Weekend Reading: Debunking The 4% Rule Edition

The 4% rule is a framework to think about how to safely draw down your retirement savings without fear of outliving your money. It was developed in 1994 by financial advisor William Bengen, who concluded that retirees could safely withdraw 4% annually from their portfolio over a 30 year period without running out of money.

Critics of the 4% rule argue that it doesn’t hold up in today’s environment because, one, bond yields are so low, and two, because it fails to account for rising expenses (inflation) and investment fees (costs matter). We’re also living longer, and there’s a movement to want to retire earlier. So shouldn’t that mean a safe withdrawal rate of much less than 4%?

Financial planning expert Michael Kitces takes the opposite view. He says there’s a highly probable chance that retirees using the 4% rule will come to the end of 30 years with even more money than they started with, and an extremely low chance they’ll spend their entire nest egg.

The problem lies in the data and testing for the absolute worst case scenarios, which in Bengen’s research included the Great Depression. Bengen looked at rolling 30-year periods to test the safe withdrawal rate and found the worst case scenario was retiring right before the Great Depression in 1929. Even with that terrible timing, a retiree could safely withdraw 4.15% of his or her portfolio.

Kitces broadened the data set and found two more ‘worst case scenarios’ which included 1907 and 1966. But what was interesting is the average safe withdrawal rate throughout every available period in the data set was 6% to 6.5%.

Even more remarkable, when starting with a $1M portfolio and using the 4 percent rule, retirees finished with the original million 96% of the time.

“Historical safe withdrawal rates aren’t based on historical averages. They’re based on historical worst case scenarios.” – Michael Kitces

If you’re interested in hearing more from Michael Kitces debunking the 4% rule then I highly recommend watching this in-depth interview Michael did on the Bigger Pockets Money podcast. It’s long (80 minutes) but well worth your time:

This Week’s Recap:

On Wednesday I offered some tips for those who are renewing your mortgage this year. 

Many thanks to Erica Alini of Global News for including that post in her latest Money123 newsletter.

On Friday I looked at tax loss harvesting both for the do-it-yourself investor and with a robo advisor.

I’ve had an incredibly frustrating experience with TD Direct Investing this week. I’ve been patiently waiting for my LIRA to be set up, and saw the funds had finally arrived on Monday. However, I could only see the funds on the EasyWeb banking side. When I clicked over to WebBroker there was no LIRA account to be found. 

I called TD Direct and got through to a representative after 90 minutes on hold. He could see the funds, but couldn’t understand why it wasn’t showing up for me in WebBroker and transferred me to technical support. More time on hold, and the technician was of no help. I requested a call back and finally received one on Friday. Again, no help. 

The good news is that while on the phone I managed to place a trade and buy $134,000 worth of VEQT. The rep was even ‘kind’ enough to waive the $43 fee for placing a trade over the phone. Yeesh.

Promo of the Week:

As most of you know, the deadline to file your 2019 taxes has been extended to June 1st, and the payment date for any taxes owing has been extended to September 1st.

I filed my taxes a few weeks ago and was happy to see a substantial refund of around $1,800. A large portion of that refund – $888 to be exact – was thanks to the new Climate Action Incentive tax credit.

With many Canadians struggling with their finances due to the COVID-19 pandemic, I’m highlighting the carbon rebate as a way for Canadians to receive a significant chunk of change back when they file their taxes.

Residents of Alberta, Saskatchewan, Manitoba, and Ontario can claim the carbon rebate when filing their 2019 tax return. If you’ve already filed your taxes, don’t worry – you can still apply retroactively. It may result in a few hundred extra dollars in your pocket.

For example, an Ontario family of 4 would receive $448 this year and $2,061 by 2022. Someone in Saskatchewan would get even more. A family of 4 receives $809 this year and $4,066 by 2022.

The climate action incentive is a tax on consumption, so the more you conserve, the more you’ll get back in rebates. To see how much you’ll get, use this handy rebate calculator.

Here are some key facts about the carbon tax and rebate:

• Eight out of 10 families get more money back than they pay in tax.
• As the carbon tax rises, the amount rebated to families grows. Next year, you’ll get even more money back.
• It’s the lowest-cost way to reduce our emissions.
• Carbon pollution shouldn’t be free. A carbon tax makes polluters pay, while giving money back to families.
• It gives people the freedom to choose whether to change their behaviour.

Weekend Reading:

Our friends at Credit Card Genius share a helpful story on getting a credit card insurance refund.

Female-dominated service-sector jobs were among the first to disappear due to the COVID-19 pandemic and stay-at-home orders. One expert calls the downturn our first ever “she-session”.

I enjoyed this conversation between My Own Advisor’s Mark Seed and fee-only planner Steve Bridge about getting through financial emergencies.

Wise words from Jonathan Clements (as usual). He says it’s a scary time to own stocks, but for long-term investors who want their portfolio to clock significant gains, there’s simply no alternative.

The Financial Post’s Ted Rechtshaffen wonders why employers make pension plans such a mystery for their employees:

“The largest frustration came from employees who asked their HR department for a pension analysis that includes information about the value of their pension, and options for how to draw on the pension. In many cases, companies have changed their policy to only allow one request a year or in some cases even less than that.”

The always thoughtful Morgan Housel shares some lessons learned over the past few months, including how some of the lowest paid workers are the most essential.

What happens when distressed markets don’t give you distressed prices? Ben Carlson offers his thoughts on why Warren Buffett didn’t make a big purchase during the stock market crash.

Speaking of Buffett, downtown Josh Brown said a different version of the Oracle of Omaha delivered the annual shareholders address – a 4.5 hour live-streamed event”

“Watching a man who’s already given the world so much literally will himself through hours and hours of this at almost 90 years old was pretty tough.”

Of Dollars and Data blogger Nick Maggiulli shares a different framework for thinking about equity investing.

Michael Batnick and Josh Brown talk through whether there is any limit to how much money the Fed and Treasury can throw at the economy, and if we even have a choice:

Universal Basic Income was an idea that lived on the political margins for years. Then the pandemic changed everything. Here’s how a Universal Basic Income can save the economy.

Michael James on Money calculates his retirement glidepath, or his plan for investing and spending in retirement.

Finally, Wealthsimple made some changes to its portfolios last year to better weather a downturn. Here’s what they did and why it worked.

Have a great weekend, everyone!