You've gotta have layers to your portfolio. You've gotta have layers to your strategy so that you can have a more predictable withdrawal rate. Welcome to how to retire on time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show's all about the nitty gritty.

That said, remember this is just a show, not financial advice. Do your research. Now, with me in the studio is David Frantz, and today we're gonna read your questions. As always, you text your questions to (913) 363-1234, and we'll answer them on the show. David, what do we got today?

Hey, Mike. What's a safe withdrawal rate from my retirement accounts so I don't run out of money? It's an interesting question because there is no actual standard. The rule of thumb is four percent.

Mhmm.

But during times when interest rates were low and bond funds were not keeping up with their historical averages, it was lowered. At some point, people were saying it's 3%. And then when bond funds became more competitive, the bond market being really the foundation of Americans' economy, My opinion, but Yeah. A lot of research to back that opinion up. Yeah.

Then it was like 5%.

5% rule.

Yeah. I've seen articles that will say, say goodbye to the 4% rule. It's now 6%. One of my favorites was, allegedly, Dave Ramsey had said, say or you could pull out 10% from your portfolio. Uh-huh.

Now, I wanted to defend Dave Ramsey for just a second. Okay?

Sure.

The person that was writing the article took his comment out of context to write the article and then go from there. Basically, what Dave was saying was if your performance has outperformed, like, you're ahead of your projections, if you took out a large, like, distribution one year, got you back into kind of a, you know, harmony with your projections, but you took the family out, the whole extended family on, like, some major vacation, that's not a bad idea. And I agree with Dave in that point that you should have flexibility with your withdrawal rate. So don't believe everything you see on the Internet. Think Dave or no.

Abraham Lincoln said that.

Yeah. No? No doubt.

But a safe withdrawal rate is the wrong question in that it depends more on how much risk you're taking and the volatility or the the the roller coaster that you're on.

Okay.

Alright. So hear me out on this.

Okay.

If if the markets averaged 7.4%, I think this was the number, and it was like the first year was 3% up, and the second year was like 30% down, then the fourth year was, like or third year or fourth year, you know, you got 12%, then 20%, then 2% over a a a typical seven year cycle where there's a market crash, but the other the others are okay.

Okay.

It was like 7.4%.

Alright.

Those that pattern, that those returns are going to increase or slow down your cash growth differently than something where it's, like, maybe four, five, 6%, and that was the range. Okay?

Okay.

So your withdrawal rate is gonna be more sensitive to the investments that you actually have. In that, you may be able to increase your withdrawal rate if you have more predictable returns. For example, like, I don't know, MYGAs, and CDs, and treasuries, and you've you've got your projections, they're all fixed, but you're slowly draining your portfolio because you've amassed enough portfolio, but you have very predictable returns. Maybe you end up doing a 5% return or withdrawal or a 6% withdrawal because you have predictability on the sequence of the return. But if you're subject to the market, no one knows the future of the market, and the markets go flat, you better not have taken a 6% withdrawal rate out because the sequence or the order of the returns that then ensued after your retirement Uh-huh.

Screwed you over.

Okay.

See, what a lot of people don't realize is the withdrawal rate is the best guess to handle the volatility, the roller coaster in the future. That makes sense.

Yeah. Sort of. So the sequence of the returns, so if there's like a 3% return and then a negative and then a only a 4% positive, but then like a that that sequence, whatever that sequence is, that matters

Yeah. Every year. And because you don't know what the market's going to do Alright. It's kinda like those game shows you see where someone's like crossing the the bridge, and then they have to jump across a a gap Uh-huh. Into a door, and they hope it's the door that's paper because the other two are wood.

Oh. And if you run into the door of wood, fall off.

Okay.

Right? You don't know what you're gonna get the next year. If you get a good year, then great. Your four percent withdrawal rate is fine. If you get a bad year, your four percent withdrawal rate's actually going to hurt you.

It's going to accentuate those losses. Right. So the the way to think about this is you've got to have layers to your portfolio. You've got to have layers to your strategy Mhmm. So that you can have a more predictable withdrawal rate.

Here's here's what I mean by that. So there's so many layers.

Yeah. It's a club sandwich.

Yeah. Let's let's take this first one. Okay? So if you're starting with if you're starting with the 4% rule

Okay.

And inflation gets out of control, what's your new withdrawal rate? Is it still 4%? Are you gonna adjust it?

Gosh. Were

you in the market? And did the market offset your inflation so it's 4% of a higher rate? Right? Do you see that one side?

Yeah. So if inflation is, like, five or 6% and I'm withdrawing four, then I'm I'm losing more money?

Well, if you're if the stocks in your portfolio grew with inflation Uh-huh. You're keeping up with it.

Oh, then all is well, sort of.

So that that kind of makes sense. Uh-huh. But let me explain this way. The there's a lot of cherry pick data out there right now. Mhmm.

A lot of people say, well, you know, if I had $2,000,000 or $3,000,000, this is what I would do. And I talk about dollar cost averaging out. Maybe that works, maybe it doesn't. If if your assets go down 30%, let's say, a year, and you take out 4%, here's the compounding difference. Mhmm.

So if you're if you got a million dollars, okay, and you lose 30%, now you're down to 700,000. Mhmm. That would require a, 43% return just to break even, just to get back to the million dollars. That's if you don't touch it.

Mhmm.

Now, you're down 700,000 and you took out 4%, you would need a 50% return just to get back to a million dollars. That's that's pretty tough. That taking out 4% in exchange for a 7% return. That's the the difference.

Okay.

And that is that seems you just break even. So in my mind, when I talk about layers and strategies, I think the first one is just to do a conservative portfolio projection, let's say around 6%.

Mhmm.

And then see where your plan ends up. Yeah. Just the general flow of things. So instead of getting hung up on a 4% withdrawal rate, let's say instead you're saying, well, I I have this much money and this is how much I want after taxes, and let's assume this effective tax rate. Social Security is gonna start in three years, and I wanna retire now.

And what would all that look like? Maybe the first couple of years, you're taking out 7% or 6%.

Mhmm.

But then when Social Security kicks on, it's like 3%. Do you see how we're not getting hung up Yeah. Necessarily on the withdrawal rate? We're trying to bring context into the situation. Mhmm.

And then you could say, well, gosh. You know, if the markets went down, 7% withdrawal is pretty steep. What if I did a CD ladder? I did a treasury ladder? I did a MIGA ladder?

Multi year guaranteed annuity. I don't care. Yeah. You don't have market risk for those years and those withdrawals. So because we brought stability into those specific years, we then can add, I guess, more assets to the risk or the growth side of the portfolio because if it goes down, your income's coming from a place that doesn't accentuate those losses.

Right. Right. Right.

So we're kinda making mini portfolios based on the plan, and then we acknowledge over time that inflation might get away. What if Social Security doesn't keep up with inflation? What if you have a pension and the pension doesn't increase over time? Then your income from your assets will probably take on more of of the retirement burden. So the withdrawal rate may end up in your eighties, nineties to be like 6%.

But we're less concerned about the withdrawal rate and more about the general projection, knowing that some of our portfolio has other assets in other places, not just in the stock bond market. Yeah. That makes sense. Can there there were several things I hit on all at once.

So many layers. Yeah. So it sounds like we if all your eggs are in one basket, you that could spell trouble.

If all your eggs are in one basket, you're on one roller coaster.

And so you can either ride high with the market and just, hey, times are great and market's up, I can take income. No problem. Yep. But you Then what happens when the roller coaster goes down?

The more higher growth potential you have, the deeper the ditch can be. That's how it works. You cannot separate risk and potential reward. And we're so used to risk equals reward because, I mean, monkeys throwing darts Mhmm. Could have done a good job in the in the economy we've experienced over the last ten to fifteen years.

Oh, yeah.

So you have to ask yourself, you know, how long is this going to keep going? Mhmm. And then where is the income going to come from. And based on the risk of that portfolio, that will probably affect any sort of withdrawal rate red flags. And if you have one or two or three higher withdrawal rate red flags, then you'd consider putting something into a safer, more predictable part of your portfolio in anticipation for those specific years.

Less risk, you could have a higher withdrawal rate. More risk, It's fine if if the markets go up. Yeah. It's not fine if the markets go down, and it's not that people get hurt when markets go up. It's the people get their legs cut out from underneath them when the markets go down.

Mhmm. So think about your strategies. If you know your income each year, then ask yourself, if in this year the markets were to go up, I would pull income from these places. If the markets were to go down, I would take income from those places. Yeah.

That kind of helps, in my mind, the withdrawal rate. I think it's important to understand generally what the withdrawal rate is, but I think it's okay to blend a higher rate in some years, like your travel years, your preferred social security, or something to that effect, while acknowledging maybe a lower withdrawal rate once all of those mechanisms are turned on, and then paying attention to the potential withdrawal rate later on in retirement because inflation is the slowed erosion of retirement planning when it comes to longevity.