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Choose from a great selection of digital coupons and use them up to five times in one transaction. Check our app for details. Ralph's, fresh for everyone. Have you ever heard of the 4% rule for retirement planning? Have you ever wondered where that came from, what the history is, and what that rule actually means?

Today's show is an introduction to the history and the science behind the famed 4% rule. Welcome to the Radical Personal Finance Podcast. My name is Josh Rasheeds. Today is Wednesday, October the 1st, 2014. Today is episode 73 of the show, and we're going to be talking about the 4% rule with Dr.

Wade Pfau, professor from the American College of Financial Services. He knows his stuff, and he's far more qualified to teach you than I am. If you pay any attention to online writings, or if you pay any attention to some financial planning writings, you'll often hear about this thing called the 4% rule.

And if you don't pay any attention to that stuff, awesome. I'm glad you're here. I don't want to pretend that everybody always pays attention to those aspects of the other online financial media. It doesn't really matter. I'm going to introduce you to it today, but through an interview with Dr.

Wade Pfau from the American College. And before we do that, I just want to give you some very quick background. The 4% rule, I've often mentioned it on the show, and I think it is a useful, very, very useful rule. But it's not a panacea. It's not a solution for every retirement planning "whoa" and for every retirement planning question.

And the reasons why it's useful, and the reasons why it has problems, are many. And they're complicated. And it's very challenging for me to present them all in an overall format. They have to be looked at as an individual situation. So I've been trying to think about how to bring you some of this more technical content, because it's very challenging to transform a, you know, a 20-page academic paper filled with academic ease and filled with charts and graphs and illustrations into compelling, interesting, and yet accurate and informative audio.

Very challenging for me to do. But I decided to start by asking Dr. Wade Pfau to come on this show and for us to discuss it. And so we're gonna do that in today's show. And we're gonna talk about the history behind this. And we're actually celebrating the 20-year anniversary of the original paper that popularized the 4% rule.

And in today's interview, you're going to hear some details on it. You're gonna understand, I think, a lot more about the 4% rule. What are the pros and cons? And we're gonna discuss some of the research behind it. And I think you'll find it very, very valuable. Very quick introduction to Dr.

Wade Pfau. He is a PhD, he has a PhD in economics, and he is also a chartered financial analyst, which is the gold, in case you're unfamiliar with financial planning designations, the CFA program is very highly regarded for for the integrity, the academic integrity of its research. It's very much focused on investment research.

And Dr. Wade Pfau holds that charter designation. And he spends all of his time now researching the retirement planning situation with the American College, which is the American College for Financial Services, and very involved in the financial services industry. I hope you enjoy the interview. This has been, it was a challenge for me to try to do it in a way that is accessible, but yet also technically accurate.

And so, but I think we pulled it off, and I think it'll be interesting. That's it. Here's the interview. So, Dr. Pfau, thank you for joining us on today's show. I appreciate you making the time in your schedule to join us. Sure, my pleasure. So, obviously, we're here today to talk primarily about retirement and some of the retirement distribution studies and research that has been done.

But before we go into that, what I'd like to do is I'd like to introduce you to the audience. Would you share with us a little bit about how you got started in your current line of research, what your personal background is, and what got you interested in the work that you're now doing in retirement research?

Sure. Yeah, well, I grew up in Michigan and Iowa, and then in high school, I well, initially just thought I'd always be a scientist, but then discovered economics and really liked economics, decided to major in economics, went to grad school and got a PhD in economics. And it took me a while still to discover financial planning.

I mean, not that I discovered it, but to find it for myself. So, though in graduate school, my dissertation was about in the 2000s, President Bush had that proposal to create personal retirement accounts, which would carve out part of Social Security to create a savings account where people would then be responsible to save for their own retirements rather than relying as much on Social Security.

And my dissertation was about analyzing that, and that would ultimately tie over to financial planning, though after graduating, I went to Japan. I worked 10 years at a university in Japan teaching economics, and at that time was focusing more on the national pension systems of different countries, but then had an opportunity to to do research and to submit an article to the Journal of Financial Planning, got a good reception about that, and ultimately just found that retirement income planning was, it's really interesting to do research in that area.

It's really important with the public now that there's a lot of interest in retirement planning as more and more people are making that transition. And so I really just found my niche then doing the same sort of research I did in my dissertation, which is simulating how different types of strategies will work out over long periods of time with saving for retirement and then retired and how that all works out.

So now you work as a professor at the American College. So other than that, other than your work as a professor, you don't have any, you're not running a financial services practice or actively selling any products or consulting with clients, right? Yeah, that's right. I joined the American College a year and a half ago, and I do work with a company that provides financial planning software in-stream.

But no, I'm not an active practicing financial planner and also not selling any sorts of financial products. Awesome. So as we record this, it is September 29, 2014. And where I thought I'd like to start is I'd like to start with you maybe giving a survey of the history of retirement planning research.

So it's the 20 year anniversary of William Bengen's original article. Start with us there. Share with us the course of the research that's been done in the academic community over retirement distribution rates over the last 20 years. OK, sure. Yeah, William Bengen really got the ball rolling with how the public and financial planners look at retirement income.

And what he was doing in the 1990s was responding to a really naive way to think about it. So the idea going around in the 1990s and still today, if you listen to Dave Ramsey, he's he's doing the same thing that the same mistake people are making before. And that's just you plug in some return into a spreadsheet.

So, for example, if you say after inflation, the S&P 500 has averaged about a 7% return. So plug in a 7% return into a spreadsheet. And then that tells you the safe withdrawal rate is 7% because every year your portfolio goes up 7%, you withdraw 7%. You never dip into your principal at all.

You just could sustain a 7% withdrawal rate forever. That's kind of where the discussion was in the 1990s. And so Bill Bengen corrected all that. He thought that sounded a bit odd, and so he just decided to look at consider a 30 year retirement, so somebody a couple of 65 years old, at least one of them living to 95.

And one of the issues today is people are living longer and longer. So 30 years is not so conservative anymore. But at the time, that was a relatively conservative time horizon. And then he looked at different 30 year periods in history. So he looked at 1926 to 1955 and then somebody retiring in 1927 through 1956.

So just looking at these hypothetical individuals in history, retiring each year and trying to figure out what percent of their retirement day assets could they withdraw. And then that's giving them an amount of retirement income that they then adjust that income for inflation in each subsequent year and have that strategy be sustainable for at least 30 years.

And he found that the worst case scenario in history was a 1966 hypothetical retiree who could have with a portfolio of 50 to 75% stocks, could have withdrawn just slightly more than 4% of their retirement date assets. And that gave us the 4% rule. And that what that was doing was introducing a sequence of returns risk that even if somebody's average portfolio return is pretty decent, the order that the returns come is really important.

If somebody has poor market returns early in their retirement and they're trying to fund a constant spending amount, they have to withdraw an increasing percentage of what's left in the portfolio. Because this is an important point that confuses people. The 4% rule is not every year you withdraw 4% of what's left in the portfolio.

It's just in the first year you withdraw 4% and then you adjust your withdrawals for inflation. So if your portfolio is going down in value, you have to withdraw an increasing percentage of what's left to maintain the same spending power. And so the sequence of returns risk, if your portfolio is losing value early in retirement, you're withdrawing an increasing percentage of what's left.

And then you're ultimately digging a hole that can be very hard to get out of. And that's why even with higher average returns, that the additional volatility created by the order of those returns has caused worst case scenarios in U.S. history to fall to around 4%. And that so that was now we have the 4% rule at the time that he did that research, he was bringing down the expectations that 7% is not a safe withdrawal rate.

It's something more like 4%. And since then, it really took a while for the research to get going. There was the Trinity study in 1998 that people, if they start searching about retirement income on the Internet, they might see references to the Trinity study. But the Trinity study didn't really do anything new.

It's just people hadn't really heard of Bingen yet when the Trinity study came out. It was looking at the same data Bingen looked at. But rather than reporting the worst case scenario, it looked at, well, if you used a 5% withdrawal rate, what percent of those historical cases would that have worked and so forth?

Yeah, I made that an important. I made that mistake myself, starting with the Trinity study and instead of with Bingen's. So I appreciate your you corrected even me. So I appreciate that. Oh, sure. Yeah, I think, well, the Trinity study, that was it came out in 98, right near the peak of the tech bubble.

And Scott Burns at the Dallas Morning News really picked up on that study and was writing a lot about it. And he had a syndicated personal finance column. So it's sort of for a lot of people that the first they ever heard of this area was through the Trinity study.

That's just because it got the media coverage. What rates of distribution were retirement planners prior to Bingen's work actually using? Was it the 7% number you referenced? Was it higher? Was it lower? Was there any methodology behind it? I don't think there was a lot of methodology. This is kind of before my time and we don't I'm interested in this history.

This is a great question. And I've occasionally talked to some planners who were around in those days, and I don't think there was any clear methodology in terms of even thinking about sustainable withdrawal rates, because that was such a naive idea that you just plug in the return. And that's really where it seems like the state of the art was.

At that point, planners were still not even using Monte Carlo simulations for the most part. They really were just plugging returns into spreadsheets and based in their analysis on that. So there wasn't, as far as I can tell, a lot of methodology behind it. And that's where Bingen really made that contribution that kind of helped set up the revolution of now financial planners using Monte Carlo simulations.

Bingen wasn't using Monte Carlo simulations, but he was using a similar type of idea of let's look at just different historical periods, which is getting at the same sort of issue of there's a lot of variability and how do we account for that variability to get get better results for our analysis?

And that's that's what planners are doing today that I don't think they were doing all that much prior to Bingen. My guess is also if we were and I'd be interested in the history as well. This is just a guess from my reading in the investment arena. But my guess is that planners prior to that time, at least if they were knowledgeable, were probably focusing more heavily on dividends.

Historically, there's been a shift that I've observed of a shift away from paying dividends by corporations that used to be kind of how the value of your stocks were primarily measured. Nowadays, with the with the more problematic taxation of dividends, many companies have shifted away from focusing on dividends.

So I think that was historically more important. Also, with the I guess prime with the large defined benefit programs that were available, I think a financial planner's job, it would have been unusual, my guess, to try to put everything based upon a portfolio of stocks and bonds, because usually a planner may have had a defined benefit plan, a pension income, a Social Security stream of income, and then also maybe other assets as well.

Whereas I think over the last 20 years, there's been such a marked decline in the defined benefit pension plans that now a planner is probably having to put a lot more emphasis on the portfolio of stocks and bonds to provide retirement income. That'd be my guess. But I think that's a good point, and Vanguard had a study about that as well, that for a lot of this historical period, just the dividends and interest coming from a portfolio without even making any effort to try to strive to get higher yields, higher dividends or or higher yields from bonds.

But you're getting four or five, six or seven percent yield from a basic portfolio, kind of focused on a total returns portfolio for much of that historical period. So I think that's a good point, that you could sustain those kinds of spending rates just with the income from a portfolio until just the more recent years where dividend rates have fallen so low and interest rates are now so low.

Right. Yeah, I think you're making a good point there. And this, I think, is a big deal as to why historically there's been such a focus on shifting the portfolio from stocks to bonds, because traditionally bonds were how you drew income from a portfolio. You had your coupon payments, you had your defined yield.

You knew what it was going in. And so that stability of income reflected, was reflected in your plan. That was the income that you based that on. Well, it's much more challenging in 2014 when your yield on your bond portfolio, the stated yield is quite low and you need to go beyond that to provide your level of income.

And so there are some of these macroeconomic changes have had made a big difference in the work of a financial planner to apply to an individual situation. Mm hmm. Yeah, it becomes much more expensive to support. A retirement income from a fixed income portfolio with interest rates so low.

So if you're going that route, you'd have to devote a lot more of your assets to it. And yeah, it's just it's tough in this environment. Extremely tough. So after Bingen, then where has the research gone? Trace the thread for us. We're looking at four different key financial planning studies since Bingen, there was in 2001, various and Mark Warshawski and John Amarik had a study in the Journal of Financial Planning that looked at how partially annuitizing with a with an income annuity, a single premium, immediate annuity could help increase the sustainability the sustainability of a retirement portfolio.

So that was the key study that would lead further down the line to some more developments. And then I think the next pivotal study came in. It's actually I just realized this last week in October 2004. So exactly 10 years after Bingen, 10 years ago from now, Jonathan Guyton and his initial study in the Journal of Financial Planning about how to adjust spending.

So one of the issues with the 4% rule and with the bank, I mean, Bingen was just trying to create a framework to explain why 7% is not a safe withdrawal rate. I don't think it was ever meant to serve as a retirement income strategy, but with its popularity in the press and everything, it kind of became the de facto strategy.

Right. And it's a strategy where you don't really adjust your spending, even if your portfolio is declining, because you're essentially playing a game of chicken and hoping that your portfolio is not going to run out. But but Jonathan Guyton looked more carefully at the idea that, well, if your portfolio is losing value, you might want to cut your spending.

And if your portfolio is growing because 4% is supposed to be a conservative spending rate, that's supposed to work in the worst case scenario. So in other cases, your portfolio is going to continue to grow. And at some point you can increase your spending. And Jonathan Guyton precisely 10 years ago published an article where he developed guardrails and decision rules to kind of set parameters that.

To to define when you can go ahead and increase your spending or when you should actually take action and decrease your spending. And he wrote how. If you're willing to make cuts in your spending, you can go ahead and start with a higher spending rate and having that flexibility reduces some of the sequence of returns risk.

So it actually. Can potentially let you have a higher initial withdrawal rate and. Not not necessarily ever have to cut your spending below where it would have otherwise been if you were following the straightforward 4% rule. So did that study have an impact on some of the alternative strategies that we've built out, for example, the floor approach, you know, where we say, OK, as long as we've got this basis, then we can adjust the discretionary spending on top of that.

Was that study a major influencer on some of the techniques we developed? No, I would say no to that, and that kind of gets to another issue that there's actually two completely distinct schools of thought about retirement income. And what I call the probability based approach would encompass Bingen's work and Guyton's work where there's not really a distinct floor or Michael Kitsies, who's a really popular blogger and financial planner in Maryland.

He he makes the statement that the 4% rule is a floor with upside approach. But for people who are focused on flooring, they are horrified by that kind of statement, because with the safety first school, when you're building an income floor, you don't use a total returns investment portfolio because you don't want to have any stocks in the portion of the portfolio meant to provide that for the floor.

It needs to be provided through fixed income, which bonds being held to their maturity dates or with income annuities. There's not a room for stocks in that floor. And the Guyton approach is a probability based. You're using a total returns investment strategy, and there really is no floor because if there's really bad markets, if the stock market's doing terrible, you're going to have to keep cutting the spending.

And and I mean, there's. Any time you try to have a floor, so to speak, with with stocks, then that's going to be a floor that's at risk and may not work out. And Jonathan Guyton, as well as one of the leading advocates of the idea that. These sorts of probability based approaches are superior to the floor and upside approaches, because with the floor, the upside approach, especially with the interest rates so low today, it's very expensive to lock in that floor with dedicated assets.

And so he he thinks that ultimately people might have to reduce their spending more, even though they have that basic floor in place. They may never get the chance to meet their discretionary expenses because they've just had to put so much effort into building that basic floor. And he would prefer or he thinks clients are going to be much happier with a total returns approach that has that flexibility and not.

And that allows stocks to be used for any part of the portfolio. Well, this is where I mean, I see a big difference. Yeah, it's it does help. And one of the frustrations I have as a planner is that you have to individualize this for clients. So some clients may have a tremendous history with investing in stocks.

They may have a comfort level with the volatility, and they may have an implicit faith and confidence in the total return strategy. History, in my opinion, history would demonstrate that the growth of companies and the growth of equities has been one of the most powerful wealth production machines of all time.

And I don't see a lot of compelling evidence to say that there are major things that are going to change that. It just seems to me like that's what history has shown. So and I don't see again, I don't see any reason why to discount that going forward. Now, relatively speaking, it may be higher or less.

And that's one of the things I'm going to cover in a few minutes with you. But but that so but that it takes a while to get to that kind of comfort level with stocks, and many people are simply not comfortable. And so the development of something like a floor approach where, just to clarify for the listening audience, my understanding of what I would use with a floor approach would be to say, what's the minimum level of income that you need to maintain the minimum level of lifestyle that you're willing to to live on, whether that's needs versus wants or discretionary versus essential, however you characterize those differences of income, we would set a floor in place, whether with Social Security income, income annuities, as you mentioned, yield off of a fixed income portfolio, whatever that that base is.

And then we would invest for a higher return on top of that. Well, that gives the client the confidence of knowing that no matter what, I always have at least this amount of money to spend. That's much more intuitive. In my experience, that's much more intuitive with with clients and how we as ordinary individuals think about our expenses.

And so it seems like that resonates more with clients than does the idea of a total returns portfolio and massive volatility and massive fluctuations does. But yet, scientifically speaking, it seems that any study I've read so far, and tell me if there's some that I haven't that disagree with this, but the greater the percentage of your portfolio that's allocated to equities, the higher the total wealth over time, simply because of that massive difference between the productivity of companies versus other investments.

So there's a challenge between what is intuitive for clients in their situation versus what the academic literature might say. Mm hmm. Yeah, I think one. So different advisors and different clients will look at this differently. And one way to kind of a litmus test is now that a lot of financial planners are using Monte Carlo simulations, they run the plan and they tell the client your plan has a 90 percent chance for success.

So if you're comfortable with that, then that means you're probability based, that you're willing to go with that total returns investment approach. 90 percent chance that it's going to work. If it looks like you might be on a path where it's not going to work, you might have to make some small adjustments, but things should generally be OK.

So if the client's comfortable with that, then then that total returns approach is right for them. But if they're more focused on a 90 percent chance for success means there's a 10 percent chance for failure. There's a 10 percent, 10 percent chance you're going to run out of money before the end of your projected lifetime.

And if they really focus on that and are really, I mean, that's frightening and causes them to lose sleep and everything, then that's where the safety first approach comes in. And that's where you do this. Yeah. As you're saying, it's more logical for the client. It's an asset liability matching that you're going to match your assets to your spending needs so that you have similar risk characteristics and that you're not going to have stocks in the part of the portfolio that's meant to cover your basic needs.

And so then no matter what, that kind of safety first approach, you really build in that secure floor. And that might be costly so that you may have less upside potential at that point. But if that's helping an individual to sleep better at night, then that then that's the appropriate approach for them.

Could you explain, please, what a Monte Carlo simulation is and how it works and why it's useful? Oh, sure. Right. So the alternative to Monte Carlo simulation is you you put together a spreadsheet and you just plug in a rate of return for the portfolio. So you just every year, if you say the portfolio is going to give you a six percent return, then every year you just have the assets go by six percent.

And then you figure out, well, have you run out of money by a particular date in the future? So Monte Carlo simulations were originally developed in the 1940s as a part of the effort in World War two of trying to introduce randomness into well, into the analysis. So maybe the average return on the portfolio could be six percent.

But there's volatility, just like the stock market. There is volatility. Some years there may be a 20 percent return. Other years there might be a negative 20 percent return. And what Monte Carlo simulations do and they've really it's just. Well, there was a famous article in 1997 in the Journal of Financial Planning telling advisors to wake up and start using Monte Carlo simulations.

And then in the 2000s. Now, these days, most every financial planning software is going to offer it. What it's doing is just providing a whole range of outcomes. So you may have 10,000 simulations of what could the market returns look like in each simulation over the retirement? If they're even if they average six percent, but some years are up, some years are down and you just draw randomly.

You're just random draws of a return that's based around some average return with some degree of volatility around that return projected out over 30 or 40 years or whatever the case may be. But each of these 10,000 simulations will have that a 30 or four year sequence, 30 or 40 year sequence of market returns based on the characteristics you've defined.

And then you get the whole range of outcomes. And then you could say something like what I mentioned earlier, that 90 percent chance for success means. If you had these 10,000 simulations in 9000 cases, the plan would have worked in 1000 cases, the plan would have run out of money before the end.

So it didn't work. And that's what the Monte Carlo simulations are doing. They're giving you more about the distribution and the probabilities associated with different outcomes rather than basing everything on just one fixed return. And then one answer, did the plan run out of money or not? When you define the plan not working, one of the things that to me is important and about about a Monte Carlo simulation is to understand what it means when it says the plan doesn't work.

And this is the difference between kind of statistically stress testing it with a Monte Carlo simulation versus a real person in a real situation. And a Monte Carlo analysis, it's basically saying, can I sustain this level of expenses, this level of income off of the portfolio over this period of time, given these random variables and in input of rates of return, inflation rates, et cetera?

And so failure is simply defined as not being able to sustain that level of income. That doesn't necessarily mean, however, that a human being couldn't maintain some level of income and couldn't adjust their expenses as time goes forward, depending on what their retirement distributions look like. Is that accurate?

Right, that's accurate. That's and that's kind of one of the side effects of that Trinity study that set everything up as success rates and failure rates. Failure means that for the plan, you've set some kind of maximum age. So if you say, I want this plan to work through age 95.

Well, if the portfolio is depleted at any point before age 95, you would call that a failure, even if it was age 94 or even if it was age 67. It doesn't make any distinction. And then you're right. It doesn't consider partial income. So people will still have Social Security.

They'll still have any defined benefit pensions. If they decided to buy an income annuity, they still have income from the income annuity. And so failure can mean something very different. It simply means the financial portfolio, the portfolio of stocks and bonds has been depleted. But that doesn't necessarily mean the person doesn't have any spending power left.

And it also if it happened, if they just missed their spending goal by one dollar in the final year, it counts as failure. But that's really not much of a problem. And as well, you're right, you could also make adjustments to spending, which. Which can be accounted for, and that's I'm now working with a financial planning software company that's going to let you do this, to have.

Spending rules where you can adjust your spending based on what's happening in the markets. If you put a hard floor in where the different meaning of the floor, like if you say, I'm never going to let the spending fall below fifty thousand dollars a year, you could still fail because you're forced, you're going to then play that game of chicken.

But if you don't have any kind of hard floor like that, where you're really going to just let your spending be completely flexible. Well, in that case, you never run out of money, though you may have your spending fall to very low levels. But right, that's all part of we need to have more sophisticated ways of measuring the quote unquote success or failure in terms of how much are you missing the spending go by or how much did you have to cut your spending or when did your portfolio run out and how much income do you have left, even if your financial assets are depleted and so forth?

It's very just one simple measure. Right. I love practicing and retirement planning, but I also find it to be one of the most challenging areas to practice in. And here is something that I've observed just in my personal experience. We as human beings, I think we desire certainty. We desire a sense of certainty.

And then especially when it comes to finance, we desire a real sense of knowledge of this is going to work. And this is there is a sense of certainty around it. And in the in developing the science of financial planning, I think one of the places that we probably go too far sometimes with as practitioners is we're trying to deliver.

A sense of certainty in scenarios that are inherently uncertain, and so when a client is looking, so there are so many assumptions and I'm going to cover them in a few minutes, I want to talk about some of the assumptions that go into these formulas or into these studies, even.

But there are so many assumptions upon which a financial plan is built. That there are many things that can happen that can cause a failure, divided in the in the Monte Carlo sense of not being able to maintain the full the full plan. And it's much less about the science of here is a number or here is what here is a plan that's going to work in every situation.

It's much less about that than it is about having the ability to react and respond to changes in market conditions, to changes in financial conditions, to the general macroeconomy or to an individual's microeconomy. And I've come to the conclusion in the research I've done and just kind of thinking it through, people are often looking for the certainty of what's my number.

And I've come to the conclusion that there is no number. There is no one number. There's just simply for each person, there's an initial, there's a comfort level with what risks you're willing to bear and what risks you're not willing to bear and what is failure and what is success.

And there is no number that you can that you can point to and say, here's your number. What say you? Yeah, I think that's absolutely right, that people always need to stay flexible. And again, with the work Bingen did and then with the Trinity study, it was a case of just putting together some simplifying assumptions.

And if you just read the research too literally, it's a set it and forget it approach that you just determine what percent of your retirement day assets you can spend and then just go with that forever without making any adjustments at any point. And of course, in reality, that's not the way to go.

And that's where we've but but the Bingen work, well, Bingen subsequently did more work with the Trinity study didn't offer any suggestion about how to make those adjustments. And that's where we've had new research filling in some of those gaps. The Trinity authors did in 2011. Republish their basic results, and then.

This is something like every five or 10 years, you should reset your withdrawal rate based on. Your new age and your new asset level, but it still wasn't very sophisticated. But but yeah, definitely, it's really a process of. Revisiting the plan, making adjustments. Seeing if the spending still seems to be on track or if maybe it's getting to be too high of a level and then as well, that's so Jonathan Guyton talks about the withdrawal policy statement.

That's like an investment policy statement that and the investment policy statement, you you write down what you're going to do with what's your asset allocation, write down that you're not going to panic and sell all your stocks if the market declines and so forth. Well, the withdrawal policy statement is a set of rules.

OK, here's the conditions where you're going to cut your spending. If if there's a big market drop one day, you don't have to panic. You don't have to suddenly cut your spending 50 percent. There's a there's a framework in place for how to make these adjustments and how to monitor what's going on with the portfolio.

And just, yeah, that's part of that being flexible, but having a process in place so that you don't overreact. Was it being ready to? I didn't mean to interrupt. Excuse me. I was going to say, was it the Trinity study where? And this was a statistic that that I just learned that I had not I hadn't grasped this, but was it the Trinity study that showed that based upon a four percent withdrawal rate, that 96 percent of the portfolios wound up with at the end of the term, at the end of the 30 year term, they wound up with the same amount of in nominal terms, the same amount of investment assets that they started with.

Was that the Trinity study that showed that? No, that wasn't the Trinity study that actually I was involved in that number a little bit, because William Bengen developed that number for a financial advisor article that he wrote in 2012. And then I wrote a blog post saying, yeah, that's that's I checked it out.

And that's right. But historically, 96 percent of the time with the four percent rule, you'd still have in nominal terms just as much wealth as what you started with. But then I said, that's actually not the best way to think about it. You should be thinking about an inflation adjusted terms, right?

That if your wealth stays at the same level after inflation. And in that case, it's about 50 percent of the time. But then Michael Kitsie has really jumped on that number. And I think he promoted that he uses that ninety six percent number in his presentations, even today still.

And. And and that's the ninety six percent from the Trinity study, though, is. But that number shows up there as well in more recent versions that they say the four percent will have a ninety six percent success rate. Right. That. And with Bingen, it was 100 percent success rate.

But what happened was they switched the bonds rather than using the intermediate term government bonds. They switched to long term corporate bonds. And in that case, the four percent rule just missed working in 1965 and 1966. So in their initial study, the four percent will had a ninety five percent success rate.

But now that we've added more data over time, you get a ninety six percent success rate. It's interesting just because it shows what I learned by doing Monte Carlo simulations is I found the variability of potential returns from Monte Carlo simulations to be so incredibly massive. So you would I would do one scenario and there would be one sequence of returns where the client wound up with dying, you know, spending at their their their desired level of income and dying with a portfolio of 20 million dollars for, you know, just a middle class, mass affluent client.

And then but they had a 22 percent failure rate. And, you know, it's zero money and the plan not working and then completely spending the money. And to me, when I started looking at those, the range of potential outcomes, it really just knocked me back because I had never realized what a big difference the market returns, the sequence of the market returns and then the actual market returns could make on a portfolio.

And it just illustrates that even it illustrates the point. And the thing I like about the ninety six percent where you start the retirement and a ninety six percent of the cases, you start the retirement with a million dollars, you withdraw on a four percent. And at the end of 30 years, you still have the million dollars, same million dollars in nominal terms, not adjusted.

I think that illustrates how. I guess the impact of those returns, because to me, that was shocking when I when I grasped that data, because I say, wow, I could still have the million dollars. So the mind would immediately go and react and say, well, the four percent rule is golden, ninety six percent of the time it's going to work.

But then what about the other times where it doesn't work? And that can be in many that can be useful, but it can also be very misleading. And to me, one of the things that I've taken away from the research I've been doing is the need for flexibility. If a client is flexible as far as where they're willing to allocate their portfolio and flexible in their spending rates, a whole range of solutions can open up and we can apply some intelligent strategies to the distribution where there can be an amazing, you know, much higher distribution because of the flexibility.

Have you have you observed that? Am I right in that or am I off base with with with your research? Right. You're right that with Monte Carlo simulations, you get such a huge range of outcomes and you're right about that. And some of those best case scenarios, your wealth grows 20 or 30 times over the retirement period.

But well, and the other point about that ninety six percent number was to try to really highlight that the four percent rule is meant to be conservative. It's it's supposed to work in the worst case scenario. Right. And what that number is telling you is, you know, hey, in ninety six percent of the cases, you actually don't end up dipping into your principle, more or less after the end of 30 years.

And yeah, I mean, that's. So there's a huge range of you could become incredibly wealthy, but and you typically you're not going to be dipping into your principle, the four percent rule is conservative. But right there are those cases where the four percent rule may not work and you do have to be flexible.

I'm excited about the work that that you're doing and then some of the other academics are doing. And I'm especially excited about some of the work. I'm not sure if you pay much attention to the online, the early retirement community. And on one hand, I love the four percent rule because I think it's very useful.

But on the other hand, I really feel as though we need to learn a little bit more about it. So I think the four percent rule is a very useful rule of thumb. Excuse me, thumb, because it's straightforward. It's easily understood. You need twenty five times your annual expenses.

And if you have twenty five times your annual expenses in a diversified portfolio, you're probably going to be well suited. But I answered a question from a reader the other day, and I just said, if you're looking for me to the reader was thirty five, excuse me, listener was thirty five years old and said, I hate my job.

I want to retire. And I've got basically a million dollars of assets. Can I afford it? And I said, if you expect me to feel confident telling you that, yes, you're going to be able to retire at thirty five years old and spend spend off of this four percent rule for the rest of your life.

I'm very uncomfortable with that. But if we can bring in added flexibility, if you're willing during a time of of low market returns, if you're willing to go and add some part time income or willing to make a dramatic change in your spending, then yes, this can be a really useful starting point.

And I think that we owe a great debt to to Bingen and the Trinity guys for popularizing this, because I think it's given people a much more conservative estimate for how they can do their own their own retirement planning, at least as a starting point. It gives them a number to shoot for.

So I think it's very useful. But also we've got to keep doing the research around it like we've been doing. Yeah, and it definitely is a lot more realistic. Because Dave Ramsey and his radio show today still talking about the eight percent safe withdrawal rate, 100 percent stocks. And that's something that Bingen figured out for us back in the 1990s.

It's just wrong. Yeah, that one is just so dangerous. And it's flat out. I'm very uncomfortable with that. And I have I have had clients in my office telling me that saying, look, I can do eight percent, both on retirement and also based off of life insurance analysis, because he gives the same advice for life insurance analysis.

You need ten eight to ten times your income. Twelve percent returns pull off four percent for inflation. You can you can take your eight percent. You can take your eight percent distribution. And I sit there and I scratch my head and I say, do you realize how nuts that scenario is in the real world?

So I'm glad that you are pointing out it out from an academic perspective. The danger in that. What I'd like to talk about is I'd like to talk about some of the assumptions that are inherent in the research that you're doing. And here's one thing that does get me very nervous.

I get very nervous that all of this is based upon a all of the research that we've been doing in this scenario is based upon the data that we have over the last, say, since accurate data since the late 1920s. Right. And I'm concerned about taking those results and projecting them forward to the future.

And although I don't necessarily feel like we have to throw those results out, I certainly don't think that I think it's naive to do all of our driving by looking in the rearview mirror and and not looking forward and say and recognizing that it's possible that the future does look different than the past.

It's possible that we do have different economic growth rates. It's possible that as we look at some of the economic challenges, that the future may look different and that would dramatically affect these. Models that we use. What thoughts do you have on my concern about looking at backward looking assumptions?

Right. Yeah, my my very first article that I published in the Journal of Financial Planning was I had a there's now 20 countries, 20 developed market countries where we have the financial data going back to 1900. And just looking at with the 4% rule have worked in all these other countries.

And basically it would have worked in the US and Canada. But there's there's a lot of well, I forget the number like. At the aggregate level, I think the 4% rule has about a 66% success rate historically across all these countries, such that part of the problem is just we're dealing with in the 20th century, the US became the world's leading superpower and the world US stock market capitalization.

That was about 20%. The US stock market was about added up to 20% of the total world stock market in 1900. And it was like 50% in 2000. And in those kinds of circumstances. The US, it's a really unique time in world history where a country grew so rapidly in such a short period of time, and it's not even being pessimistic about the future of the US, you can still be optimistic, but still say maybe in the 21st century, we're going to have a bit more average type of performance with our equity markets, in which case just that alone means 4% is not going to be as safe as it looked in US historical data.

So you're right about that. It's the 4% rule is just based on US historical data since, well, banking used since 1926. And we do have Robert Shiller data on his website goes back to 1871. The 4% rule did work in that older period as well. But that's what it's based on.

It's a relatively short period in world history. Right. And it's, and like you said, it's a, it's a period of, of tremendous growth. And one of the major concerns that I have is that in all of my formal training as a financial advisor, the training that I received to pass the government licensing exams, the training that I received to pass the, you know, my, my firm's elements, you know, financial planning education, the majority of the, the information that we study is based from a US American centric context.

And so if you were to ask me, what is the average return of the general US stock market over the last a hundred years, I got an easy answer. I know that, but I don't have any idea about what the average return of the major German companies has been or the major English companies have been.

And by putting a historical lens to, to the world and looking at it and recognizing that we have had a history of, of time in the United States that has been massive growth, that it seems that US America, many US American companies have had major successes on a global scale, but yet looking at the trends and the forces that, you know, the US American economy, that the individual companies are doing very well.

But if you look at how much of the money is kept offshore because of the, the US tax policy, if you look at the changes with the corporate, the, you know, some of these corporate inversions that are gaining news, that are hitting the news now, I think that's a trend that's only just beginning.

I could be wrong about that, but that's a trend that's only just beginning. And the major economic headwinds of, you know, basically to use professor Kotlikoff's numbers from Boston, from Boston college, $222 trillion of unfunded liabilities and national debt facing the US American economy. It's hard for me to see how the future won't look different than the past.

Now, what it looks like, I don't know, but it's hard for me to see how the future won't look a little bit different. And then you must've experienced that. You said you taught in Japan for 10 years. That's always the example that is cited in, in financial markets. It's hard for me to feel so confident about the 4% rule, looking at some of those headwinds.

Yeah, I think fair enough. And just so, well, to give you the answer that William Bengen would, would give for that is yeah, all that may be true, but if you look at this US historical period, it had the great depression and it had the stagflation of the 1970s and so on.

And the 4% rule had survived through all of that. So in that regard, there's some precedent that we could rely on it in the future. But no, I agree with you. I think that the US historical period is not enough. And there's all these things that could be different in the future.

And just simply looking at the fact that in other countries, results varied. Yeah, the US equity markets in the 20th century, basically with that data set, Australia was the only country that had a higher stock return and less stock volatility than the US. There are a couple other countries that had higher average stock returns, but much more volatility.

So a much lower compounded return. And then all the rest of those countries were lower, mostly lower. Well, Canada had a lower return, but less volatility than most every other country was lower returns and more volatility. The US really came out of that right near the top of the heap.

And with Australia, even in Australia's case, the 4% rule didn't work. They, in the stagflation they experienced in the 1970s, 3% ended up being a much more realistic number than 4%, even though they had a better equity market performance. And I'll give Bangan his Great Depression data, but I would observe and I would say that the United States of America of 2014 is different in many ways than the United States of America in 1914.

There's a dramatically different culture. There's a dramatically different socioeconomic context. There's dramatically different costs, embedded costs for doing business. And I mean, I'm happy to give him the 4%, but it certainly seems to me that we live in a very different world than we did back then, a world that is much better in many ways, much greater access to life enhancing technology, a much higher standard of living for the average person, and yet a world that is dramatically different and has many more embedded costs in 2014.

And so I don't know how to reconcile those things. Right. And some other research I've been involved with, with David Blanchard and Michael Finca, was looking at how well low bond yields mean lower future bond returns, which imply a lower withdrawal rate. As we were kind of talking about earlier, when interest rates are so low, it's very difficult to get income from the portfolio.

You have to spend some of the principal. And then Robert Shiller has the cyclically adjusted price earnings ratio, which is a ratio of how highly stocks are valued, are they overvalued or undervalued, and it's currently at levels that are right up near the highest in history, only exceeded right before the great depression, Robert Shiller's PE10 had a higher value, and then it had a significantly higher value in the late 1990s, as we had that lead up to the bursting of the tech bubble.

But we're now at a point where we don't have much experience with such low bond yields and high stock market valuations at the same time. The only other time that happened was 1898, 1899 and 1900. So we really are in this sort of uncharted water. Higher stock valuations mean lower expected future stock returns and lower sustainable withdrawal rates.

So high valuations, low bond yields, it's sort of uncharted water with that, even though the thing about the great depression was there was dramatic deflation and also the real return on bonds doubled in the 10 years between 1929 and 1939. So even the stock market performed so abysmally. Bonds were doing great.

Deflation meant when you're testing the 4% rule, rather than having to increase spending each year, you actually get to decrease spending each year because of the deflation in the economy. So the 4% rule ended up being fine in the great depression. And it's not clear that that's, I mean, we don't have to have another great depression to have a set of circumstances where the 4% rule wouldn't work.

Right. The permanent portfolio guys are screaming to say deflation, our plan works in deflation too. I can hear them in my ear saying, get out of this stock bond paradigm and come over to the permanent portfolio side where we bring in some of the other, hopefully non-correlating assets. I have one other thought.

I'm interested in your feedback. And I've got three more questions and then we'll wrap up. But I feel another major change that, and one thing that I'm particularly attracted to is bringing back the influence of dividends on an investor's portfolio, because in many ways, the easy answer to this retirement distribution rate, the safe withdrawal rate is don't burn your principal and set up a system where your principal is not being invaded.

So if you had a portfolio of dividend producing stocks and you were just spending the dividends, then no matter what's happening to the underlying values, you can live off of that stream of dividends. You're not going to exhaust your portfolio. This is an advantage that rental real estate has, that if you have rental real estate, you can just spend your net rental income without worrying necessarily about the underlying value of the portfolio.

And one of the concerns, however, is as our society has shifted away from dividends and with this emphasis, and for example, the most popular investment strategy now is the total return strategy and using indexing. I'm just, I feel like that to me feels safer than counting everything on these safe withdrawal rates.

And I wish for a re-emphasis on dividends, on not invading principal, rather living off of the production of that principal. But it's hard to make that go with a client. It's hard to make that go with a client who doesn't have enough to live off of dividends only to support their level of lifestyle.

Do you have any thoughts or feedback or is there anyone kind of bringing back a focus on dividends into the portfolio research? Yeah, I think that's a viable strategy. I don't really have a strong opinion about it. It's certainly like internet discussion boards and things. A lot of people will talk about how they've basically built a portfolio of dividends stocks that are going to cover their retirements.

And I think, yeah, we'll help with the sequence of returns risk if you can avoid selling principal when the market is down, that if you're able to just live on those dividends and historically dividends do tend to keep up so that even if the stock price goes down, the dividend check might go down a little bit, but not by as much as the stock price.

I know William Bernstein, who's a writer and planner in Oregon has said, you could basically treat 50% of your dividend level as safe, historically dividends have never fallen by more than that. The only other point about this is Vanguard did a study where they talked about how portfolios focused on higher dividends tend to have lower total returns than just the total market portfolio.

And in that regard, maybe an inferior strategy, but at the same time, though, if this is something that the client understands and can stick with and that Vanguard study didn't incorporate the sequence risk, if this really does help to avoid some of that sequence risk. Yeah, I think it could be a viable strategy.

It needs to be studied more, but it's also difficult because it's just getting the historical data on different individual stocks and their dividends and so forth. It's a little bit hard to define how you would study this in a systematic way. But at some point, yeah, someone might look in that direction.

Especially in the light of the changing investment climate, because dividends are so heavily penalized today that you see many companies just for the sake of their shareholders. And I'm uber simplifying the discussion, but simply saying, why would we pay dividends? We have the worst taxation policy ever on dividends.

It's better in our clients, in our customers, best in our owners, best interests for us to enhance their capital gains. It's better for us to do stock buybacks. It's better for us to do other alternative methods to return that money to our shareholders than paying dividends. And so I've read research that would just show there has been a change in the investment climate.

And so you would have to factor that into the research as well, which would make it tough. I just think it's more intuitive in many ways. And one of the challenges, and I'll wrap up the research portion and get into just a couple of your thoughts on solutions. But one of the challenges when we talk about retirement planning, that's such a generalized term.

In my mind, I think about in many ways, almost three different levels of retirement planning. If I'm doing planning for somebody who doesn't have many assets and is still interested in retirement planning, then their retirement planning, let's say lower income, lower assets, their retirement planning is going to look very different than a moderate middle income, middle assets, middle class person versus an affluent person.

Is that someone who is poor and is planning for retirement, 4% is not going to be a strategy that's going to be central. And for someone who's affluent, 4% is not going to be a strategy that's central because there they may be able to deal with the variability of returns.

They may deal with the sequence of returns. But where this 4% rule is most important would be for those, there's some term for it, I can't remember the right financial planning term, but... Mass affluent? Right, right. The mass affluent who they've got just enough money, but not necessarily a lot of excess.

And then we're trying to figure out how can we maximize the spending of that income over their lifetime with the confidence and surety of knowing it's going to last for their entire lifetime. But we don't want to die with a bunch of money. We don't want to underspend. And so that's where some of this research is the most useful is in that middle tier where we're trying to maximize the return but not die with a bunch of extra money.

So it's... That's a fair... Sorry, I didn't ask, I didn't leave you with a question. But that's where we've got to focus on. We've got to focus in a little bit more. And that's the job I think we as planners do is to interpret the research from the academic side, but then put it into context for an individual.

And I think we can do a huge amount of good in that area. Any feedback on that comment? No, that's a fair point. And even... So even though there's a difference between what is the safe withdrawal rate and then what is more like an optimal withdrawal rate that balances those considerations for wanting to be able to spend more when you're still alive and healthy and know you're alive versus wanting to protect.

There's not a high chance you're going to still be alive at age 100, but you don't want to be alive and destitute at age 100. And looking at how to balance all that out, that moves you away from necessarily using the safe withdrawal rate to using something that might kind of balance those trade-offs better.

And that's, yeah, we need more research in that area. That's the way the academics approach that is to use something called utility maximization of plugging in a formula of how much life satisfaction people get from different spending levels. And then that satisfaction decreases with higher spending and then try and translate that all into what's a good spending strategy.

I'll have to research that more. I haven't spent a lot of time reading any of that literature, so I'm interested in, I wrote that down. I'm interested in reading some of the, some of the research in that area. We just celebrated my grandmother's 100th birthday last week. So thanks.

It does happen. And you're right. Was she on the Today Show with the Leatherman? No, no, she wasn't. But she's doing well. She lives in Wyoming and she is doing well. All the family got together and celebrated her. And it just shows that, you know, who knows, she could live another week or she could live another 10 years.

And you've got to account for that in your planning. It makes a difference. I'd like to ask you just a couple of questions. And as we wrap up about where to help our listeners continue their own research. First, there's a lot of debate about the stock bond allocation. Do you have some guidance that you could give people as far as how to think through their own allocation in their portfolio of stocks versus bonds, maximizing the total returns of exposure to stocks versus maximizing the volatility from greater exposure to bonds?

Do you have any guidance that you could give people as far as how to think through that question for themselves, especially in light of safe withdrawal rates? Yeah, so the safe withdrawal rates, the 4% real style thinking is 50 to 75% stocks in retirement. So the idea, if you're focused on upside and just want to maximize wealth or maximize the legacy, the inheritance you leave behind, then just the highest stock allocation that you can feel comfortably go with is going to, on average, give you the most wealth at the end.

On the downside of trying to protect your spending, and that's where the 4% rule is focused on trying to protect your spending. Then actually even going back to some of Bengen's original work, the asset allocation doesn't matter that much anywhere between about 30 and 80% stocks is going to give you about the same worst case scenario with sustainable withdrawal rate.

And then with the sequence risk as well. So one of the areas where I did research with Michael Kitsey, we wrote about the rising equity glide path in retirement. But the idea instead of sticking with, say, a 60, 40, 60% stocks over your whole retirement, you start at retirement with about 30% stocks and then slowly work your way up towards 60% stocks that that can potentially provide even further protection on the downside while also giving you a lower average stock allocation.

It is clear that most retirees are going to need some stocks because fixed income, if they want to spend more than what the yield curve of more than what's feasible with a fixed income portfolio, then they have to take some market risk. They have to have some stocks in the portfolio to hope that are hopefully going to grow and help provide protection for inflation.

So definitely need some stocks, but you're getting to then the point of. There are a wide variety of stock allocations that will get the job done, and it's not necessarily the asset allocation that's the most important variable. It's more about the spending rate, the flexibility with the spending. And then and then the asset allocation, your rising equity glide path article, I think, would be counterintuitive when we're accustomed to thinking about the approach taken by the target date retirement funds, which is to start off with heavy stocks and to continually continually diminish the exposure to stocks throughout our lifespan, throughout our lifespan.

I understand your argument to be that by starting at the beginning of retirement with, as you said, a 30 percent stock allocation, 70 percent fixed income, then that would allow for a more stable portfolio and lowers the sequence of returns risk. And then as time goes forward, because we have to worry less about the sequence of returns risk, we can take more volatility as time goes forward because we have a shorter amount of time and it makes less of a difference in the portfolio.

And so therefore, that's why you can increase your exposure to equities to capture the maximum total lifetime return throughout your retirement, because you're not so worried about having those four awful years, right, you know, from 65 to 69. Is that an accurate understanding of your of your paper and of your research?

Yeah. And basically, if you're not in the worst case scenario, your wealth continues to grow. And so your withdrawal rate as a percent of what's left in the portfolio is actually decreasing. And so your retirement become even more stable and then you're bringing back up the equity exposure. And yeah, that's if you are in a worst case scenario, it's you get those poor market returns in early retirement.

You have a lower stock allocation at that time to protect you. And then to the extent that poor market conditions don't last forever, you're going to be increasing your stock allocation at a time where you're going to hopefully be getting some some better market returns. Right. And that's right.

It's I'm glad you pointed out it's very counterintuitive, though, for people. I think it's very counterintuitive for people who have just mainly been exposed to this idea that as you get older, constantly decrease your exposure to equities. If you were encouraging, if there was somebody with an above average interest in this stuff, whether it's because they're trying to figure out their own plan or whether it's because they're an advisor or a planner who's trying to help clients, somebody with an above average interest, where would you encourage someone to go to start their research and to start their their learning path?

How would you teach somebody to educate themselves on this area? That's a good question. I've I've got a blog that I write quite frequently about even reviewing different studies from others. So that could be a good starting point. And that's if you just Google my name, you'll come across the blog pretty easily.

My last name is Piazan Paul, F as in Frank, A.U. First name Wade, W.A.D.E. And then the American College also has the New York Life Center for Retirement Income, even though it has the corporate sponsor there. So New York Life is an insurance company, but it's got it's a great educational resource with interviews with a lot of different experts from all over different aspects.

And so that you can watch through those videos. It's a great education. And that's even where basically some of these the arguments in favor of the probability based approach. A lot of that comes with interviews with Michael Kitsies and Jonathan Guyton available through the New York Life Center. So even though they're basically against insurance solutions, just pro total returns investing, it's an unbiased source of information that you can hear all the different sides of the story with the video series there.

And yeah, I think those are my blog and then the New York Life Center video series would be two really good places to get started for financial advisors. The American College also has the RICP designation. It's a three course sequence, a retirement income certified professional that goes into great detail about how all the different retirement income tools work and how to build a retirement income portfolio and how to claim Social Security and and just a whole lot of information related to retirement income.

And I'll put in a plug also, those are both really good results. I'd put a put in a plug for people to find for a for if you're an advisor or planner become really excellent in this stuff. I think the RICP curriculum from the American College is probably a perfect place to start.

And also, I mean, I haven't done that course of study. Myself, but from all of the exposure that I've had to the topics that are covered, I may do it myself just to give myself an organized way to work through it. So if you're an advisor or planner, specialize in this.

And then if you are an individual consumer, I think this is really one of the most valuable places that an individual financial planner can have. One of the biggest impacts that an individual financial planner can have on your situation, it's unusual. A lot of times people think a financial advisor, financial planner is all about maximizing the rate of return on their on their portfolio.

That has very little impact on on any of these studies. These studies are all using index data, right? Dr. Pfau, is that right? Yeah, right. Right. It's all index data. So all of these are based upon index data. All of these are based upon just, you know, it's this is investing style diagnostic.

But there are so many little things that a good planner can do, little things that can help, whether it's a Social Security distribution strategy, maximizing that, just a huge amount of of research that that somebody can do. There's a huge amount of good that a planner can do in this area that can help.

And I really believe, even though we've kind of glossed over it, I believe that some of these other strategies that that have been developed, whether it's a, you know, the systematic withdrawal strategy, focusing on the the the total return from a portfolio, a bucket strategy where you're, you know, you're you're setting aside different buckets of of investments towards different points of retirement, a flooring approach where you're trying to put a floor in place, an asset dedication approach where you're trying to match invest and invest certain investments to liabilities that are going to be incurred during retirement.

These strategies have been developed to try to help people to feel more comfortable with their portfolio. And going back to my bias towards behavioral investing, the key to any plan is having you as an individual feel comfortable with the plan. And if you feel comfortable with the plan, you'll follow it through.

So one person may be very comfortable with a 4% rule and just a series of systematic withdrawals. Another person may not be comfortable with that and they'll bail on the plan, in which case all the academic research in the world doesn't help a bit. When the market is, you know, when the market is taken to 25% decline and you're sitting there saying, how am I going to eat next year?

You might need a different plan if that's your personal, if that's your personal approach. So my plea would be advisors, sharpen up and potential clients consider consulting an advisor in this area. It's a real, real value add in my opinion. Dr. Fowler, I think that is most of what I had on my list.

Can you think of anything that I missed that you think would be valuable for people to be aware of? No, I think we had a pretty good introduction, but yeah, we, there are different retirement income strategies. We didn't really talk much about that. The buckets are time segmentation or asset dedication that you just mentioned.

But yeah, that's basically, you've got the systematic withdrawals, things like the 4% rule, then you've got holding individual bonds to meet upcoming expenses in the near term, and then having stocks or other growth investments for the longterm and then essentials versus discretionary, which is the floor upside. It's building a safe and secure income floor for the basics and then having more volatile assets for discretionary expenses.

And yeah, it's, it's complicated. It's William Sharpe who won a Nobel prize in economics. He developed a lot of the tools of modern finance. He said that he's now devoting the rest of his career to retirement income planning research. Wow. And he says it's the most difficult problem he's ever looked at.

So it's, it's tough. So there is value in advisors, getting more education and then individuals running things by an advisor to make sure that they're not making mistakes. Even with social security, it's the difference between a good claiming strategy and a kind of default. A lot of people just want to take it to age 62.

Well, if they end up living into their eighties or nineties, they could get a hundred, more than a hundred thousand dollars more if they make an optimal claiming strategy. So it's an area where mistakes can be made and it's important to make sure you're doing things right. And spend more time thinking about your retirement strategy than you do where you're going to buy the next vacuum cleaner to save $10 on the price.

It's, we're talking about hundreds of thousands of dollars with retirement income planning. It's huge. It's huge. It's hard for me to understand. I understand that. And I'm very frustrated with my own industry as far as some of the awful work. We deserve a lot of the criticism that we've taken.

It's very difficult for me to see, however, how an average person will be able to retire successfully without the input of a good financial advisor around these strategies. And just from having worked with average people, it's very difficult for me to see how you can't do it with an advisor.

And I'll give you one anecdote, Dr. Fowle, when I was up, when I was up your way last week in Bryn Mawr there for our MSFS capstone class, here is a room of some of the most qualified financial advisors I've ever sat in a room with. And we were going over retirement distribution strategies.

And one of the individuals in our class had made an in, what's the word that means? Not, not ideal. Like it wasn't the most ideal decision for social security. And he had been pressured by the social security administration. And I use the word pressured intentionally because that was what he experienced.

He'd been pressured into taking an, a suboptimal distribution strategy. And thankfully, I think we were able to help him give him some strategies for unwinding that strategy and deferring it a little bit more. But even amid, amidst a bunch of experts, many of us have made mistakes, me included.

So I think I'm glad to hear that about William Sharpe. I have to, I have to reach out to him and maybe talk with him about some of what he's been studying. And thank you for the work that you're doing. I really appreciate it. Okay, thank you. Do you feel more well educated now?

I hope you do. That was the purpose of the show. So hopefully that starts to give you some background for the 4% rule. I would encourage you to go over to Dr. Fowle's blog. If you're interested in the technical side and the technical aspects of some of the academic literature that has been done in this area, start with his blog.

He does a good job of linking to some of the different resources and of discussing some of the different resources that are available. Certainly not an easy area of science to read through, but it's an important science area of science. I'm going to try as time goes on to bring you, maybe talk through some of the articles, talk through some of the different strategies that we talked about.

May bring Dr. Fowle back in the future to discuss some of the strategies. Probably the key thing that I would explain to you, however, is I think there's a big difference between being able to talk about this information in a technical way that's straightforward and being able to apply it to an individual situation.

In my experience working with clients, that's where the real rubber meets the road. That's where a good financial planner can really have a fighting chance, I think, to really impact a client's, it really impacts your situation. So I would encourage you to consider this, but don't go too deeply into the technical side because the technical aspects are just really one side of the situation.

But hopefully you feel more well educated now and able to understand the information that comes at you. That's it for today's show. Hope you've enjoyed it. Back in the saddle now, doing these shows full time. Got some more interviews coming this week and answer some listener questions. Really working on improving some stuff on the show.

I've got a lot of things on my to-do list. To improve, I thank you for being here and would love your feedback on today's show. It's challenging to do these technical shows, but I think I'm going to try to do more of them, especially in an interview format. I'm going to try to do more on my own as well.

So we'll just see how it goes. Learning with you. Thank you for listening. Make sure that you are subscribed to the show and whatever your preferred subscription technology solution would be, whether that's iTunes or Stitcher or wherever you like to subscribe to stuff and you're a podcatcher, make sure that you're subscribed.

Thank you for those of you who've been leaving reviews. I really value those reviews. They encourage me and keep me going. Have a great Wednesday, everybody. When you download the Ralphs app, you have easy access to savings every day. Get the most out of weekly sales and receive personalized coupons to save on your favorite items, all while earning one fuel point for every dollar spent.

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