The 2 Portfolio Withdrawal Mistakes To Avoid If Retiring Before Age 65

Create Your Custom Early Retirement Strategy Here

Unlock the secrets to a rich retirement as we dissect the myths of withdrawal rates and prove why it's not just about surviving post-work life, but thriving in it. This week, I pull back the curtain on the story of a client whose journey shatters the illusion that the lowest withdrawal rate is the safest bet. Together, we navigate beyond the oversimplified 4% rule, emphasizing the need for a personalized strategy that adapts to market shifts and personal spending. Tailoring your retirement to your unique timeline and expenses is not just smart—it’s essential.

Strap in for a candid exploration of the pitfalls of static withdrawal plans and how a diverse investment portfolio can be your golden ticket to an optimized retirement. I reveal the significance of dynamic strategies that respond to the ebb and flow of markets and life changes. Plus, we'll address the risks of a one-size-fits-all investment approach and how avoiding it can lead to more favorable tax outcomes and a retirement that's as varied and full of life as you are.

As we wrap up, I extend an invitation to you, the listeners, to become an active part of our community by submitting your burning questions and stories. Each piece of advice here is a stepping stone to customize your retirement blueprint, but remember, the nuances of your journey require the finesse of a professional’s touch. So, tune in, take notes, and get ready to craft a retirement as unique as you are.

Create Your Custom Early Retirement Strategy Here

Ari Taublieb, CFP ®, MBA is the Vice President of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients navigate the nuances of an early retirement.

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PS: Before anyone decides to move forward with our services, I want to ensure we're the best fit to help you reach your goals and I personally have the first conversation with you.

Transcript

Speaker 0: 0:00

A client came to me and said that I was gonna be one of their best clients. I asked them why? And they said because they have a very healthy portfolio balance north of $5 million in a very low withdrawal rate. And I said I think you'll be one of my worst clients. They said what do you mean? I thought a low withdrawal rate was good. I thought that meant I would never come close to running out of money. I go oh yeah, and I could do you one better. If you wanna have the best withdrawal rate, go work 30 more years. Your withdrawal rate will be very low and they go. Well then I can't retire and do everything I wanna do. I go exactly. The point in life is not to have the lowest withdrawal rate. It's actually to have the highest withdrawal rate without running the risk of running out of money. That's good planning. So level one, which they're alluding to wisely, is can they retire?

Speaker 0: 0:42

I think a lot of you that are reaching out know you're in a spot to retire. The question is how much can you take out of your portfolio? You could, of course, take out maybe $6,000 a month if you have $2,000,000,000, and be rest assured you won't run out of money. The question is can you take out $8,000,000,000, can you take out $10,000,000,000, can you take out $12,000,000,000, or $15,000,000, and maybe, if you're only doing that for a portion of your retirement, call it the first two, three, four, five years, while you're also paying, maybe, for health insurance and other travel and you name it. Well, I want you to do those things, and I want you to do it if you're in a sustainable spot to do it. Now, if you're not, it's a different story and that's what we're gonna be talking about today. What are the withdrawal rate rules that you should follow so that you can really have a successful retirement? And too many people follow the 4% rule. The 4% rule. There's nothing wrong with it inherently when people look at it, and it is the foundational aspect of most retirement plans. Now, of course, I'm recording this on YouTube, so if you want to actually see me go through this and the thinking and actually watch me explain it, you're more than welcome to do so. If you're listening just on the podcast application, that works great with me as well.

Speaker 0: 1:46

I am gonna go ahead and start with a review of the week, and this one comes from Angel2, who says I love this podcast. Ari does a wonderful job getting into the weeds of finances with early retirement and I'll tell you why I do that. He covers any and all topics relating to early retirement lots of details you might not have considered when contemplating an early retirement. Also, love his relatable stories of others that are on the journey now with him. He is very genuine, smiley face. Angie, thank you very much for that review. I love that you said I get into the weeds, because one person came to me and this is a current client that might be listening right now and if you are, this is about you and I will not say your name but they came to me and they said Ari, one advisor that we spoke with just told us don't worry about the weeds, you're fine, meaning you're in a fine spot to retire. Now, for those of you that don't know me or new to the show, fine is my trigger word, and so what that means is a lot of people. They're triggered by people that are bad drivers or whatever it is. I'm triggered when people say, yeah, it looks like I'm fine. It's like we don't do fine, we do optimize. You work too hard to not make the most out of what you've worked so hard for. So people joke at the firm because they go. We know Ari's weekend wasn't fine. It was optimized and I'm used to it at this point.

Speaker 0: 3:00

And then Angie goes on to say he brings up details you might not have considered when contemplating an early retirement. And that's what really today is all about. I'm talking about the 4% rule, and a lot of people follow this 4% rule and if they did, would they be fine? A lot of people would be fine, they'd be okay. But most of you are going no, I want to know, could I do better? Can I retire two years earlier? Can I spend more time with my mother who's not in the best health? People go do you love taxes? I go no, I love the idea that if you're smart with numbers, you can do a whole lot more fun stuff in life. That's what this comes down to.

Speaker 0: 3:33

So the challenge, as I see it, is the 4% rule. It's too surface level. I'm going to walk through a few examples today, but I want to walk through a few notes first. So I like to start with that basic story. Give you a financial example and then, of course, hit you with the logic of it the weeds, if you will. Thank you, angie.

Speaker 0: 3:49

So here's the reality. The reality is, most people say I'm gonna spend 8,000 a month in retirement, or 10,000 a month, or 6,000 or whatever it is, and they just stop there and go, okay, I'm gonna plan that for retirement. That's not real life, though, and I don't work with robots. I work with people Most people in retirement. Maybe they're still a mortgage, maybe it's only the first few years, maybe you wanna travel for the first five to 10 years, maybe you're going you know what. I actually wanna retire, but I'm gonna have to come out of pocket for health insurance before Medicare kicks in. So this idea of marrying 8,000 or 6,000 or 10,000 a month sounds good and it's easy for my software, but in reality, it's going to change, and it's gonna change the taxes, and it's gonna change the withdrawal strategy, and there's a lot of moving pieces to it. And then, on top of that, most people say, once again, I'm gonna spend 8,000 a month, but what about part-time income? What about social security and the fact that that might turn on in five years? And so does that mean I could take a whole lot more for my portfolio, or less Like? How do I think through all of that. Maybe there's a pension. So I'm gonna walk through a few reasons why I don't love the 4% rule, then I'm gonna explain why it does have validity and then finally hit you with the pro withdrawal rate tips. So here's the first thing to know.

Speaker 0: 4:58

A lot of people base all of their retirement analysis on the 4% rule, and here's what that means. Let's assume that you have a million dollars and you wanna take out 4% of your portfolio. Well, that's $40,000. And if the study that was done by Bill Bangin showed that, if you do that you will not run out of money, so it sounds good. But it's based on a traditional retirement from 65 to 95. So if you're trying to retire early call it age 60, 55, whatever it is well, if you pass away at 90, you might run out of money. So that's the number one flaw is it's not designed for an early retirement. The other flaw is, if you wanna take out $40,000, really you might have to take out 55,000 or 50,000 or even 60,000 out of your portfolio so you can end up with $40,000.

Speaker 0: 5:43

Now, of course, it depends on your tax situation, and some of you are going. If I keep my income really low, my ordinary income brackets are really low. You can, of course, pay even less, so maybe you're taking out $45,000 to actually end up with $40,000, but the 4% rule is not accounting for taxes and the bigger issue that I see with it is it doesn't assume a dynamic strategy. So the number one issue with the 4% rule is that it's not dynamic, meaning when markets are doing well, I'll go to my clients and say, hey, markets are doing well, this is the time to take an extra trip. Think about it like giving yourself a bonus at work. If you've done well at work and you're getting a bonus, you're not gonna decline the bonus. And if markets aren't doing well, you're not gonna just take extra income and go take a trip. Just as if you were in business and your company wasn't doing well and you're the CEO and you need to hit payroll, you're not gonna say, yep, I'm gonna go take some extra trips, unless you're a very bad CEO. So the idea here is do you have a dynamic withdrawal strategy that adjusts with markets, adjusts with your income sources and the timing of all of this? The 4% rule just says take 40,000 every single year. Assume you have a million bucks and just don't worry about it, you'll be fine. Once again, my trigger work Now.

Speaker 0: 6:52

The 4% rule also doesn't assume you're invested in a diversified mix of assets, which most of you are. The 4% rule assumes that you have 50% intermediate term US bonds and 50% large caps, which is the S&P 500. The reality is most people that are working with us, they have a whole lot more than that. They have international markets emerging and developed within that, different sectors, small cap, international value, and what that allows you to do is it allows you to invest a whole lot more intentionally and decide where you wanna pull assets from when you actually retire. So the tax and withdrawal strategy transparently is the number one reason people reach out to our firm. But if you go to my YouTube channel, you'll see a video where I actually walk through an example of the risk of the 4% rule and the risk of not being diversified, because all of us know we should diversify. Most of us don't know to the extent in why we actually do it. So if you want the logic or the weeds, as Angie says, you can go ahead and check that out.

Speaker 0: 7:47

Now the other thing I wanna talk about is really what are RMDs? So RMDs are required, minimum distributions and so if you've invested really, really well and you're gonna grow that IRA and that's all pre-tax money, in the future you're gonna have these required minimum distributions which, for most of you, is gonna start at age 75. That's gonna start at 3.8%. That's where it begins. Now at age 85, you're at six and a quarter, so 6.25%. So some of you are going, hey, that's not a big deal, like it's just not that much for my portfolio. Others of you are going wait a second. If I have two, three, four, five million bucks in my IRA because I'm gonna touch that last, maybe live on brokerage account, I've got a really healthy 401K and you have to take out 2% of a million dollars, well, that's pretty simple. That's $20,000. But now, if you're looking at 6% of a million dollars, you're looking at 60,000. Maybe you have $2 million and you have to take out 6% at age 85. Maybe you've invested really well, maybe you have to take out $200,000, $300,000 and you have Social Security and you have a pension and so all of that extra money you don't necessarily quote, unquote need you're gonna be taxed at the highest bracket.

Speaker 0: 8:52

Now I'm gonna pause for a second and explain the following, because I love, when this client mentioned it to me. They said, ari, do you know how I knew I was successful? I said no, I mean you're retired and you seem happy. But what do you mean? They said I knew I was successful when distributions meant I had to take out more than I need. It means I invested so well that I'm not even gonna need everything the government's gonna require me to take out. I said you know what I like? That definition that's pretty cool, can I share on the show? And they said yes. And I said well, that doesn't mean you don't do good tax strategy. And they go oh, I know. That's why I'm hiring you guys. I want you to do all the tax strategy to minimize my taxes. But that's when I knew I was in a good spot, when I was gonna be forced to take out more than I needed. And so I just think it's a nice reframing, because it's really easy to get mad when the government's gonna force you to take money out of your pre-tax accounts. But if we could take a step back and say, hey, listen, this is pretty cool. You invested really well, you're gonna be forced to, yes, take out a lot of money, let's do good tax strategy. And our joke here at the firm is don't be, you know, we're all about being patriotic, just not to the point. You pay more in taxes than you need to. So making sure you're following all the strategies to minimize that, but also taking a second and say, hey, we're in a good spot.

Speaker 0: 9:58

So the 4% rule doesn't blow up required minimum distributions. It's a mouthful. Rmds are only on the pre-tax part of your portfolio. So if half of your RMD, for example, is coming from a pre-tax account and half is coming from a taxable account, you're really only having to pay taxes the required distributions on the pre-tax balance. Most people don't think about it that way. Most people go yeah, I'm gonna get taxed on everything and that's just kind of how it works, when in reality that's not how it works.

Speaker 0: 10:27

So the 4% rule not only does it assume a 30-year life expectancy, but if you're 85 years old and you're really not worried because you're going well, I'm gonna have a million dollars in the future, I'm gonna have to take out four and a half or 5% of my portfolio. You really don't. It's not that you shouldn't follow the 4% rule. What it means is, if you do follow the 4% rule, it's not gonna be near as impactful to you because in the future, required distributions are gonna start and you're not gonna have to be forced to take out a ton where it's gonna put you in a huge tax burden. Meaning, in plain English, if someone came to me and they have $500,000 and they were gonna be forced to take out 4% of their portfolio, it's probably not the end of the world, even quite simply. If they're taking 1% out of their portfolio, okay, so they're taking 5,000 out. If they have to take out 20,000, 4%, the truth is they're probably gonna have to spend that on living expenses. Anyways, it's not a huge deal. The issue becomes if you have 2,345 million in pre-tax balances, well, now, all of a sudden, it is a big deal, and so that 4% rule is something that you likely don't wanna follow because you're gonna be hit with this big tax burden.

Speaker 0: 11:31

So retirement planning has to be dynamic and for most of you, you're coming to me going hey, I wanna retire early. I know there are specific strategies to follow. What are the pro tips that your clients do to actually retire early successfully? And one of them is this dynamic withdrawal strategy. So let me tell you why I once again don't love the 4% rule to summarize, which is it's based on a 30 year life expectancy, it doesn't assume a dynamic strategy and it doesn't diversify the portfolio. The inherent assumptions I don't think are actually applicable to the way most people invest today. Then the reason I do like the 4% rule is it's easy to understand, so most people just base their whole logic on that and if you do that once again, it's a nice spot to start, it's fine. I just don't do fine. I do optimize, and so whenever I'm creating analyses for withdrawal rates for my clients, walking through the 4% rule or really any of these concepts that you hear me talk about, I really want to make sure that you don't take the assumption, like the client story at the beginning, of hey, yeah, it looks like I could take out 1% of my portfolio and just be fine. You probably could, and you could be really fine and look back and go why didn't I spend more? Now the final thing I'm going to leave you with and this is the pro level stuff One client came to me and I recommended they retire and they had a 7% withdrawal rate and you're like how on earth could you possibly recommend that?

Speaker 0: 12:49

That's terrible advice, and you're right. It is terrible advice if that particular client had a 7% withdrawal rate for the rest of their retirement. There was one year they were retiring at 63 that they wanted to renovate the home, they wanted to travel and they wanted to buy a car because the car was breaking down, and I recommended they take 7% out of their portfolio. The market was up it was last year and they were in a fine spot to do so, because what was going to happen is very quickly their pension was going to turn on and then, in addition to that, in 5 years from now, they're going to be forced to take required distributions and their withdrawal rate is going to be at 3-4%, which they don't even need, meaning their withdrawal rate.

Speaker 0: 13:26

What's happening is, at the beginning, most people go well, 4 or 5, 6%. That's not a sustainable withdrawal rate. Then social security gets turned on and now, because you have social security, let's call it making up 3,000 a month. Maybe you have another pension of 3,000 a month and then you want another 1,000 or 2,000 to come from your portfolio. Your withdrawal rate is very low. And so now, all of a sudden, you have a high withdrawal rate because you're retiring and these income sources aren't quite on yet. Then all of a sudden, social security is turned on. You have a really low withdrawal rate and then it shoots back up again once. All of a sudden you're forced to take out more than you even need. So the idea here is how do you have a dynamic withdrawal strategy to make sure you're actually optimizing the way you are creating income and not paying any more taxes than you need?

Speaker 0: 14:09

So for one of my shorter episodes, I try to keep it under 15 minutes. More often than not, you can see I do go 20, 25 minutes. Hopefully this did make you think a little differently. Regarding early retirement, I'm fully aware I don't get to work with all of you, so my only request is if you did learn something different today or if this was helpful at all. Please do drop a comment on YouTube or leave a review on iTunes, and I appreciate it more than you know. Love you guys.

Speaker 0: 14:33

Thank you for listening to another episode of the Early Retirement Show. If you have a question that you want answered in a future episode, you can always go to my website, earlyretirementpodcastcom that's earlyretirementpodcastcom and you can go ahead and submit a question that I'll look to answer in a future episode. Thank you all for listening. Please do rate it, review it and share it with someone who you think would benefit from this information. If there's anyone out there that you know, I certainly appreciate it and I will see you all each week. Hey guys, it's me again. Please be smart about this. Nothing in this podcast should be construed as financial, tax or legal advice. Consult with your tax preparer or financial advisor before taking any action. This podcast is for informational purposes only.