Many of my retired clients have mentioned that the working part of their lives was much easier than the retirement stage and I’m reminded of a t-shirt my husband would wear that said “Old age ain’t for sissies.” One of the most pressing questions I hear is “how do I determine a comfortable draw from my portfolio that ensures there is money left over when I am unexpectedly drawing breath at age 95?” Enter a gentleman named William Bengen who postulated, in 1994, that a retiree could draw 4% from their assets, increasing their distributions by inflation each year, after rebalancing their portfolio annually. Sounds like solid advice…and Swiss Cheese is still a cheese.

Let’s start with what that portfolio looked like back in 1994. Mr. Bengen did his calculations based on a portfolio that contained just two asset classes—intermediate Treasury bonds and large-cap stocks. Intermediate Treasuries were paying an enviable 5.92% in 1994 compared to 1.29% for those same issues right now. In his favour, the inflation rate when he did his research was 2.56%. That’s not terribly far off from our current non-medical inflation rate, although he didn’t account for the increasing amount an older person spends on medical expenses as they age. Another cheesy hole—this is based on a ~25 year draw so you have a choice: don’t retire early or don’t live too long.

All that number-crunching aside, there was a huge flaw in Bill’s strategy—annual rebalancing. While strong statistical data is hard to come by, years ago, the stat often quoted was that less than 15% of people rebalanced their portfolio annually. Anecdotally, I can tell you that the majority of people who swing through my office haven’t rebalanced their portfolio in several years and there’s a good percentage who have rarely, if ever, rebalanced their accounts. Rebalancing annually means every year, not just the years you feel like it and absolutely rebalancing during the years you don’t want to even open the envelope.

My next cheesy hole has less to do with Mr. Bengen’s calculations and more to do with people’s interpretation of his rule of thumb. You’d be surprised how many people layer their own interpretation on this mathematical theory and “feel” that it shouldn’t have to include taxes (boy, are those taxes inconvenient). On a $500,000 post-tax portfolio, 4% is $20,000 (let’s ignore that whole capital gains nonsense). To pull that same $20,000 from your $500,000 pre-tax portfolio, you have to pull at least $24,100, which is now closer to 5% of the portfolio, more than 20% more than the recommended draw. When you are building that retirement cash flow, make sure that you adjust your work based on what you have in your post-tax account and what you have in your pre-tax accounts (and no, we aren’t going to talk about Roths…. it’s been a long week).

I’m not saying that targeting a 4% draw is a bad thing. I love the idea of a structured stream of income since it makes my life a whole lot easier helping people build strong balanced portfolios with that goal in mind. I‘m just saying that what some talking heads call rules, I call guidelines and everyone needs to make sure they take into account as many variables as possible when they come up with the goals we are working towards. If you want to pull more than 4% in the early years of retirement, I hope you have a cash flow put together that has you spending a lot less than 4% in your later years. If you are in a higher tax bracket and all your money is pre-tax, your cash flow should be built on a lot less than 4% after tax.

If you are thinking of leaving a legacy for your kids, if there is an age difference of more than a couple of years between you and your partner, if one of you is the picture of health and one of you isn’t, then I would seriously reconsider becoming too enamored with the 4% theory. In fact, there are mathematicians who are now saying a more realistic draw is closer to 2.5% (although I think that’s a little on the miserly side myself). As with so much of what we talk about, having a better understanding of what you have, what your resources can, and can’t, do, and setting some realistic (and somewhat flexible) expectations goes a long way towards helping you create a consistent, annual stream of income in retirement.