You’ve probably heard of the “4% Rule.” It has been popularized by investment planners and financial advisers for decades.
The 4% Rule is based on a 1998 study by three finance professors at Trinity College in Texas. It showed a high probability of success (not running out of money) in retirement, so long as an investor could live off of 4% of their portfolio (at the start of retirement).
That 4% safe withdrawal rate (“SWR”) has been used as a target for investors looking to retire ever since. The study showed that over a 30-year period, an investor with a well-balanced portfolio – 60% in stocks and 40% in bonds – would run out of money less than 5% of the time if they stuck to that 4% SWR.
Ninety-five percent is a high success rate for retirees. Most are willing to take that bet, especially if it means they can stop working. And, as history has shown, if your nest egg is large enough that you can reduce your safe withdrawal rate to 3%, you will have a 100% success rate in retirement.
Let’s stop here for a moment.
Here’s what most people don’t realize about the 4% Rule: It often leaves retirees with more money than they started with.
Believe it or not, you (probably) should be spending more money in retirement. Why that is – and what you might spend it on – is what we’ll look at today.
Faster Than 4%
The data shows that around a 3% SWR has historically worked in every 30-year period over the past century. And yet, because of fears of the uncertain future, a lot of people continue to work for years or penny-pinch in retirement so that they can push that SWR level down even further.
Having a SWR of 1% to 2% makes them feel good. But, in reality, all of that effort is likely wasted. These people would be much better off enjoying life with a higher SWR.
When researchers test retirement plans using the 4% Rule, most retirees don’t end up in a “die with zero” scenario. In fact, the opposite happens.
When Monte Carlo simulations are run with 4% SWR – essentially thousands of “what if” scenarios – more people end up with more money after 30 years than they started with. That’s because the U.S. stock market tends to compound at a rate well above 4%.
Financial planner Michael Kitces has done studies on the 4% Rule looking at data all the way back to 1871. He found that a retiree who started with $1 million and withdrew 4% annually would grow their money over a 30-year period.
In fact, more than two-thirds of the time, they would double their wealth.
Even more surprising, investors following a 60/40 portfolio with a 4% SWR were more likely to end up with 5 times their starting wealth than to run out of money.
Think about what this means.
The 4% Rule was created to prevent failure. To make sure retirees wouldn’t run out of money.
But historically, it has done more than that. In most scenarios, it hasn’t just protected wealth – it has grown it.
If the rule works, then constantly lowering your withdrawal rate out of fear may mean you’re sacrificing life for money you’ll never use. You’re working more, not taking the family trip, and constantly stressed about what you’re buying at the grocery store.
The point of building a portfolio isn’t to die with the highest balance possible. It’s to fund a life well-lived.
And when you actually follow the 4% Rule – when you spend with confidence instead of hesitation – something powerful happens.
You begin collecting a different kind of return.
“Memory dividends.”
Memories Over Money
If you’ve read Bill Perkin’s book, Die With Zero: Getting All You Can from Your Money and Your Life, then you’ve heard of the memory dividend.
I don’t agree with everything that Perkins wrote. And frankly, I hope to die with more than zero dollars to my name. However, as catchy as his title is, that’s not his point either.
What Perkins wants everyone to do is live a well-examined life. One that realizes time and our life experiences are the most valuable things that we have here on planet Earth.
He wants us to save and invest responsibly. But he also wants us to invest in meaningful experiences with loved ones. Because when it’s all said and done, and we’re old and decrepit, those memories are all we have left. They’re everything.
For example, I love going to Disney World with my family. We’ve been doing it for years. Yes, it’s expensive. However, I’ve come to realize that those trips are the gifts that keep on giving for my family.
We have a great time while we’re there. But unlike most things, my kids talk about the trips for years. They remember them better than I do. I’ll be sitting in the car with one of them and they’ll say, “Dada, do you remember when…” We laugh, relive it, and that’s the compounding process of a memory dividend.
Every time I look at a picture from Disney and see smiling faces, that’s a memory dividend. At this point, I’m a bit of a Disney World nerd, so every time I’m able to help someone else plan their dream vacation, that’s a memory dividend.
Years from now, if I’m blessed to take my grandkids there, I’ll see my own kids as joyous youngsters again. That’ll be a memory dividend.
And to be clear, these things don’t have to cost thousands of dollars. When it snowed recently, I built my kids an igloo. We worked on it for hours. They loved it and have been talking about it ever since.
That’s the start of a memory dividend.
With the benefit of hindsight, a lot of people end up looking back and wishing they would have invested more in experiences than stocks or bonds.
I don’t know your personal situation, obviously. But if you’re like most Americans, you’re probably worried about having enough money in retirement. Wide Moat Research is here to help you with that goal.
But it’s okay to give yourself permission…
Permission to take the trip. Permission to build the igloo. Permission to fund moments that compound in ways no spreadsheet can measure.
Safe, reliable, and growing dividends are great. But the 4% Rule exists so you can use them.
So, this weekend, do yourself a favor and go make a few memory dividends.
Best wishes,
Nick Ward
Analyst, Wide Moat Research
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