A few years ago, Bill Bengen, the originator of the safe withdrawal research that led to what is now known as the 4 percent rule (he never called it that), gave an interview to Forbes in which he pointed out that even with a 4.5 percent initial withdrawal rate, 96 percent of the time, after 30 years, the original starting value was intact. This inspired my friends Dr. Wade Pfau and Michael Kitces to have a conversation. Dr. Pfau crunched some numbers, which were shared on his blog, Retirement Researcher and on Kitces’ Nerd’s Eye View.
The median nominal value after 30 years of spending (real) of 4.5 percent was 4.6 times the starting value. Almost 70 percent of the results showed a terminal value with the purchasing power of the starting value, or more.
One way to look at this is that the more conservative you are in your assumptions in an effort to reduce the odds a client will need to adapt, the greater the odds they will be giving their heirs the ability to do more financially because the client did less.
That may be the approach they wish to take, but they should choose it based on good information not statistics that make something good—a long life—sound like something bad.
Instead of trying to prevent the client from needing to adapt, perhaps it would be informative to assess the types of adaptations they are capable of making and helping them shore up their adaptability. It is not a “10 percent chance you will run out of money at age 95”. It’s a “10 percent chance you will need to make an adjustment between now and age 95, so let’s explore what those adjustments might be and when we would make them.”
Financial planning is an ongoing process, not a one-time set and forget it event. Financial planning should help people use their money to make the most of their life, not use their life to make money.
Dan Moisand, CFP, has been featured as one of America’s top independent financial advisors by Financial Planning, Financial Advisor, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager and Worth magazines. He practices in Melbourne, Fla. You can reach him at [email protected].