're trying to hit over as many pins as you can.

Speaker 1:

I know I'm beating a dead horse here, but it's pretty simple. In retirement, you're trying to create as much income as your portfolio will allow without running out of money. So what you want to do, if possible, is use a cheat code. A cheat code would be bowling with the bumpers up. That's the idea here. So the guardrails approach is saying no matter what, we're going to make sure that you don't underspend and hit gutter balls, and we're not going to let you overspend. And what we're not going to do is say here's a magical number you can take 4% every single year out of your retirement. That's unrealistic.

Speaker 1:

The analogy that I prefer to use imagine that you own a business and your business is doing really well. You might hire employees, you might try to innovate by buying equipment to then sell which might bring more profits down the line. If your business is not doing well, you're probably not going to go hire or buy more inventory. That doesn't make a lot of sense. Here's what most people do. Most people go like this they close their eyes and they spend 4% from their portfolio every single year, whether markets are doing well or markets are not doing well. That's not logical for our clients. When markets are doing well, we're going. Please spend more. You're in a good spot. This is the time to increase your spending, and when markets are not doing well, we're asking them to temporarily cut back expenses, because it makes a big difference over the long term. Now, every single plan differs, but here's how I want you to think about it the 4% rule it's based off a 30-year study. It's not based off a 40-plus year study, like the guardrails approach is. And the guardrails approach is much more reasonable because I view it as logical.

Speaker 1:

If you could guarantee someone were to say, hey, I guarantee you will have 4%, you can take that from your portfolio every year and you'll never run out of money. I would say look, imagine your surgeon guaranteed that you not pass away in the operating room. You probably won't, but to guarantee it, that's unrealistic. Anything can happen in surgery. I know it feels good to hear, hey, don't worry, you'll be okay. But if he said I guarantee that you'll come back and be a better soccer player than ever, because I'm a soccer player Well I would know. Hey, doc, that's nice of you to say, but that's not true. The truth is you're going to do your best and that's why I'm happy to be here. But you're going to do your best. You cannot guarantee that nothing will go wrong. And he should say, yeah, that's right, because the reality is I can't guarantee anything.

Speaker 1:

That's how my approach works. I can't guarantee that you won't run out of money. I don't know if inflation is going to go up like crazy or if tax brackets will change or if health care is going to shift. That's out of my control. What's in my control is how much income that you can take in retirement. So what I want to do is be able to show my clients here's how much you can spend.

Speaker 1:

So hypothetical here pretend you have $2 million and you want to retire one day off of that money. Well, 4% of $2 million is $80,000 a year. Well, what we want to make sure that we're not forgetting is okay, wait a second. So pretend your portfolio is at 2 million, but at the beginning of your retirement you retire at 60, you've got kids in college. Still, you've got healthcare costs, you want to travel more, you're going to do a home remodel, you want to pay for your kids' future down payment, there's cars you need to buy. These are a lot of expenses that can come up in the early years of retirement, and this is when you don't have social security or rental income or inheritance, probably yet.

Speaker 1:

So now, at this point, everything's on your portfolio. So, 80,000 a year, that might not cut it. Maybe you need to take 150,000. Well, now, once again, we said you were going to spend 80,000 a year in retirement. 50,000. Well, now, once again, we said you were going to spend 80,000 a year in retirement. That's what you were planning on, right. But the first year of retirement your 2 million went down to 1.85 and you got unlucky because markets went down 10%. So now you're in the 1.6 to 1.7 range. Okay, well, that 4% of that. That's really changing your retirement. That's year one.

Speaker 1:

Imagine the first few years you've got care and travel and expenses keep coming up, but you rely on this 4% rule. Hey, you're going to be spending 60, 65,000 a year in retirement. Is that going to allow you on a $2 million portfolio, as what it once was, to let you do what you want? Probably not. So I'm not doing this to scare you. I'm doing this because if you use the guardrails approach and you go hey, wait a second, I actually do have those healthcare costs. The first few years of retirement I'm going to work part-time or I'm going to work one more year because, even though I have 2 million, I'm going to be in a much safer spot. If I work that one extra year, I can pay for healthcare my kid's. If I work that one extra year, I can pay for healthcare. My kids college will be taken care of. If I want to do a home remodel or buy a car. I can do that in two years.

Speaker 1:

What you want to do in early retirement planning is remove the pressure from your portfolio in the early years, because you might be on track for a wonderful 30 year retirement. But the first few years, that's the difficult part, that's the hump you need to get over. So what we talk about, the guardrails approach, is if you are investing not just in S&P 500 and not just in intermediate term US bonds but you add small companies, bill Bangan said here and this was most recently if you add small companies, you could increase your initial withdrawal rate to 4.5%. So 4.5%, you could increase your initial withdrawal rate to four and a half percent, so four and a half percent. That four percent to four and a half percent, that's a big deal just by adding small companies as well as companies like Apple and Google and Meta, but adding in different companies at different levels. So if we're able to go wait a second, what if we have international companies, both emerging markets and developed markets? What if we have smaller companies, both companies that focus on dividends and companies that focus on value dividends, growth, ensuring that we have a wide variety of assets? So if, for example, you own a REIT, a real estate investment trust, and it's not doing well, that's okay.

Speaker 1:

We have this other aspect of our portfolio. We have the US large companies. What if large tech companies are not doing well? That's okay. We have this other aspect of our portfolio. We have the US large companies. What if large tech companies are not doing well? That's fine. We have international companies in the developed markets that are doing totally fine.

Speaker 1:

We can pull from there for income this month. So having a different way to pull income creates flexibility, which means you don't have to go sell things at a loss because you're still going to need income in retirement when markets are going down and the question is not if markets are going to go down, the question is when. And they will go down. And what you want to do is to be in a position where you retire and go, no matter what happens. If I'm super unlucky because markets go down and healthcare goes up and tax brackets change, I'm still in a great spot. My retirement is not going to be impacted. So the withdrawal strategies that we talk about specifically whether it be Monte Carlo or 4% rule or guardrails approach they're all good because they get people interested in really finding out how much income can I withdraw.

Speaker 1:

But if you want to really optimize, if you're using a Monte Carlo, for example, that's taking into consideration the following things your portfolio size at retirement, your asset allocation, your age, your age of death. But these things could change. And if it says you have an 85% probability of success, that's probably not going to make you feel confident. You're going to think, hey, is there a 15% chance that I won't be okay Because I don't want to get on a plane with an 85% success rate of landing? Well, that's not what Monte Carlo means. Monte Carlo means hey, does this mean that I have an 85% chance that I'll pass away with this amount of money based off of these simulations that have been run? That's what that means.

Speaker 1:

So what you want to do is understand what is Monte Carlo, what is the 4% rule, what is the guardrails approach, which is the one that aligns with you. We'll use the guardrails approach for our clients and oftentimes this is us saying before we go implement, telling you to spend more money or spend less, it's let's first optimize your asset allocation. Let's understand how much money should be growing for you, how much money should be in safe assets we call it, root reserves. How much safe money should you have in war chest like investments, things like inflation, protected securities or CDs or just cash, something that's super safe, so, no matter what's going on, you can pull from it, which allows the rest of your portfolio to grow, because there's way less pressure on it. So you can see I'm going to link to this article below there's a lot of different strategies out there. There's the guard rails approach, there's the 4% rule and Monte Carlo simulations and all these things connect.

Speaker 1:

But here's the main reason that I wanted to talk about this the three main reasons of why retirement planning today, as you can see on my screen here, I saw this in an article and this was written by Dr Gunnell here, and he was saying retirement has been getting longer and longer because we're living longer. Obviously, projected market returns are lower in the coming decades Now people have been saying that for a long time who knows if that's the case and inflation is running at historically higher levels. So the reason I get so passionate about where you pull income from is when you're in retirement, you can customize where you pull in from. So I'm going to show you something right behind my screen right now, and the reason this is so amazing to me is because, when you retire, you can choose where you pull income from a 401k, a brokerage account, a Roth IRA, an IRA, an HSA? You have the flexibility to control your retirement income from a tax perspective, but there are certain things that are just out of your control. I'm going to make myself smaller here, for the remainder of this video Doesn't apply, once again, if you're just listening on the podcast app, but if you're watching on YouTube, you can see.

Speaker 1:

Here I'm going to stress test scenarios with clients, and this is something that you have the ability to do if you want. This is inside the Early Retirement Academy, this software that I'm going to show you right now. If you retire and you get unlucky and markets drop 40% and Social Security gets reduced 70% because you're retiring so early, inflation goes up by 4.5% and returns don't do what you think they'll do and you live until you're 100 because you're super healthy, well, I want you to understand. What does that change to your probability of success? That doesn't mean that you keep working and it doesn't mean you just go retire based off these numbers, but the fact that you can go manipulate these with your own custom plan.

Speaker 1:

There's a base case that I have in here of someone who's got 1.6 million with a home that's paid off. They're 60 and 59 years old. You can go use this same tool that I just showed you. And here they are right now. They were thinking about working until 64 and 63, but they wanted to know what if we retired earlier and if they spent $9,000 a month? You can see here they are projected to pass away at 91 with $2.4 million. Now if they work till 64, they'd have $4.8 million. But that's not their goal.

Speaker 1:

So what they haven't done is they haven't gone in and said wait a second, what if we switch around some of these things? What if we use a guardrails approach? What if we were to switch around the spending or we switch any of these things? What if we were to downsize? So there's a lot of moving pieces here. Now you need to make sure that you understand the assumptions and how all of these things shift. But it makes a big difference if you're doing the right things. If you're switching, for example, to 85% equities, okay, how does that change the plan? Well, it depends. It depends on the original mix. You can see here this is someone who is more conservatively invested. So now if we were to switch their allocation from their current allocation to 85% equities? Well, now they're retiring earlier, at 61 and 60. And you can see there's 1 million fewer dollars. There's 3.8 million at the end. So there's a lot of assumptions gone into here in terms of what expenses they want salary savings. So don't rely on this, but go build your own plan, and this is something that you can do in the early retirement academy. So this is available to all.

Speaker 1:

The reason I started doing this is because, as many of you have heard on separate episodes, I had someone reach out and say hey, I went and paid an hourly advisor and they told me what a roth ira is. They didn't tell me, like, if I should convert money and what tax bracket I should go to, and I need more detail. I wanna optimize, and so I went okay, well, we can't work with everyone, but if I could create a course that gave you access to the software to go do your own projections, that might actually be really helpful. So what if you do live longer? What if social security is reduced? You can go it's a one-time fee and enroll in the Academy, where you get access to the software as well as which I think is the main value, all of my videos.

Speaker 1:

Now you also. This is what I tell many people. You also might not need to work with Root right now. If you're in your 30s or 40s or early 50s and you're like, hey, I'm five, 10 years out from retirement, you might not need to hire an advisor on an ongoing basis quite yet. I tell everyone it depends. Hiring an advisor is all about timing. And if you're five years out or so from retirement, that's when it can start to make sense to hire an advisor who can really help start crafting that income, so it's ready for you before you officially retire. And if you're already retired and you're like, hey, I just, I want to know there's a better way to manage this. I don't want my new job in life to be managing my money. That's why most people pay us. So you can, of course, enroll in our academy, but you can also go to our website, rootfinancialcom. You can in the upper right, just like this. You can see I'm doing it with you. If you are on my screen, click see if you're a fit, and then it'll have a few questions to try to gauge if we're a good fit with one another. If so, then of course we can speak with one another. That's it.

Speaker 1:

That is the 4% rule, guard rails approach. Trying to go into more detail to give you guys a better sense of okay. Why is it truly that I don't love the 4% rule is it doesn't apply directly to an early retirement. So if you're only relying on that, it is not the most applicable to your situation, more than likely. Now, if you're planning on retiring at 65 and dying at 95, exactly with two kids and a white picket fence, then I'd still say it's not optimal, but it would be more applicable.

Speaker 1:

If you really want to optimize, I would recommend strongly looking into the guardrails approach and doing even more research, playing around with the software and really starting to build out to understand what you want to pull in retirement. Because I know I said this was the last thing I'd show, but inside this portal you can see there's a section for withdrawal rate and you can see what is my withdrawal rate. Is it 6%? Then it drops to 2%, then it comes up. Well, here's someone that's retiring at 62, taking 6% out of their portfolio and that doesn't concern me. Why? Because, although that's higher than the 4% rule. That drops significantly to the 2% range when social security is helping out, and then it increases because their required distributions are going to begin.

Speaker 1:

So I can go see a guardrail spending strategy. I can go see where it's going to come from. I can get really, really creative and build out my scenario so that I have total confidence as to how I'm going to create income. And hopefully that's what most of you guys are looking for, is you want to make sure, before you retire, you're absolutely not missing something. So that's it, guys. Thank you you so much as always for watching these videos. I love getting to make them for you. If you've made it this far, thank you. That's a lot. You're probably nearing 20 minutes here and that is a lot of time to spend on withdrawal strategy.

Speaker 1:

If you're listening to the podcast, please. If you enjoy it, rate it, review it. That helps more people find the show on iTunes, and that's it. See you next time. Thank you all, as always, for listening to the early retirement podcast. I love getting to host these shows and make different content for you guys every single week. I've not missed a single week in years and that is because I love getting to do this Now, please be smart about this.

Speaker 1:

Before you actually execute any strategy that you see me talk about or hear me talk about, should I say please talk to your financial advisor, your tax preparer, your estate attorney, please be smart about this. None of this should be construed as financial advice. This is for fun, educational, informational purposes only. Once again, just quick disclaimer here. Guys, please be smart about this. Appreciate you listening, as always, and you can, of course, submit a question on my website, earlyretirementpodcastcom. If you, of course, want me to address a specific case study or topic. I will not promise I can get to it, but I respond to every single person and if I find it will be helpful for a lot of people, I will absolutely make an episode on it, at the very least, give you some insight. That's it. Thanks, guys.