Reflection No. 48

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Three Quick Hits:

• Article: 401(k) Changes

  A recent Executive Order could open 401(k)s to more investment options like private equity, crypto, and real estate. I’ll share my two cents on allowing private equity. Even if allowed, I don’t think most 401(k) plans are going to offer these investments. The risk is high, the fees are higher, and exposing average savers to speculative investments invites potentially more liability/litigation for plan sponsors. If the goal is let more investors share in the growth that now happens in private markets, the real solution isn’t permitting private equity/venture capital into 401(k)s; it’s making it easier for companies to go public.

• Tip: Invest in yourself. Set aside a “learning budget” for courses, certifications, or books that can increase your income or career potential. Investing in yourself is the best investment you can make.

• Quote: “Beware of little expenses. A small leak will sink a great ship.” - Benjamin Franklin

Two Questions:

• What emotion do you most associate with your money? Why?

• If money were no object, how would your day-to-day life change? Would your values shift?

REFLECTION No. 48: The 4% Rule

I - Issue: What’s the 4% Rule?

R - Rule: The 4% rule says you can withdraw 4% of your portfolio in your first year of retirement, then adjust the dollar amount annually for inflation.

A - Analysis: We all think about our retirement years, but do we know how to turn our savings into a paycheck? Queue the 4% rule. If you had $1M in retirement, the 4% rule says you’d be able to withdraw $40k in your first year of retirement and adjust that dollar amount each year for inflation. The 4% rule is built for a roughly a 30 year retirement and assumes you are invested in a diversified stock-bond mix.

This rule is a good starting point, but it’s not one you have to set in stone and never change. After all, everyone’s retirement will look different. Here are two forces to consider.

First, most of us want to retire earlier. Earlier retirement lengthens the runway: more years to fund means thinner margins, so you might consider dialing the 4% rule back to 3-3.5% or adding income buffers like a part-time job or delaying social security.

Second, market swings—especially bad returns early on—could wreck havoc on your portfolio. If the market retreats in your earlier years of retirement, any fixed withdrawals will be pulling from a shrinking base. During a market downturn, you can trim or pause discretionary withdrawals, have a nice cushion in cash/bonds, or add in income buffers.

With all that being said, the 4% rule is a good starting point but should be paired with adaptability and checked annually.

C - Conclusion: Use the 4% rule to set a baseline paycheck and adjust it accordingly as needed to enjoy the retirement you’ve always dreamed of.