MML# 088: This $3 Million Retirement Misses the 4% Rule. I'd Still Keep Going.

Last week we worked out what your life actually costs once the billing stops. We landed on $200,000 of spending, which takes about $240,000 of gross income to fund, for an attorney who had been earning $500,000. Now let's do something with that number.

The math is pretty simple. Add up the income you can count on, subtract it from what you spend, and whatever is left is your portfolio's job.

What shows up whether or not the market cooperates

Start by listing the income that arrives regardless of what stocks do this year.

Social Security. A pension, if you have one. Installment payments from a practice sale. Rent from a property you own.

That's your floor. Everything above it comes out of the portfolio.

Running the gap

Let's say you're 66, married, and the picture looks like this.

Portfolio: $1,950,000 in a traditional 401(k), $450,000 in a Roth IRA, $600,000 in a brokerage account. An even $3 million.

Income: $4,000 a month from your Social Security, $2,000 from your spouse's. $72,000 a year.

Spending: $200,000 to run your life, plus roughly $40,000 in taxes. Call it $240,000.

Subtract one from the other and the gap is $168,000. That's what the portfolio has to produce.

$168,000 divided by $3,000,000 is 5.6%.

Again, these are illustrative numbers. Yours will be different, and I use planning software for the tax piece rather than doing it on a napkin.

What the 4% rule is actually telling you

William Bengen's research found that withdrawing 4% in year one, then adjusting that dollar amount for inflation each year after, gave a retiree roughly a 90% chance of the money lasting 30 years. It assumes a balanced, properly managed mix of stocks and bonds, which is a large assumption to accept and a subject for another week.

At 5.6%, our couple is a long way over the line.

A lot of analysis stops right there. Come back in 3 years, save more, work longer.

But I wouldn't tell you that you can’t retire just yet.

Why one number can't carry 30 years

The 4% rule takes a snapshot of year one and stretches it across three decades. Real retirements don't hold that still.

Say this couple delays Social Security to 70 to lock in the larger benefit. They may draw well above 5.6% for those 4 years, and then the bigger checks start and the withdrawal rate falls on its own. Drawing 4% forever when you don't need to just leaves money sitting in an account you never touch.

Or the practice buyout pays $150,000 a year for the first 5 years. During that stretch the portfolio might barely get touched. One static rate misses what's happening right in front of it.

Then there's inflation. Social Security comes with a cost of living adjustment. A pension often doesn't, so its purchasing power quietly shrinks year after year and the portfolio has to cover the difference later.

And flexibility may matter more than any of it. Research from Guyton and Klinger found that retirees willing to make modest spending adjustments when markets turn down may sustain starting withdrawal rates well above 5%.

So what do you do with a 5.6% withdrawal rate?

Treat it as a flag.

It tells you this plan has real work to do in the early years, and that the decisions you make between now and 70 will matter more than anything you do after. It’s just useful information, but also a long way from a closed door.

The initial number is simply where the conversation starts.

Next week: what actually happens to a plan like this one when the market drops in year 2, and why your spending curve probably isn't the straight line your calculator assumes.

If you'd like your own numbers run by someone who does this every day, you can schedule a call here.

Cheers, David