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Does the 4 Percent Rule for Retirement Income Still Work?

Stan Haithcock
February 11, 2024
Does the 4 Percent Rule for Retirement Income Still Work?

Hi there. Stan The Annuity Man. America's Annuity Agent licensed in all 50 states. I am glad you joined me today for a topic that needs to be addressed. Does the 4% rule still work for retirement income planning? We're going to talk about the 4% rule. We're going to talk about very smart people who have factually and academically destroyed it. And I can do that because I used to be on that side of the table.

‌I know you're saying, "Stan, what are you talking about? You wear the Stan The Annuity Man logos, the hats, the whole thing." I started with Dean Witter; then it turned into Morgan Stanley. Then I went to Paine Webber, which became Union Bank of Switzerland, known as UBS. I love all those firms. But I'm now in the contractually guaranteed-only space, "Will Do. Not Might Do." But I was in the world of the 4% rule. I understood it, was taught it, and talked about it. Still, at the end of the day, I've got a different opinion from when I worked for those ivory tower firms all over this country, New York City, and all over in my previous life, before I became the mythical figure of Stan, not mythical. Stan The Annuity Man. So, we'll get into that 4% rule because you need to hear what I'm getting ready to say.

‌Masters of the Universe

‌Let's talk about "What is the 4% rule, Stan? Sounds good, sounds interesting. Tell me more, tell me more." Was that Grease? "Tell me more, tell me more." Okay, let's talk about the 4% rule. In the world of stocks, ETFs, bonds, markets and all that stuff. What advisors are taught is don't buy an annuity. Don't buy a contractual guarantee. Don't buy something like that. Let me, the advisor, manage it. Let me manage it because I'm the master of the universe, and we'll just peel off 4% of the gains for the income you need, sir. And that they'll run Monte Carlo simulations. No, that's not the race car showing you, "Well, we ran a thousand Monte Carlo simulations, showing markets and blah, blah, blah, and this is how it's going to work." Life doesn't work that way. I mean that's like showing me an exercise plan. I have to implement the exercise plan. That's not going to happen either.

‌The point is, when you're coming toward retirement, chapter two, three laps out of four, four being retirement, you're at three and a half. You're rounding the corner, and you can see the finish line. The 4% rule works like a charm in a bull market, but when it doesn't work is when it's choppy, and there are things happening in the world that can make markets go up and down, and you don't have time to get toward retirement in chapter two of your life to recover from a market loss period.

‌What's Your Age?

‌I had a conversation today, and he was talking about annuities. He said, "Should I own an annuity?" I said, "How old are you?" And he said, he's in his 40s. "No, you shouldn't." You should own stocks and all those things and all the growth things because you have time for it to recover. The 4% rule, in my opinion, and I'm getting ready to tell you who else's opinion which matters, is dead because of the volatility of the markets.

‌Wade Pfau

‌If you have one or two years where you've lost a lot of money in the markets, the 4% rule is killing you because you've got to take money out as you're losing money. Don't trust me on this. The smart people in the room with the ascots and got the jackets with the elbow protectors, and they're in the ivory tower and really nice offices with a receptionist that brings them coffee every morning, those people like Wade Pfau, who's been on my Fun With Annuities podcast, P-F-A-U. If you want to pull it up, he has factually destroyed the 4% sales pitch, the 4% rule. He's like, "Does it work?" If you want to dive deep into and listen to the podcast and how he explains it, I suggest you do that or buy his books on Amazon, Wade Pfau.

‌The 4% Rule Is Dead

‌The 4% rule is dead in my opinion, and Wade's opinion and others' opinion. He said, "But wait, why am I still hearing this? Why am I still hearing? Yes, the 4% rule still works. Stick with the 4% rule." Think logically; the person managing your money is making a fee for managing the money, right? It makes sense; if it's disclosed, nothing is wrong with that. When annuities for lifetime income that replace the 4% rule are put in place, you cannot charge a fee on Immediate Annuity. You cannot charge a fee on a Deferred Income Annuity. You cannot charge a fee on a Qualified Longevity Annuity Contract. You should never charge a fee on an Income Rider; some people do. For lifetime income, those are contractually guaranteed transfers of risk for as long as you are breathing. You do not charge fees on that. That's why that's not being recommended because those assets are taken out of what they're charging a fee on.

‌The other thing and this is nothing against the masters of the universe that are managing money. When you're in that world, you believe that you know and can do it. You believe that you are the man. You believe that you are the master of the universe. You have to believe it to go into it and to do it. And historically, there are arguments for it. There are historically great returns in the stock market. I have nothing against that. And you should keep some of the markets if that's what you want to do. But when you get close to chapter two and retirement and pivoting and going and doing your thing and taking care of yourself and taking risk off the table, to me, that's when you need to pivot away fork in the road moment from the 4% rule and put that lifetime income guaranteed floor, that income floor in place to combine with the income you're getting from the other annuity that you own, which is Social Security, which is the best inflation annuity on the planet.

‌Annuity Types

‌And if your employer has provided you with a pension, that's the second annuity that you have for lifetime income. Do not depend on the 4% rule. Here's another reason why. If you have the income floor in place contractually with lifetime income annuities, there are four different types. Immediate Annuities, Deferred Income Annuities, Qualified Longevity Annuity Contracts, Income Riders. "Not just one annuity, I hate all annuities, Stan." And we can set it up so that 100% of any unused money goes to your beneficiaries, not the annuity company. "So, the annuity company won't keep the money?" I hate it when people say that. When people say, "Well, I'd never buy an annuity because the annuity company keeps the money." That's one of 40 ways to structure it, Chester; we will structure it so that the money you worked hard for will not go poof. It's going to go to your beneficiaries.

‌But what I was going to say, which is very important, is that if you put that income floor in place contractually that you know is going to be there, you know it will happen. It has nothing to do with the markets. Guess what? You will be a better investor because you don't have to disrupt the investments to take the 4% out in a down year. Does that make sense? It should make sense because it does make sense, period. So, put the contractually guaranteed floor in place and then invest the money. You'll be a better investor, trust me. Trust me on that. Think about it. And when you need the income floor, look at what you need, and you can do a reverse engineer quote on my site using our calculators to use as little money as possible contractually to solve for that goal. And if there's inflation in the future, you need to fill in another gap, you go in and do it again; you do a reverse engineer quote to solve for that specific dollar amount.

‌So, let me declare right now as Stan The Annuity Man, America's Annuity Agent, licensed in all 50 states with the backing of Wade Pfau, smart guy in the room, the 4% rule is officially dead. The 4% rule is done. The 4% rule needs to be buried. The 4% rule needs to be replaced by contractually guaranteed lifetime income, using annuity transfer risk strategies with A-plus rated carriers or better for a lifetime income. And if that happens and it will happen because I'm going to pound the table out here too. Make sure it happens; you'll be a better investor.

‌Boy, I got going, didn't I? Yeah, and the caffeine's wearing off. My name's Stan The Annuity Man. Thank you so much for joining me, and I'll see you next time.

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