The Death Of The 4% Rule (And What That Means For Retirees Overseas)
Friend and colleague Paul Terhorst forwarded me an article from the Wall Street Journal(WSJ) that talks about the death of the 4% rule. Paul writes a column for the Overseas Retirement Letter about the financial aspects of retiring overseas, so this kind of thing gets his attention. And, considering that Paul retired when he was 35 (about 30 years ago) and hasn’t worked since, I pay attention to whatever gets his attention.
For decades, the 4% rule has been used by people (and their financial advisors) to kind of shortcut a financial plan for their retirement. When you retired, the theory went, you would withdraw 4% of the money you had saved for retirement and live on that for the coming 12 months. The next and each subsequent year, you would withdraw that initial amount again, adjusted for inflation. The expectation was that, following this system, you wouldn’t outlive your money (assuming you lived no more than 30 years after retirement).
Unfortunately, the “experts” are figuring out that the 4% rule doesn’t work in the types of markets we’ve seen over the last 10 years. The big epiphany is that, if your nest egg’s value drops significantly during the first couple of years, you can’t continue to take out the 4% plus inflation without running out of money sooner than 30 years.
Some financial geniuses working in the U.S. financial planning industry have spent years researching this to come to that conclusion. They could have saved themselves the time and trouble by checking with Paul first. He’s not only been living on his nest egg for 30 years, but, in that time, he’s managed to grow it to more than double its original value. Paul and his wife figured out on their own that the secure retirement route would be not to withdraw some percentage of their nest egg each year but to live off the income generated by their nest egg portfolio. If that meant moving from one retirement location to another when wherever they happened to be living got too expensive, then that’s what they did.
Story Of Paul And Vicki Going Offshore
Paul and Vicki started their retire-overseas adventures in Argentina in the 1980s. When Argentina became too expensive a place to live full-time, they moved on to Europe and, most recently, Asia. Today, they spend much of their time in Thailand, their current base, from which they travel regularly to neighboring countries. Over the years, Paul and Vicki have lived in Mexico and even Paris, this when the euro was at its weakest against the U.S. dollar, making Paul and Vicki’s cost of living extremely affordable.
This kind of flexibility and control is what living an international lifestyle gives you.
The pundits referenced in the WSJ article, having killed off the 4% rule, advocated different approaches instead. Some recommended simply dropping your initial withdrawal to 3%. That ain’t a lot to live on. Others suggested splitting the nest egg, buying an annuity with half and keeping the rest in stocks. With this approach, you’d have some fixed income; however, you wouldn’t have access to that capital in case of an emergency.
Turn to the tax man was the final suggestion. Base your withdrawals on the IRS’ life expectancy tables for planning your retirement income. With that plan, you’d take out some percentage of your nest egg each year based on how long the government thought you’d live considering your current age. Right, that’s what you want to do…rely on the government to manage your retirement funds.
None of the financial experts quoted in the article suggested living off the income generated by your nest egg. They probably don’t think anyone can…especially in a U.S. market where income yields are less than the rate of inflation. The viewpoint is myopic, considering only what can be accomplished by investing money in U.S. markets.
Again, all those pundits should have asked Paul what to do. He would have told them, simply: Globalize your life. Then you’ll be able to generate a decent yield, albeit, in some cases, with currency risk.
I’m with Paul.
You can get 5% to 6% on money market accounts in Colombia right now, 5% or more on long-term CDs in Panama, 5% to 12% net yields on income-producing real estate from apartment rentals in many markets to condo hotels in Panama, Colombia, or the Philippines, and you can get high double-digit yields on some agricultural investments (although turn-key ones with management may not produce cash flow right away, in some cases).
As I mentioned in my dispatch on Monday, one definition of “wealthy” is having passive income to exceed your living expenses. The beauty of working with that model is that, if need be, you can adjust your living expenses. You can either buy less stuff…or move someplace new where stuff costs less to buy. Meantime, you’re also managing your investments with the goal (and always the potential) to expand your income. You’re completely in control.