How the 4% Rule Undermines Advisors and Clients

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Do-it-yourself investment tools that help individuals build their retirement savings are perceived threats to the advisory business model. But building a nest egg is not where advisors add their greatest value.

Rather, advisors should distinguish themselves by managing the distribution of those retirement savings. And the complexity of this function cannot be displaced by simple rules of thumb.

When building retirement savings, portfolio diversification and consistent account contributions will serve an individual well. Advisors play a key role in managing clients’ behavioral impulses so that they don’t veer from that model, but these basic guidelines work.

When it comes to drawing down a portfolio, however, simple rules are deeply flawed. Investors who choose to follow rules of thumb do so at their own peril.

Dissecting the 4% rule

The golden rule of withdrawal rates is, of course, the “4% rule.” It suggests a simple way to draw down your nest egg by withdrawing 4% during the first year. In following years, adjust that withdrawal amount in line with annual inflation, and you should be able to safely fund a 30-year retirement.