Have you heard of the 4 percent rule? I’m guessing you have as it seems to be some magical number espoused by traditional financial advisors and bloggers alike.
The idea is that you should safely be able to withdraw 4 percent of your portfolio to live on for retirement. Theoretically the 4 percent is based on the idea that, over time, portfolio yield should outperform 4 percent and result in principal preservation.
Is it really that simple? Maybe it is. Maybe that’s all you need to do and it will work out for you. As you may have guessed, I’m more than a little skeptical of the rule myself.
Why? Well, for one thing, I’m a real estate guy. I like income producing assets with tax benefits that I can see, touch and feel. Admittedly, that’s just my bias.
The bigger problem with the 4 percent rule is that it is based on old data. Specifically, the modeling uses data from 1926 to 1976. To me, that’s a little concerning.
You see, the underlying assumptions of the 4 percent rule are that most of the most of the portfolio income is produced from dividends and fixed income.
What is fixed income? Fixed income comes from bonds of course and bond yields are reflective of interest rates. I don’t need to remind you that we are at historical low interest rate levels now and our president is advocating for negative rates.
How does that make you feel about the 4 percent rule now? It makes me very concerned for my high-paid professional colleagues—doctors, lawyers and engineers who are following the 4 percent paradigm like it is religion. While it may work out, it sure doesn’t sound like a risk that I would want to take.
We live in unparalleled times. How in the world can we use hundred year old data to guide us into retirement? No way I’m doing that. But the problem is that most of our colleagues will and all we can do is watch them like an accident ready to happen, hoping they will survive.
In the meantime, we need to continue to educate ourselves. Financial education is our best weapon defense against going broke.
In line with that, my guest on Wealth Formula Podcast today is an author and educator that I have invited to teach us about the biggest financial sector on earth: the bond market. Without understanding the bond market, you cannot understand the economy. Don’t miss this interview!
Russell Wild is the principal of Global Portfolios, an investment advisory firm based in Philadelphia, Pennsylvania. He is one of few wealth managers in the nation who is both fee-only (takes no commissions) and welcomes clients of both substantial and modest means. In addition to the fun he has with his financial calculator, Wild is also an accomplished writer who helps readers understand, and make wise choices about their money. His articles have appeared in many national publications, including AARP The Magazine; Consumer Reports, Kiplinger’s Personal Finance, Reader’s Digest, and The Saturday Evening Post. He also contributes to professional financial journals, such as Financial Planning.
The author or co-author of two dozen nonfiction books, Wild’s most recent books, Investing in Bonds for Dummies (2016), and Investing in ETFs for Dummies (2016) — are updated and condensed “portable editions” of his Bond Investing for Dummies and Exchange-Traded Funds for Dummies, which both had second editions published in 2012. Prior books include Index Investing for Dummies (2009), and One Year to An Organized Financial Life (co-authored with Regina Leeds, Perseus, 2010). Before those, he wrote The Unofficial Guide to Getting a Divorce, along with attorney Susan Ellis Wild, his ex-wife – yeah, you read that right (Wiley, 2005). No stranger to the mass media, Wild has shared his wit and wisdom on such shows as Oprah, The View, CBS Morning News, Good Day New York, and in hundreds of radio interviews.
Wild holds a Master of Business Administration (MBA) degree in international management and finance from Arizona State’s Thunderbird School of Global Management (consistently ranked the #1 school for international business by both U.S. News and World Report and the Wall Street Journal); a Bachelor of Science (BS) degree in business/economics magna cum laude from American University in Washington, D.C.; and a graduate certificate in personal financial planning from Moravian College in Bethlehem, Pennsylvania (America’s sixth oldest college). A member of the National Association of Personal Financial Advisors (NAPFA) since 2002, Wild is also a long-time member and a past president of the American Society of Journalists and Authors (ASJA).
- Russell’s background
- What are Bonds?
- The role of bonds in traditional investing portfolios
- What are Junk Bonds?
- Russell talks about the 4% Rule
- Global Portfolios: Globalportfolios.net