Broker Check

EP5: The 4% Rule

February 04, 2020

Peter:                           Welcome into GulfCoast Financial with John Kuykendall, your resource for a common sense approach to planning for a more stable, secure financial future. Challenging the status quos and the talking heads from Wall Street, John will lead the way in informing you on what it takes to achieve your financial goals here on the program. John, welcome back in.


John:                           Thank you, Peter. Great to be here.


Peter:                           Always a pleasure, John. We appreciate the time that you share with us, the guidance, the knowledge, the insights that your years of experience, decades of experience in financial services has taught you and what you have seen it does truly take for workers, savers, investors to achieve their goals and what they envision retirement to be all about. It certainly is a challenging transition to make, isn’t it?


John:                           Oh, it certainly is. Retirement is one of the hardest things I think to get used to of anything we do.


Peter:                           John, on today’s program you have brought along some notes here and you want to discuss an old adage on how much income we can create in retirement. There have been a few guidelines, a few loose rules for this, but essentially, this is the question that retirees are going to need to answer, isn’t it?


John:                           Oh, yes. Yeah, we really need to know how much income we’re going to have in retirement, and we really need to be on a budget to know how much we can spend.


Peter:                           Again, if you have questions or concerns about your own personal planning, John not only provides the information here on the program, but also to individuals. If you are working and saving your way toward retirement or even already retired and you want to make sure that you’ve got a plan for how to build for steady, consistent income throughout retirement, pick up the phone and give GulfCoast Financial a call, 386-755-9018. That’s 386-755-9018. You can also visit online, It is a dot net domain name, or text GCF for GulfCoast Financial to 555-888.


You can submit questions there as well. We might answer and address a few of those on the program or again, for that individual strategy session, give a call, 386-755-9018. I guess, let’s take the 30,000-foot view approach here, John. A lot of retirees are really concerned with running out of money. This boils down to a question of annual or monthly cash flow, doesn’t it?


John:                           Oh, yes. One of the things is, when we reach retirement, we don’t have a check coming in anymore. That paycheck that we used to get every week, every month, every other week, is gone. It leaves about 73% of the people in a recent survey were concerned about running out of money during retirement.


Peter:                           Is it really the money, John or is it the income that the money is capable of producing for us?


John:                           I think it’s the income. We accumulate during our working years and then we’re in the distribution age during our retirement years. It’s that predictable income that’s coming in every month that they’re really concerned about running out of.


Peter:                           It’s not just the direction of money that changes. We’re used to making deposits, watching accounts grow and now we start making withdrawals and potentially see accounts begin to dwindle or shrink just a little bit. That’s got to have a psychological component in the brain that makes us have a little bit of a concern of running out eventually when we’re trying make this finite amount of money last for an unknown amount of time.


John:                           I think that that’s true. There’s something that clicks on and says I’m going to run out of money and I really get either ultraconservative or some people don’t have that problem and they spend too much and then they do run out of money. What we have to do is get a mindset that we’re going to figure out a way that we’re going to have enough money coming in predictably to last us our lifetime, but also, we want to be able to do the things we want to do in retirement. 60s are the go-go years, 70 are slow-go and 80 are no-go. That is being pushed out now to where actually, 70s is still the go-go years and we’re wanting to travel and spend and do the things that we haven’t been able to do while we’re working all those years.


Peter:                           Healthy and active, but we’ve got to have a budget to cover it, right?


John:                           Yeah, that’s right.


Peter:                           It’s a blessing and a curse, this double-edged sword. A generation or two ago, John, we didn’t need to worry about this cash flow and how much we could generate. Our companies used to take care of that for us.


John:                           That’s right. Everybody had a defined benefit plan that was a pension. They got a monthly check. In the ‘80s, we did away with that and companies and the government put the retirement responsibility back on the individual. While they were building up that 401(k) or working on their individual retirement accounts, now they’ve got to have a way to get predictable income that will last them for life.


Peter:                           Is there any way of really telling, given a lump sum in the retirement investment account what that income is going to be? There have been guidelines or proposed methods of calculating that, correct?


John:                           Yes, there has been. Over the years, it started back in the ‘70s, I think. There was a study that was done and an individual came up and said that 4% would be what you could take out of your account without running out of money. The whole economic environment, the internet, all the financial news, and the fact that we are spending – we’re living better, living longer, want to live better and do more things, that’s all changed that 4% rule.


Peter:                           We need to understand what our cash flow is. If it’s reasonable. Do you ever run into individuals, John, that have unreasonable expectations of what that cash flow may be? Hey, the market has always returned 8% so I should be able to take that out of my portfolio pretty easily.


John:                           We have people now that are actually coming to us and they are in jeopardy of running out of money. We’ve had to refinance some homes. Do some things that we normally wouldn’t do in order just to keep them – their head above water and keep them in retirement. A couple of them have actually had to go back to work.


Peter:                           Good thing to understand and attack early to get a plan for this prior to retirement or very early on in retirement, at the least.


John:                           Yeah. We used to talk about the three-legged stool, which was Social Security pensions and then your investments. The problem is we have Social Security and we know how much it’s going to be and we have our investments. As you know, because of the sequence of returns, if I’m talking my money out in a down market, then that money is going to run out a lot quicker than if I was lucky enough to retire in a [00:07:41] market. Those people that are fixing to retire in the near future are probably going to be pulling their money out in a down market because we’re due for this recession at any time. I mean, this is the longest bull run we’ve had in history. It won’t last forever so you have to plan and you have to be ready to do something. We also need to get that third leg, that stool back together so we won’t wobble.


Peter:                           Sure. I mean, just Econ 101, the simple laws of supply and demand through the ‘80s, the ‘90s and so far in the 2000s as the baby boomer generation has been buying equities in large numbers as they contributed to their 401(k) accounts, market prices have gone up. At the peak of this baby boom where we are rapidly approaching, more of those baby boomers become sellers than buyers. Again, Econ 101, when there is more selling and more supply out there, prices go down. On top of regular market cycles, there could be some different pressures being put on the economy and on the government and on our entitlement support systems into future.


John:                           That’s right. You got to remember, Peter, this is the lowest in history that we’ve had taxes. Taxes are an all-time low. Eventually, taxes will have to go up.


Peter:                           Definitely a concern there when we look at the fact that most of those retirement dollars are yet to be taxed. Tax deferred accounts. We have to account for that as well. John, you’ve got a book in your office that’s actually being used across the country by advisors and by investors who are looking to understand how to structure a portfolio and know with more certainty the amount of income that an investment asset can generate for them. You make an offer for a complimentary review, helping people structure such a written retirement income plan, but you also have got that book available that you wanted to provide for folks who come in and want to learn more about this.


John:                           Yeah. We do, Peter. We have a book by David Gaylor. He’s a very recognized advisor out of Georgia who’s written this book, Income Allocation. It is something that we structure our practice around because what it does is it tries to develop the different ways that we can retire and still have that predictable incoming coming in and make sure that we’re not looking at the sequence of return or we’re looking at inflation. We take all those things into effect and that Income Allocation book will tell you how to retire for life.


Peter:                           I’m going to turn into my Billy Mays here, but wait there’s more. John Kuykendall, ladies and gentlemen. He is offering the opportunity not only for a complimentary review, a retirement planning strategy session and to structure that plan with you, get your retirement income plan in writing, but wait, there’s more, also that book, Income Allocation. It’s a great value. It is an essential retirement planning strategy guidebook. Addressing the biggest risks to retirement, market risk, sequence risk, longevity risk, interest rate risk and how to structure a portfolio to specifically address those risks.


If you would like to pick up a copy of the book and come in for that strategy session, pick up the phone right now and give a call, 386-755-9018. That’s 386-755-9018, 386-755-9018. When it comes to our investment dollars, John, there are several different ways that those dollars could generate income for us, correct?


John:                           Oh, yes. Yes. Not only does the dividends that your portfolio is paying, but there are also ways that we can get [00:11:31] because the cash value there will come out tax free. There are also annuities now that will guarantee us the upside, none of the downside, and for no or little fees at all, will give us that predictable income. Also, they will provide a long-term care rider or nursing home rider for us where they will pay double whatever that yearly income was if we ever can find or we need nursing home [00:12:00]. It’s a great way to go.


Peter:                           Again, kind of the Billy Mays, but wait, there’s more. That long-term care protection, it’s such a big issue. That’s the elephant in the room that everybody likes to ignore and act like it isn’t there, but the old ostrich with the head in the sand approach, John, your backside is still exposed. You got to have some plan to address this.


John:                           You have to and because of the actuarial state that actuarially, people weren’t living this long when they came up with the long-term care insurance. Most of the insurance providers have gotten out of the market. What we’ve looked for is ways to provide an income or a one need, but also, at the same time, take care of that other need. It’s a [00:12:43].


Peter:                           It’s problematic for the insurance companies as it was for the individual worrying about their healthcare in the future. The insurance companies underpriced it. They underestimated the number of people who would be needing long-term care and the duration of that care which seems to indicate, John, that this is even more of an important reason why we need to figure out how we are addressing it.


John:                           Yeah. I just met this week with a client who had a long-term care policy they bought a long time ago. They’re in very bad health now. The policy’s gone up tremendously and it will go up every year. 50% this year is what policy went up on their premium and it will go up even more next year. We can’t afford to drop it so we’re trying to maintain it because of the health situation and because of the fact that we can’t do anything else. That’s just one thing.


There are several other companies who have gone into bankruptcy. The premium guarantee companies had to take those over which means that they probably won’t get 100 cents on the dollar if they do have a confinement. We have to look at other ways to maintain our ability to handle that problem, but at the same time, we got to think of the spouse. Because the partner that’s left behind is the one that suffers.


Peter:                           Indeed.


John:                           We were looking at – everybody says well, Medicaid. Medicaid will take care of me. It won’t. We had a situation not too long ago where we had a client who had early onset dementia. He had army retirement, a State of Florida retirement, he had Social Security. When he went into Medicaid, they took all of those and left his wife $1000 dollars and her $800 a month Social Security check to live on.


Peter:                           Yeah. It happened to my wife’s grandparents as well. Grandpa went into a facility, doubled the expenses because that was an additional $3,500, $4,000 a month. The assets got spent down very quickly. Grandma was left with not a whole lot to live on after he passed away for a number of years. It’s a difficult issue to attack, but by understanding how your assets can generate cash flow and adding in some of these additional protections, you can help to begin to insulate yourself from those risks.


Today, we are talking about generating that cash flow. Rabbit hole down there on the long-term care, but it’s an important issue to mention. Figuring out how much cash flow your assets can generate for you is the essential question of retirement. How much income can I rely on? We can have stocks that produce dividends, bonds that produce yields, money in real estate for rental. Savings you can take the interest. The old adage, John, was protect the principal and live off the interest, but in this low interest rate environment, that’s exceedingly difficult.


John:                           It really is. Back in 1971, when I got into banking, we were paying 5% on a savings account.


Peter:                           Not bad.


John:                           Yeah, that wasn’t bad at all in that time. In fact, it was more than a one-year CD. Now we’re down to where we’re at 1% or one and a quarter percent and we’ve been there forever. The feds indicated they’re not going to raise rates again this year. We’re still looking at those low interest rates to last for some time in the future.


Peter:                           You’ve brought along a few charts here and this show $1 million, but math being math, it would work on $100,000 or $10. If we were to take a 4% cash flow from our lump sum, and we’re only earning 1% interest, John, that money runs out in under 30 years. If we do add on historical inflation, it’s under 26 years. Even if we’re earning 4% once we add on inflation and include what that has been, the money still does not last for 30 years. A lot of people’s retirements are lasting longer than 30 years.


John:                           That’s right. Because when we retire at 65 or 62, somewhere in there, there’s an excellent probability that one of that couple is going to last to 95 or longer. It’s just the way that we’re living and the way that we’ve had medical advancements. I was talking to someone the other day and their 84-year-old grandmother just had shoulder surgery. We’re not afraid to operate and to keep people mobile now than we used to be. You wouldn’t think of anybody doing that. I just let it mend. Living longer and we need to provide for that 30, 35, 40-year retirement. We’re going to be retired longer than we worked in most cases.


Peter:                           Yeah. With the low interest rate environment, the old protect the principal, preserve the principal, not only are we not doing that if we are trying to go by that 4% cash flow, we are depleting the principal, exhausting the principal, and as soon as that principal exhausts, so does the income. John, on the other end of the spectrum in the pendulum there, a lot of people are recognizing that and saying, well, I need higher returns and therefore they’re taking risk with their money, but that comes with a whole another set of problems.


John:                           Yeah. The problem is we don’t have time to make up the losses. If I lose 50% in the market when we have this next recession, I have to make a 100% just to break even. From one year losing 50, I have to make 100 the next year to be back to where I was with no gain. At the same time, I’m making monthly withdrawals to live off.


Peter:                           I mean, 50% loss. That’s a huge number. Not that it has not happened. It’s happened close to that twice in the last 15 to 20 years and certainly could happen again. Let’s just look at last year, 2018. The month of December, the market was down close to 15% to 18%, I believe. If you’re taking out income on top of that, let’s say another 4% you’re way, way down. That’s a whole lot of gains that you’ve got to make to recover that.


John:                           Oh, yeah. The thing is, is that, The Wall Street Journal posted an article a couple of years ago that said, the 4% rule was out of date. That it’s really the 1.72 rule. It’s one and three quarters percent is what we should be pulling out of our account to make sure that we have enough to last. We used to show these numbers, Peter, where you would come in, we’d take out 4% and then we’d say, okay, when you die at 85 or 90, we’re going to have $4 million left. What are you going to do with it? That was before we really got sophisticated enough to understand what this sequence of returns, taking the money out in negative markets, what effect it has on the portfolio.


Peter:                           More savvy investors or even those who have understood the benefits of a 401(k), probably are familiar with dollar cost averaging. The inherent advantage that we get when we are putting money in on a consistent basis. Even when the market goes down, if that money goes in at that time, we’re buying low. The sequence of returns risk, John, is the opposite force as money changes in the opposite direction when the market dips. If we’re taking money out, that is a significant disadvantage and increases dramatically the danger of running out of money.


John:                           Oh, yeah. It’s more risky than what we’re talking about with inflation there. It’s just the probability that money is going to run out in less than 25 years, less than 24 years because depending upon how the markets work, you don’t have to have a huge loss to end up with that. Just minor losses in putting your money out have a rippling effect.


Peter:                           Backing up that article that you were citing from The Wall Street Journal, you could do a quick Google search on the new 4% rule and find reports and articles and studies from Wharton School of Business and American College, Morning Star citing all of the issues with that 4% cash flow that most people’s financial plans are based on. Vanguard which is very famous for the do it yourself investor and the calculators and the tools that they offer, you can go on their retirement calculator and calculate out a 4% cash flow.


At the bottom, after you run that calculation, John, it says, there’s a 10% likelihood, probability of running out of money with that 4% rule. I certainly don’t want to be that one in ten that doesn’t understand that and that’s what my plan is based on. Even the rest of the nine out of ten have to be concerned that they might be that one. Probably, you’re living much more conservatively. Not doing the things that they should be doing and enjoying themselves.


John:                           That’s right. The thing about it is we want to make sure that we’re comfortable enough with the income we have coming in that we can still take that trip, go on that vacation. When you retire, every day is Saturday. Normally we spend the most money on Saturday. We need to make sure that one, we’ve got a budget that we understand how much we’re spending and we take into account for those things that we want to do. The second thing is, we don’t want to be so afraid to spend that we miss out on the opportunity to really enjoy retirement.


Peter:                           There are certainly problems with that 4% rule. The 4% rule incepted during a much different set of market conditions, a different interest rate environment, said that you should be able to take 4% cash flow and hopefully not run out of money over a 30-year retirement. The problems are should be and hopefully and the fact that retirement these days oftentimes can extend longer than 30 years. John, you and the team at GulfCoast Financial as well as many advisors across the country are really rethinking retirement from an income planning perspective and finding ways to restructure the portfolio to generate more consistent, stable income.


John:                           Yeah. We call it a private pension. We’re looking for a way to set up a private pension for an individual so that they have a set guaranteed income coming in that with Social Security and the other checks they have coming in, we can give them a pension that will eliminate us from having to pull out all of that investment account early on, or if we get into a down-market we can pull less out of account of the assets so that they will continue to grow or at least stay stagnant, and we’re not going to run out of money sooner. Income allocation, income planning is the buzz word that we use every day and it’s what we really set our whole practice on. It can’t be any more asset accumulation. It can’t be asset allocation. It has to be income planning.


Peter:                           That private pension type of quality, that income allocation, the income plan, this is one of the services that you provide there at GulfCoast Financial. It’s part of the retirement planning review and strategy session that you offer to listeners of this program?


John:                           Oh, yeah. We have a software that we use that will actually, once we input all the information, we can build a strategy so that we can show you where you are right now and then we can try to improve on it, or if you’re already there we’ll tell you, hey, this is – you’ve done great. This is what you should have done. You’re there. All we have to do is live by the plan. The thing about income allocation or income planning is it’s not a one-time deal. Once we get into retirement, we have to continually monitor that income plan to make sure that we’re going to be okay. Every year we recommend a review just to go over the plan and tell people where we are.


Peter:                           On this program, we have reviewed the 4% rule. It’s actually the theory that most retirement plans and projections are based on. If you look on your 401(k) statement and it says you should have this much income by the time you retire. You might want to check those asterisks to see what kind of rate of return that is hypothetically projecting and what kind of income or cash flow rate. That is hypothetically based on – and then understand that those are hypotheticals. Do you want to question those projections? Do you want something that is a little bit more stable and secure and in some cases you can even contractually guarantee the amount of retirement income that your assets can product for you?


The transition translating that money to income and retirement is a difficult problematic process. but John Kuykendall makes it simple there at GulfCoast Financial. Even offering the book, the income allocation guidebook. If you come in for a review and a strategy session, pick up your phone today, give a call, 386-755-9018. That’s 386-755-9018 or you can visit online, Lots of great additional resources there as well. John, you’re always an excellent resource for us here on the program and of course, the listeners throughout the area. Thank you for being here and providing the information and the guidance that you do.


John:                           Thanks for having me, Peter.


Peter:                           Always a pleasure. Every time we get the opportunity to speak with John there from GulfCoast Financial, I encourage you to give him a call. You’ll enjoy the conversation and I promise, leave that strategy session much more informed and educated about where you are and what it’s going to take to get to where you want to go. Putting that plan in place. Reviewing your portfolio. Maximizing Social Security. Minimizing taxes. Understanding the income plan.


The market risks that’s inherent in your portfolio and what your strategy is to address some of the biggest financial challenges throughout retirement. Give a call, 386-755-9018. He makes it easy. It’s a complimentary. No cost, no obligation meeting and he’s even got that book income allocation that he’ll put in your hands, 386-755-9018. We look forward to hearing from you soon or talking with you again next week on GulfCoast Financial.