Safe Withdrawal Rate: How Much Can You Spend Without Running Out?

How much can you pull from savings each year without running out? Ryan breaks down the 4% rule, what current research says about a safe starting rate, and how to adjust it to your own plan. Education, not advice.

Find "Your Fiscal Physical" the book on Amazon

If you have suggestions or feedback, please email us at: Podcast@AlchemyWealth.com

And, as always, Stay the Course!

Transcript

Welcome And What We Cover

SPEAKER_00 0:01

Welcome to the festivalfesticle.com. Jonathan Stateweek is Mr. Town with the founder of Alchemy Wealth Management and author of your Festival Festival, Ryan Nelson. Tune in to gain valuable insights and practical tips as we simplify complex financial concepts into digestible lessons. From budgeting to retirement planning, this podcast is your go-to resource for mastering financial literacy.

Aaron Hoisington 0:33

Welcome everybody to this week's episode of the Fiscal Physical Podcast. My name is Aaron Hoysington. I am here with Ryan Nelson, founder of Alchemy Wealth Management. Ryan, what's the uh what's the good word today, man? How are you? I'm doing really well. How are you doing today? I'm doing pretty solid, man. Cannot complain. Cannot complain. Appreciate you checking in there, ready to ready to dive in. How about yourself? You ready to dive in today?

Ryan Nelson 0:54

Yeah, absolutely. Let's do it.

Aaron Hoisington 0:56

All right, that's good. I got good energy today, so let's let's see how long that lasts. So all right, Ryan.

The Safe Withdrawal Rate Explained

Aaron Hoisington 1:01

So today we're gonna cover uh and how we're gonna kind of do this. And you guys might have, if you've been sticking with us for a long time here, you know, we we've covered certain topics previously. I feel like almost every episode we touch on. Hey, we talked about this in episode XYZ. So um, if you guys feel like you've maybe heard this before, like first off, thanks for listening to those previous episodes. But uh second, this is gonna be a bit more targeted and uh you know just cover some topics that I think are you know pretty important uh just in the financial world. So today we're gonna we're gonna talk about uh the you know the safe withdrawal rate. We'll call it like that, or 4% rule, however, you want to kind of target this. But uh I'm gonna I'm gonna go ahead and paint a picture here for you, Ryan. So yeah, we got a couple who may have just retired and they're asking how much they can pull from their accounts without going broke. So they're wondering, you know, the you know, the what's the what's the amount, how much can I take out of my savings each year without running out of money? So that's kind of a broad overview. Hopefully they've done their research before they get to retirement age at this point. But you know, you never know, everybody's situation is different. So I'm hoping you can kind of break this down of you know, how much can a person normally take out of their retirement each year without running the running dry?

Ryan Nelson 2:11

Yeah, so I think the the the short answer is is somewhere around that four percent. So there's something called that four the four percent rule, which we've talked about in the in the past, and that is a really general rule of thumb of approximately how much somebody could take out of their account. It's certainly not like a hard rule, but it it it is a good sort of s starting point to get a feel. And you know, if you're looking to take 10% out, uh you're probably not gonna be able to. If you're thinking you might only take one percent out, you can probably take more, right? So somewhere in that four percent range is is roughly approximately what most people can can take, depending on, of course, the the what the stock market does, their age, and their plan.

Aaron Hoisington 2:54

Sure. Yeah, and and I you've probably once again you've probably heard the four percent rule before, because I think we've referenced it a couple of times, but just for refreshing maybe myself too, but where does that number, that four percent number kind of come from?

Where The 4% Rule Came From

Ryan Nelson 3:06

Yeah, and and so yeah, like you said, we talked about this in episode 33. If you want to go back and kind of listen to a deep dive on the 4% rule itself, that said it comes from this, you know, what I'll put in air quotes famous study, famous in our industry. Most people probably have never heard of it, but it's from back in the 1990s, so 30 years ago, and it's this famous study where they effectively tested a bunch of different market scenarios and figured out like what could you have withdrawn and not run out run out of money. And so they came up with this idea that then got coined the 4% rule where they said, hey, 4% is probably a pretty safe withdrawal rate, where you there's you know lots of places in history where you could have theoretically taken this out, 4% that is, and not run out of money over a 30-year window. So 4%, 30-year window using past data. And then it makes the math really easy on our end. You know, if somebody has a million dollars saved, 4% of a million is about $40,000 a year.

Aaron Hoisington 4:05

Okay. And you know, you think about you mentioned like this is a study done in the ninth in 1990. I think back in 1990, I'm not even sure if we had internet back then. To be honest, that was the year I was born. So hard to say. I think the Berlin Wall might have still been up. So is that number still the right number today? Like, would you it's it's a hard thing to say, but I mean, thinking about 36 years ago is when that was like, you know, is is that four percent still still the kind of the the the go-to, if you will.

Ryan Nelson 4:32

Yeah, I mean it's definitely uh, you know, I I don't know if it was ever necessarily, you know, it it I guess it is what it is, and it it really is just a rule of thumb back then, and really is just a rule of thumb now. I would say that, yeah, some market conditions have changed. Really, what you want to do is take a look at your like specific retirement situation, right? Look at your age, what your risk tolerance, your goals. Obviously, somebody who is 99, you know, if you're 99 years old and you have five million dollars saved, you could probably take a little bit out of it, right? Now, if you're gonna try to retire, if you got five, you just received five million dollars in the sale of a business and you're 26 years old, hmm. There's a lot, you know, those those are two very different scenarios, and those two 26-year-old and 99-year-old probably would be safer spending different amounts, right? So it really is just like a very rough guideline. And and you know, that being said though, like it it's more or less like math, right? So in a lot of ways, the the 4% rule is still a good rule of thumb today. There's been some more recent research out there maybe suggesting closer to 3.9%. But I mean, if we're just talking about a rule of thumb, 3.9% versus 4%, I'd say, hey, we're we're we're pretty darn close there. And as far as rules of thumb go, that's still staying pretty strong. I did see this research article recently. It was from Michael Kitsis. He put out, I'll just read it straight from his article. He said he's talking about the 4% rule, and he says, in fact, by applying the 4% rule, over two-thirds of the time the retiree finish with more than double their wealth at the beginning of retirement on it on top of a lifetime of 4% spending. Oh wow. Half the time, wealth is nearly tripled by the end of retirement as retirees fail to spend their upside. So kind of interesting. So you can see one side of the equation is like, hey, there's some research coming out saying, hey, maybe instead of 4% it should be 3.9%, encouraging a lower rate. But then this other research says, hey, you know, the the reality is two-thirds of people who go out spending 4% are more likely to double their wealth than run out of money, which is pretty interesting. And I think if anything else, that just goes back and proves the point that this really is just a rule of thumb, but it is a good rate starting point. Like, okay, how you know, if I have $2 million saved, how much approximately could I be saving? Again, 4% tells me 80 grand. Okay. If I was thinking I needed to spend 150 grand, I probably don't have enough retirement assets yet. If I was thinking I was only going to spend 40 grand a year, oh, I probably have more than enough and can maybe afford to spend a little bit more. So that's the really kind of the way I like to think about this 4% rule.

Aaron Hoisington 7:02

Yeah. No, I think that that's a solid, a solid way. And it's it's it's fun to see. I always think about like the constants and like life. And one of those ones is like math normally. Like that normally holds up like over time. Like it's like, hey, like, you know, you don't just figure out like, you know, two plus two is four. It's four in 1990, it's four now. Yeah. Obviously, like this isn't exact math, but I I feel pretty good about anchoring to that normally if it's rooted in that mathematical calculation at some point. But I'm going on uh around that, I mean, like you can probably I'm sure you get asked the question, like for as a financial advisor yourself, like uh how do you know which number fits you? I guess or fits a per person. I think you kind of covered it a little bit, but I don't know if you have anything else, like yeah.

Ryan Nelson 7:44

So I think you really do want to build like a financial retirement plan, whether you do that yourself or you hire and outsource that to a financial advisor, but you really do want to build a financial plan,

When 4% Fits And When It Fails

Ryan Nelson 7:52

and that's gonna look at factors like income and your social security, right? It's gonna look at your your risk tolerance, it's gonna look at, you know, what's the difference between that 99-year-old we mentioned versus the 26-year-old we mentioned. So you really do want to build a personalized retirement plan to yourself, right? We always say there's like that spreadsheet answer and then there's your answer. And you really do want to come up with the number that's right for you. And you really can, I think, only get to that through building a financial plan and so modeling this out over time. So I'd start with how old you are, you know, how much money or how long you need the money to last, and then you know, your income, things like social security, risk tolerance, and all of those, you can start to kind of hone in and figure out, okay, maybe I can start spending a little more than four percent, or maybe I should be spending a little bit less than four percent.

Aaron Hoisington 8:35

Sure. No, I think that that that all those different factors, I think that once once again, hopefully you've been planning for this moment for a while. You would hope so, versus like getting to be like, you know, that's 67 and you're like, how much can I take out? But uh and I guess it all leads into the question about you know, I'm sure everybody, everybody, you probably get this question a lot, but what happens if the market like tanks or drops right before you or right after you retire, I guess?

Sequence Risk And Spending Guardrails

Ryan Nelson 9:00

Yeah, so we we would call that sequence of return risk. And so there's there is a big risk if you enter retirement and there's sort of quote unquote immediately a down market, that is hard on your retirement plan. And that is one of the biggest risks. And so, you know, a couple of things is a you know, when we're talking about percentages, so 4% rule that is in essence a flexible strategy. So, you know, if if 4% of a million dollars is different than 4% of $500,000, right? That being said, a lot of retirees don't always have that flexibility. So if you had a million dollars and I said, hey, you could spend $40,000 out of your retirement assets and then all of a sudden your assets drop to $500,000, would you just be able to cut your lifestyle from $400, $40,000 to $20,000? That'd be pretty challenging for a lot of retirees, right? So there'd be a couple of things to pay attention to on the front end is you know, what are your expenses? Like have you been locking in a lot of sort of fixed expenses? So are you, did you go buy the new car that requires a car payment? Because that makes it a lot harder to bull harder to flex your spending up and down, right? Whereas if you're only buying cars you can afford and you're paying cash for them, then if something were to happen and you have to sort of take a quote unquote pay decrease in retirement, it's gonna be a lot more your spending can be a lot more flexible and it's gonna be easier to accommodate that. So I'd say do what you can, you know, in your lifestyle to keep your spending as flexible as possible. Smart. You know, moving into the new house, the new gorgeous house can be fun and exciting, but it also can strap you down with a larger mortgage payment and maybe larger insurance payments, right? And more tax more tax associated with that as well. And so all of those things are sort of compound. And then if you do have to take a pay cut in retirement, now you say, Oh, I can't afford to. Yeah, exactly. So so preparing a little bit on the front end, making sure you have a little more flexibility. This 4% in theory, there's different there's been now so many different research papers or like studies on this 4% and different people interpret it different ways. But like in essence, like having some sort of guardrail where you're sp, you know, if your money drops below a certain threshold, you can flex your spending down. If you're in the flip side is true too, if you're if your account increases above a certain threshold, you should also be able to flex your spending up, right? So we don't run into that same equation that Michael Kitsis was talking about in his article where most retirees are like, you know, more of them are doubling their assets. That means they were leaving a lot of sort of quality of life on the table. They could have spent more during while they were healthy and enjoyed maybe enjoyed life a little bit more. And so we want to avoid both both of those scenarios where we could both run out of money and we want to both avoid running out of money and passing away with too much money, right? And so having these guardrails and being flexible with flexing our spending up and down is both valuable.

Aaron Hoisington 11:44

Yep, I think that that's that's super well said. Now, kind of the the I don't want to scall it the million dollar question because I think we've done a lot of good questions here, but like, how does that actually become money in my bank account?

Building A Retirement Paycheck

Aaron Hoisington 11:54

Like I have my retirement, everything, and then it's like, oh, how do I actually get that money to spend? I mean, maybe that's a pretty simple question, but I think I'm like, eh, that's an interesting one.

Ryan Nelson 12:03

Yeah. I always talk about this as like a we call it like a retirement paycheck with our clients. And so, you know, there's different ways to structure this up, but you can go into your investment accounts and set up a monthly distribution from your investment accounts into your bank account, and it feels very much like that of a paycheck, right? Instead of a paycheck hitting your your your account every day, it would be the exact same thing. And you know, if you want to spend, you know, $100,000 a year and you have $2.5 million saved, so 4% of $2.5 million is $100,000 a year, $100,000 a year is what, a little over $8,000 a month. You can set it up where just $8,000 a month automatically goes from your investment account over to your bank account every single month. And then again, you're living life similar to that of just like if you had a W-2 paycheck. And typically what you'd want to do is, you know, you need to make sure the cash is available in your investment account, right? Right. As you transition into retirement, we've talked in the past about maybe your risk level should change. So you might be a little more conservative where you might be holding a little bit more cash. There might be some more investments in bonds, and you'd slowly be then sort of automatically transferring the cash over into your checking or checking your savings account and then over time sort of replenishing that cash in your investment account. So yeah, really we'd call that like an you know retirement paycheck, and most of it can honestly be automated.

Aaron Hoisington 13:20

Yeah, no, that's awesome. And I I always think about that like, you know, I've gotten a paycheck like bi weekly for my like my whole life pretty much. Like so, like to go from something like that to be like, hey, you know, I just want that to continue. Like to go into retirement and like continue to be like, hey, like now I'm doing this but out without having to do the work because I've already done the work kind of piece of it. Like that sounds that's that's probably a nice little routine piece that like you know, people versus like, oh, I get mailed a check and then I have to go down to the bank and cash it. Like I should I we're we're you know probably well past that if we can but all of that's I guess possible.

Ryan Nelson 13:54

You could do it that way, but yeah, uh uh what we find in at least in our practice is most clients right are gonna elect for it to be automated and electronic.

Aaron Hoisington 14:01

Awesome. Well, that was great, Ryan. I really appreciate that uh that information there. I think that that was super, super helpful. Just kind of uh with that four percent rule kind of establishing like you know what that looks like, how that could come to be, and kind of what to do with it and how to uh once again, we always recommend talk to your financial advisor, your financial planner for for how you want to set this up to be uh you know best most advantageous to you. But uh um anything you want to say on this before we uh wrap this one up here?

Ryan Nelson 14:25

Yeah, so I think it like in in summary, a safe withdrawal rate is what's important, figuring out what a safe withdrawal rate is for you and then how to turn that into like a recurring paycheck for yourself and what that safe withdrawal rate will be will be different for everybody, but somewhere starting around that four percent is probably a good place to start and then just be flexible as you know accounts change and lifestyle changes, and just be flexible and you know, willing to flex that percentage up and down over time as needed.

Aaron Hoisington 14:49

Awesome. Well, I appreciate it, Ryan, as always, for sharing your your knowledge with the listeners out there, and uh everybody go ahead and uh hang tight with us. We'll be right back on the other side of this.

SPEAKER_00 14:58

And now to put the personal in personal finance.

Splurges Worth It Every Time

Aaron Hoisington 15:06

Welcome back, everybody, this side of the physical physical podcast. We're here on the personal section here, and so uh Ryan, I got a question for you. You ready? Let's hear it. All right, what's uh one purchase or experience you've decided is always worth the money no matter what? So we we've kind of covered similar questions like this in the past, but I mean they all kind of kind of run together here, and obviously our lives change over time. So I'm really curious like what your answer is to this on one purchase or experience. You've just decided, hey, I'm gonna spend the money on that.

Ryan Nelson 15:35

Yeah, I mean, I think most experiences are worth it. And yeah, I'm a big experience guy, but from a purchase standpoint, I I I'm comfortable, I guess, splurging, if you will, on my watch and my phone. I use them both every day. I mean, I wear my watch like 24 hours a day. I sleep in it. It's a Garmin GPS watch, and you know, my phone, I probably have it with me too much as well, right? But those are things that I use like I feel like all day, every day. And so, you know, I don't, I'm not like trying to chase a $20 savings on that or something. If it's something I'm gonna use all day, every day, I'm comfortable spending a little more to have like the best or or or at least a tool that accomplishes what I want there. And then kind of a more unique splurge. I bought one of those cooling mattress pads. Have you seen those?

Aaron Hoisington 16:16

Yeah, yeah, absolutely.

Ryan Nelson 16:17

Yeah, so it's it's it's like a little, it's just a pad that goes on top of your mattress, it has water that runs through it that cools or heats, you know, depending on what your preference is. But I sleep pretty hot in general, and so I can set that thing up and yeah, it's worth like every penny. It's so nice. It's just like keeps your bedroom like, or not your bedroom, just your bed, I guess, so consistently like climate controlled and it can adjust the temperature out throughout the night and stuff. So I I absolutely love it. What about you?

Aaron Hoisington 16:41

Yeah, no, those are good, those are great ones for sure. Yeah, there's there's two pieces. One is my phone, like I just I I just use it all the time. Like it's just what it is, that technology piece of it. And I, you know, I for the longest time, like I was the proponent of like, oh man, like I don't want to like have my phone slow down, like it gets like old, and so I always try to stretch these things out, and now I'm to the point where I'm like, well, I just I I can't miss a call for my kids' daycare because you know my phone didn't pick it up or something like that. So like I I definitely I try to stay constant with that and make sure I'd you know keep it as running as smoothly as possible. Another thing that I'm I'm a big proponent of is uh I treat my vehicles really well. Like I I I think that like it's uh it's pretty important to, you know, if you get the oil changed, you know, frequently, you get your tires changed, get everything to the regular maintenance, maybe spend a little bit more to if you take it to the dealership or a specialized mechanic to make sure everything's being done right. Yeah. I just think that my wife always gets on me because she doesn't really think like that. She's like, oh, it's fine, you know, 5,000 miles is just a recommendation for oil change. And I'm like, yeah, but I I'd feel better knowing that like at the 5,000 miles, I'm gonna get it changed and it's gonna continue to run well and such too. So I spend probably more money than I maybe should on vehicle maintenance, but I always sleep better, like knowing that on the road I'm like, cool, like if something goes wrong, I've done my due diligence. It's not like negligence that I like, you know, my tire blew out. I mean, that sounds a lot like investing to me, right?

Ryan Nelson 18:06

You're investing in the in the car's future and and it has this compounding effect where yeah, if you let it if you let if you have a brand new car and you let the oil, you know, you go a little longer than you're so too for the oil change, are you gonna notice it that year? Probably not at all. But will it have a small incremental increase in wear and tear that might compound over 10, 20, 30 years? Probably, right? Yeah, or at least in this analogy, we'll say so.

Aaron Hoisington 18:29

Yeah, so it's cheap license and train mechanics here. Yeah, yeah, exactly. Yeah, yeah.

Ryan Nelson 18:33

So, but yeah, I mean, I think that's a that I think that actually has a great analogy coming back to investing in, I mean, as far as I'm concerned, you're investing in the vehicle and and and over time, you don't notice any single any single time you take your car to the, you know, have maintenance done, you probably don't notice. But yeah, I'd be curious to see how that compounds over time.

Aaron Hoisington 18:51

And so too, man. And I also just don't like having a car payment either. So whatever I could do to extend the life of these vehicles, I'm like, uh, it's better I'm gonna pay the extra 200 bucks here versus like, you know, pay 800 bucks a month for the car insurance or the new car payment. So, you know, it's kind of kind of fun there. So awesome, Ryan. Well, appreciate you, you know, sharing your sharing your insight with us here.

Wrap Up And Listener Next Steps

Aaron Hoisington 19:11

And uh um, you know, for a deeper dive on, you know, what we covered in the first section here, go back and check out that 4% rule, episode 33. If you guys want to, you know, go go back and reflect, kind of compare it to this one. Hopefully you can uh match up the two to get what you'd best like out of it. And Ryan, I'll leave it up to you to uh take us out here. As always, stay the course.

SPEAKER_00 19:31

Thank you for joining us for the Fiscal Physical Podcast. Until next time, happy listening. And as always, stay the course. If you have a question or topic suggestions, please email us at podcast at alchemywealth.com. If you enjoyed today's discussion, subscribe to the podcast to ensure you never miss an episode. And consider leaving us a rating and review on your favorite platform. This helps other listeners like you find this channel. For more resources, you can visit Alchemy Wealth Management's website at www.alchemywealth.com or find your physical physical debug on Amazon. We'd be remiss if we didn't mention the personal finances just then. First of all, please don't take anything we say as advice. The printed content is for informational and entertainment purposes only. It's not an offer or a solicitation, nor should it be construed or relied upon for tax, legal, or investment advice. It doesn't consider your personal financial situation or objectives and may not be suitable for you.