Making Your Money Last

Stop 'Dollar-Cost Ravaging' Your Portfolio in Retirement

Retirees who live by the 4% rule and who keep pulling out money of their portfolios trusting that they won't run out, could end up regretting it.

It’s been more than seven years since Wade Pfau, one of the top professionals in retirement research, wrote a column for MarketWatch urging readers to “Say Goodbye to the 4% Rule.”

In it, Pfau suggests that the “rule” — which is more of a theory, really — made too many assumptions based on old numbers that didn’t necessarily translate to modern markets — or modern investors. A few months later, in 2013, Pfau and fellow retirement professionals Michael Finke and David Blanchett published their study, “The 4 Percent Rule is Not Safe in a Low-Yield World,” further demonstrating why advisers who base their clients’ withdrawal plans on historical data could be doing them a disservice.

Since then, the topic has been debated in just about every financial forum out there (including this one). Not everyone believes the 4% rule must be completely discarded, mind you. But I think most retirement professionals would say it is, at most, a guideline or starting point for determining what’s appropriate for each individual’s needs — not a hard-and-fast, one-size-fits-all rule.

And yet, I still hear from retirees and pre-retirees regularly who are using it without question to determine a sustainable portfolio withdrawal rate in retirement. Or their advisers are.

How the 4% Rule Works

If you aren’t familiar with the 4% rule, it asserts that retirees won’t run out of money as long as they withdraw approximately 4% from their portfolios, adjusted for inflation, each year. It was created in the 1990s, based on stock and bond returns over a 50-year period, from 1926 to 1976. And it made sense for many folks — for a while.

But times change, and so does investing. For one thing, the 4% rule came about when interest rates were much higher. Back then, you could get a Treasury note that was paying 5% or 6%. Now, the 10-year Treasury rate is at less than 2%, and there are no signs that it’s going to be rising significantly in the near future.

That means many older investors are looking to stocks to make their money, and often they’re taking more risk. This type of strategy may work out while the market is good, or even if there’s an occasional dip. But if your plan is to withdraw 4% from your retirement accounts every year and there’s a drastic drop in the market, suddenly you could be taking 4% out of a portfolio that’s been cut by a third or even half.

What Happens When a Downturn Hits the Market?

If you run into a bear market early in retirement and continue withdrawing the same amount, you’ll have to sell more stocks to get there. And you’ll risk putting your portfolio into a downward spiral.

Even if the market eventually recovers, your portfolio might not. You may have to downsize your withdrawals — and your planned lifestyle — or risk running out of money. Add in increased longevity, the possibility of higher taxes in the future and, of course, the fees you might be paying to manage those stocks, and you can see why the 4% faithful might want to rethink their withdrawal strategy — and their overall attitude toward retirement income.

To Thrive, Switch Your Focus to Income Instead

That requires a significant mindset shift, from “How much return do I hope to get from my portfolio?” to “How much reliable income can I count on?” And instead of working with a generic withdrawal percentage, it means choosing investments — high dividend-paying stocks, fixed income instruments, annuities, etc. — that will produce the dollar amount you need ($2,000, $3,000, $5,000 or more) month after month and year after year.

Most investors — and some advisers — aren’t well-trained for this. Accumulation gets all the glory in retirement planning, but it’s a thoughtful decumulation process that can make your retirement a true success.

In our practice, we often use a mountain-climbing analogy to get this message across. While climbers may feel they’ve conquered the most difficult part of their quest when they reach the summit, and that’s when they tend to celebrate, according to a 2017 study, 75% of dangerous falls occur on the descent.

It’s not a lot different when you’re working toward retirement. Most people dream of the day when they’ve accumulated enough money to move on to the next phase of their lives, and they diligently save for that goal. But without proper planning for the “descent” — when instead of contributing to your retirement accounts, you’re pulling money out — it’s easy to make mistakes. And dropping your guard could be devastating.

Retirees Need to Rein in Their Risk

In the financial world, putting your portfolio at risk by steadily withdrawing funds during retirement, regardless of market conditions, has been referred to as “dollar-cost ravaging” (a bit of wordplay based on the accumulation strategy of dollar-cost averaging). And it’s a true risk for retirees.

Limiting your losses at this stage in your life is as critical as growing your money when you’re working. If you’re near or in retirement, and you’re still going with a 50-50 or even 40-60 stock-bond mix or all S&P 500 stocks, it’s time to change your focus to income. Talk to your financial professional about adjusting your portfolio. And say goodbye to the 4% rule’s potential for retirement peril.

Kim Franke-Folstad contributed to this article.

About the Author

Jason Lambert, Investment Adviser Representative

President, CEO, Northwest Financial and Tax Solutions

Jason Lambert is president, CEO and portfolio manager of Vancouver, Wash.-based Northwest Financial & Tax Solutions ( He co-hosts "The Retirement Trailhead" radio show, and he hosts the "Peaks and Valleys" podcast. He holds a degree in finance from Auburn University.

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