It seems to me that, like many fad diets, the exercise of financial planning as it is marketed right now is in search of some magic elixir that will allow you to eat too much or exercise too little and then lose weight.
The dangerous thing about financial planning at the big banks are the bold return forecasts their “strategists” build into financial planning software. Market volatility happens. If those returns don’t come to fruition, you are screwed! You don’t build wealth. Isn’t it better to simply save as much as possible, essentially deferring gratification to later in life, and then not worry about whether those return forecasts are too rosy?
The Four Percent Rule
Here’s a simple approach to a financial planning question when someone is in their 50s and has a meaningful net worth.
Annual expenses < = to asset (1)*4%+ asset (2)* 4%….asset (n)* 4%.
Limitations: assets reflected above must be something considered stocks, bonds, or real estate or the private equity equivalents, perhaps even a business investment.
This idea was formalized in the 1990s by a financial planner named William Bengan.69 Mr Bengen’s “4% rule” has been criticized over the years by those suggest that that level of returns isn’t sufficient because today’s longer lifespans would force investors to outlive their money. My contention is that the array of investments one can use today would clearly allow for extended lifespans. In fact, investors asset levels would grow over their lifespan, not decline.
Assumptions with a 4% distribution rate:
Must use a rolling 5 year period to get the 4% coefficient. Must consider taxes fully in this conversation.
Will all the assets mentioned above achieve 4% every year? No, but that is why we use the rolling five years.