Why the 4% Rule Isn't Always Right for Lawyers

Last week, we talked about how your retirement expenses will likely be lower than your working income. 

Today, let's look at why that famous "4% rule" might not be the best guide for your retirement plans.

‍What's This 4% Rule Anyway?

The 4% rule says you can withdraw 4% of your savings in your first year of retirement, then adjust that amount for inflation each year after. This supposedly gives you a 90% chance of your money lasting 30 years, according to research from William Bengen when he first developed the rule back in 1994.

For a $1 million portfolio, that's $40,000 in the first year.

Many lawyers look at this rule, calculate they need more than 4%, and think they can't retire yet. But before you push back your retirement date, let's look at why this simple rule might not tell the whole story.

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‍The Rule's Blind Spots

The 4% rule assumes you'll spend the same way every year of retirement, just increasing for inflation. 

But real life rarely works that way. In fact, I can’t ever remember a financial plan that I’ve created for a client that worked out that simple.

Here are some common situations where I see the 4% rule go awry with attorney clients:

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The Social Security Strategy

You might spend more from your savings between ages 65-70 while waiting to claim Social Security at 70 to get a bigger benefit. This strategy requires increased withdrawals—and hence more than 4%— in those first 5 years.

Once those larger checks start coming in, you'll naturally take less from your portfolio.

One retiree I work with is drawing 5.8% from her portfolio for a few years, knowing her withdrawal rate will drop below 3% once her maximized Social Security kicks in at 70. 

This approach actually increases her total lifetime income.

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Practice Buyout Boost

Many attorneys receive partnership buyout payments, deferred compensation, or of counsel income for several years after leaving full practice. During this time, your portfolio can keep growing untouched.

When your plan includes these temporary income sources, you can often support higher withdrawal rates later on.

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Real-Life Spending Patterns

Research shows that most retirees don't increase their spending with inflation every year. Instead, spending follows more of a "smile" pattern: higher in early active years, lower in the middle period, then rising again with healthcare costs in later years.

If general inflation runs at 3%, your actual spending might only increase at about 2% for most of retirement. 

This small difference adds up over decades and can allow for higher initial withdrawal rates.

I find this true in practice. Even with the last few years of high inflation, most of my retirees have taken inflationary bumps to their withdrawals, but much lower than the actual rate of inflation. 

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Better Approaches for Attorney Retirement

Instead of relying on the 4% rule, here are some smarter strategies to consider:

Monte Carlo Analysis

This approach runs your financial plan through thousands of different market scenarios to see how likely your money will last. 

It accounts for changing expenses throughout retirement—like your mortgage being paid off in year 12 or increased travel in the first 10 certain years.

This gives you a much clearer picture than a simple withdrawal rate can provide.

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Flexible Spending Strategy

Instead of withdrawing the same inflation-adjusted amount every year no matter what, adjust your spending based on how your investments perform.

Research shows that being willing to reduce spending by just 5-10% during market downturns can let you start with a higher withdrawal rate and still make your money last. 

Likewise, you may consider a “pay-raise” as your portfolio moves through “upper guardrails”, due to optimal market performance.

For attorneys used to unpredictable income, this flexibility comes naturally.

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Smart Tax Planning

The order in which you withdraw from different account types can significantly impact how long your money lasts.

Many people are told to use taxable accounts first, then tax-deferred accounts, and finally Roth accounts. But a smarter approach coordinates withdrawals based on your tax bracket each year.

In years with lower income, you might take more from tax-deferred accounts up to the top of your current tax bracket. In higher-income years, you might rely more on tax-free Roth withdrawals.

This tax-efficient strategy can add years to how long your portfolio lasts.

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Making It Work in Real Life

Let's go back to our example from last week: an attorney with $1 million in savings who needs $56,000 annually from their portfolio (a 5.6% withdrawal rate).

By using a flexible spending approach, they might decide that if their portfolio grows to $1.2 million, they'll increase spending by 10%. If it drops to $900,000, they'll reduce spending by 5%. This simple adjustment can increase their chances of success by over 15% in many cases.

Adding smart tax planning makes the picture even better. 

By converting small amounts from their tax-deferred buckets (Traditional IRAs) to their tax-free buckets (Roth IRAs) during the first few years until Required Minimum Distributions kick in (Usually accompanied by a higher tax bracket), they can potentially reduce their lifetime tax bill substantially.

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On deck..

Next week, we'll look at how to identify and optimize all your retirement income sources. We'll cover maximizing Social Security benefits, exploring pension options, and structuring practice transitions to boost your retirement security.

Remember that retirement planning isn't just about math—it's about creating confidence that you can maintain your lifestyle without the pressure of billable hours and court deadlines.