I recently discovered a Ted Talk by Dr. Riley Moynes about the “4 phases of retirement.”
We talk a lot about the financial side of retirement planning.
– Safe withdrawal rates
– Tax efficiency
– Investing to and through retirement
– Legacy
– Insurance
However, it’s equally important to understand and think about the softer side of retirement planning. In this episode, you will want to hear Dr. Moynes’ take on the 4 phases,and I’ll talk about a real-life hero in the College Football world that canhopefully inspire you to SKIP the dark and depressing phase!
I hope you enjoy this one.
-Kevin
Takeaways
· Retirement is not just a financialtransition; it’s an emotional journey.
· Understanding the four phases ofretirement can help avoid pitfalls.
· The vacation phase is characterized byfreedom and excitement.
· The loss phase involves identity andpurpose challenges.
· Michael Phelps’ experience illustratesthe emotional struggles of retirement.
· Therapy and seeking help can be crucialduring transitions.
· Finding new meaning in retirement isessential for fulfillment.
· Engaging in service and mentoring canenhance retirement satisfaction.
· Financial independence allows forexploration of new passions.
· Planning for purpose in retirementshould start before retirement begins.
Are you interested in working with me 1 on 1?
Recently, I talked about the 4% rule and how it’s historically conservative, with average withdrawal rates potentially as high as 7% annually. But here’s the kicker: averages hide the risk of when bad returns happen.
This is what we call sequence of returns risk. Imagine retiring at the end of 2007 with $2 million saved. You’re ready for the good life, ready to enjoy retirement. Then the market drops 51%. Suddenly, that $140,000 withdrawal doesn’t look very safe anymore.
In today’s article, we’ll highlight some major market downturns over the last few decades and discuss seven real strategies to help you protect against this dreaded sequence of returns risk.
What is Sequence of Returns Risk?
Sequence of returns risk is the danger that the timing of withdrawals from your retirement account could negatively impact your portfolio’s overall rate of return. This risk becomes particularly significant when you begin withdrawing funds from your investment portfolio in retirement.
The sequence of returns in the first few years of retirement can determine whether your savings last a lifetime. Unlike pre-retirement years, when you’re accumulating assets, the sequence of returns matters significantly once you start withdrawing money.
For example, two retirees with identical portfolios and withdrawal rates can have dramatically different outcomes based solely on when they retire. If you retire just before a market downturn, your portfolio may never recover, even if the market eventually rebounds.
Historical Market Downturns: A Look at Bear Markets
To understand the real impact of sequence of returns risk, let’s examine some significant market downturns that could have affected retirees.
The Dot-Com Bubble (2000-2002)
This period was particularly painful because there were actually two separate bear markets in a three year span:
In March 2000, there was a total drawdown of 36% over 18 months
After a brief rally from January 2002 through October 2002, prices dropped another 33%
This means you had two 30+ percent drops in basically a three-year period. This is why this time is often called “the lost decade.” The markets were flying in the 90s because of the dot-com boom. Anything with a dot-com at the end of its name was soaring in price, and people were feeling euphoric.
I guarantee some folks tried to retire around 2000 after seeing their 401(k) grow to $2 million. They were feeling confident until they experienced a 36% drop at the beginning of 2000 and then another 33% drop in 2002.
The Great Recession (2008-2009)
From October 2007 through November 2008, prices dropped 51%. Then, after a brief rally at the end of 2008, from January 2009 through March 2009 (ultimately hitting bottom on March 9, 2009), prices dropped another 27%.
I’ve talked to people who retired around this time. Thankfully, many stayed retired, which was great. But I also know people who were planning to retire in 2008, 2009, or 2010 who couldn’t. They wanted to retire but weren’t able to, whether because of fear or their portfolios dropping significantly.
COVID-19 Sell-Off (2020)
Who would have predicted a pandemic at the beginning of 2020 and the markets dropping 30% over just five weeks? For me, this was the most dramatic sell-off because of its speed.
I remember talking to a friend who worked at Google whose coworker’s wife was a doctor. At the beginning of the pandemic, she knew what was happening and moved their 401(k) to cash.
They were right for a period—the 30% drop happened. But the crazy part was that we hit bottom on March 23, 2020, and the markets fully recovered all those losses by May, only 2 months later. The S&P 500 ended that year up 18% after being down 30% in March.
This illustrates why I caution people against trying to time the market. You can’t predict these things, which is why you shouldn’t get too high in the highs or too low in the lows.
The Triple Bear Market (2022)
The 2022 downturn was different from anything I’d experienced in my career. I call it the “triple bear market” because it affected stocks, bonds, and cash:
Stocks were down 25% over about nine months
Bonds were down 15% due to aggressive interest rate hikes
Cash was essentially returning a negative yield because interest rates on cash lagged behind inflation
This triple threat created a challenging environment for retirees, as all three major asset classes were negatively impacted simultaneously.
7 Strategies to Protect Against Sequence of Returns Risk
Retiring into these markets is largely uncontrollable. What you can control is having a plan for your portfolio management and withdrawal strategy to protect against sequence of returns risk. Here are seven effective approaches:
1. Implement Guardrails (Dynamic Withdrawals)
One of my favorite strategies is the concept of guardrails or dynamic withdrawals. Instead of sticking to a fixed percentage rate like the 4% rule, you adjust your withdrawals based on portfolio performance.
Guardrails, made famous by Guyton and Klinger, establish decision rules for when to make adjustments to your withdrawal rate. There are four primary decision rules:
Portfolio Management Rule: Pull funds from overweight asset classes. If stocks are up, trim stocks to get back to your target allocation. If stocks are down and bonds are up, trim from bonds.
Inflation Rule: Give yourself an inflation raise every year, similar to the traditional 4% rule.
Capital Preservation Rule (Portfolio Rescue Rule): If your withdrawal rate increases by 20% because your portfolio value decreased, cut your spending by 10%.
Prosperity Rule: If your withdrawal rate decreases by 20% because your portfolio value increased, give yourself a 10% raise.
By implementing these four rules, you can potentially increase your starting withdrawal percentage by 20-25% while maintaining the same or better probability of success compared to the traditional 4% rule.
This strategy works best for those with flexibility in their spending. If you break down your expenses and find that 50% is discretionary, you could be a great candidate for guardrails because you have the capacity to cut spending during market downturns.
2. Create a Bucket Strategy
The bucketing concept involves having a dedicated pool of assets you tap into for withdrawals. This might include:
Cash reserves
CDs
Short-term bonds
Individual bonds like short-term treasuries
Short-term bond funds or ETFs
Intermediate-term bond funds
There’s no scientific formula for how much to keep in these buckets. Some advisors recommend 1-2 years of expenses based on the average duration of bear markets. Others suggest up to 5 years of expenses, considering that the Great Recession took about five years to fully recover from the bottom in 2009.
The right amount depends on your risk tolerance. Someone with higher risk tolerance might be comfortable with just 1-2 years in cash or cash equivalents. Someone more concerned about market volatility might prefer 5 years in a CD ladder or individual bond ladder.
For our clients, we use a combination of money market funds, individual bonds, short-term bond ETFs, and intermediate-term bond ETFs. This typically provides liquidity for 2-5 years of expenses, depending on risk tolerance and other income sources.
3. Categorize Your Spending (Needs, Wants, Wishes)
Breaking your spending into three distinct categories—needs, wants, and wishes—helps identify what you can potentially cut during market downturns.
This approach helps determine:
How much of your spending is truly discretionary
Whether you have the flexibility to cut spending by 10% if needed
How much to allocate to your bucketing strategy
For example, I recently worked with a couple planning to retire in their 50s with a 7% initial withdrawal rate until they begin Social Security. By analyzing their spending, we determined they had enough discretionary expenses to implement guardrails successfully.
4. Consider Partial Annuitization
Annuitization involves turning some of your assets into a lifetime income stream. While annuities can be a controversial topic, they have a place in retirement income planning when used appropriately.
The benefit of partial annuitization is that it puts less pressure on your volatile assets (stocks and bonds). This allows those investments to potentially grow at a higher rate because you’re withdrawing less from them while maximizing income from the annuity.
I’ve said this before: you will not out-withdraw an annuity in your lifetime. I recently had a client with TIAA who received an annuitization schedule showing a payout rate close to 8% annually. Few advisors would recommend withdrawing 8% from a portfolio due to sequence of returns risk.
To determine if annuitization makes sense for you:
Identify your essential spending needs.
Compare those needs to guaranteed income sources like Social Security or pensions.
If there’s a gap, consider annuitizing enough assets to fill that gap.
5. Earn Additional Income
Similar to annuitization, earning part-time income early in retirement can significantly reduce sequence of returns risk. This strategy can be implemented reactively to a market downturn—if we enter a bear market, you could work part-time and reduce your portfolio withdrawals.
This works best if you:
Enjoyed aspects of your career
Are willing to work a couple of days a week
Would consider consulting or a completely different field
I’m working with a couple who initially planned to retire several years from now, but after seeing friends get sick or pass away, they want to retire sooner. The wife has a side hustle, and they’re considering renting out an ADU (additional dwelling unit) on their property through Airbnb. These two income sources could potentially allow them to retire 4-5 years earlier than planned.
6. Adjust Your Social Security Strategy
You may have plans to delay Social Security as long as possible to maximize lifetime benefits. However, if you’re experiencing a significant market downturn early in retirement, starting Social Security earlier than planned could reduce pressure on your portfolio.
While this might reduce your lifetime Social Security income, it could be worth considering if it helps preserve your portfolio during a critical period. What’s helpful is that if you start Social Security before your full retirement age, you have a one-time option to stop it at your full retirement age and then delay until 70 (or as long as you want) to receive delayed credits.
7. Implement an Asset Allocation Glide Path
Different phases of retirement have different income needs and sources. Your investment strategy should be dynamic, not set-it-and-forget-it.
Early in retirement, during what I call the “bridge period” (from retirement until you start Social Security), you may have no guaranteed income and might be less risk-tolerant. During this phase, you might have more in your cash bucket—perhaps that five years in cash, cash equivalents, or short-term bonds.
Once you start Social Security, you’ll have guaranteed income covering your fixed expenses. At this point, you can potentially take on more risk because your withdrawal rate might drop significantly—from 5% to 1%, for example. This increased risk capacity could allow for a more growth-oriented portfolio allocation.
Preparing for the Next Downturn
I don’t know when the next market downturn will be—I don’t have a crystal ball. If I did, I probably wouldn’t be working at all! But the most important thing is to have a plan in place before the next downturn occurs.
Right now, markets are looking pretty good. This is the perfect time to set your plan. We may be heading into a recession, the Fed may be too late with cutting rates, unemployment might tick up with tariffs and uncertainty—I don’t know. But set up your plan before the next downturn so you can implement it unemotionally rather than reactively.
Be proactive instead of reactive. What are you doing to reduce your sequence of returns risk? If you’re approaching retirement or already retired, now is the time to review your strategy and ensure you’re protected against this significant risk to your retirement security.
Remember, sequence of returns risk can devastate your retirement savings if you don’t have a protection strategy in place. The strategies outlined above—guardrails, bucketing, spending categorization, partial annuitization, part-time income, Social Security timing, and dynamic asset allocation—provide a framework for building that protection.
By implementing these approaches before market volatility strikes, you’ll be better positioned to enjoy a secure retirement regardless of what the markets do in those crucial early years.
At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions.
If you are looking to maximize your retirement spending, minimize your lifetime tax bill, and worry less about money, you can start with our Retirement Readiness Questionnaire linked on our website at www.imaginefinancialsecurity.com. Click the “Start Now” button to learn more about our process and how we might be able to help you achieve a more confident retirement.
Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.
This is for general education purposes only and should not be considered as tax, legal or investment advice.
In this episode, I’m tackling America’s “headline culture,” how short clips and soundbites dominate not only politics, but also the way we think about retirement planning. With the tragic assassination of Charlie Kirk as a starting point, I reflect on how social media algorithms amplify the loudest, most divisive voices, while thoughtful, nuanced conversations get drowned out. When I dug into Charlie’s long-form interviews, like his sit-down with Gavin Newsom, I realized how much context gets lost and how much more common ground we really share when we go deeper.
The same thing happens in retirement planning. Viral soundbites like “Social Security is going bankrupt,” “Never pay off your mortgage,” “The 4% rule always works,” or “Financial advisors can’t beat the market, so don’t hire one” may sound convincing in 20 seconds, but they can be misleading and even harmful if you base major decisions on them.
In this episode, I break down why these headlines don’t tell the full story and what you should consider instead.
At the end of the day, just like politics, retirement requires long-form thinking. The clips may get clicks, but the deeper conversation is where the truth, and a confident retirement, really lives.
-Kevin
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Welcome to another “Whiteboard Retirement Plan” breakdown!
Scottie and Meredith had the perfect plan: retire at 65, sign up for Medicare, and start Social Security at 67. With nearly $1.9 million saved, everything looked like it was on track, until life threw them a curveball. After some friends their age got sick and passed away, they started asking: Why wait? Can we retire right now at 60?
In this Whiteboard Retirement Plan, Kevin Lao stress tests their plan to see if early retirement is really possible without jeopardizing their future.
You’ll hear:
How a five-year shift can dramatically impact retirement projections
The hidden risks of retiring before Medicare and Social Security kick in
Which levers (investment allocation, side hustle income, rental property, and more) can make early retirement realistic
The trade-offs between financial security and living life on your own timeline
If you’ve ever wondered whether you could retire earlier than planned without blowing up your financial security, this episode is for you.
-Kevin
Are you interested in working with me 1 on 1?
If you’ve nerded out on retirement planning, you’ve probably heard of the 4% rule. It’s a seemingly simple guideline. Retire with a million dollars, withdraw $40,000 in your first year, adjust for inflation each year after, and you’re set for 30 years. But is this rule-of-thumb still relevant in 2025? Interestingly, Bill Bengen, the ‘father of the 4% rule’ back in the 1990s, recently released a new book called “Richer Retirement” where he suggests the 4% rule might actually be too conservative.
In this blog post, we’ll explore
The background of the 4% rule
Examine Bengen’s recent updates
Discuss some downsides of following this rule too rigidly
Provide practical approaches for your own retirement income planning.
Let’s dive in!
What is the 4 Percent Rule in Retirement?
The 4 percent rule was developed by Bill Bengen in the 1990s as a worst-case scenario approach to retirement withdrawals. Essentially, Bengen wanted to determine a safe withdrawal rate that would allow a retiree’s portfolio to last at least 30 years, even in the most challenging market conditions.
Through his research, Bengen back-tested various withdrawal rates using historical market data going back to 1926. What he discovered was fascinating. While many retirees could have started with much higher withdrawal rates, those who retired in the fall of 1968 (right before two bear markets and a period of high inflation in the 1970s and 1980s) needed to be more conservative.
The 4 percent rule works like this: In your first year of retirement, you withdraw 4% of your total portfolio. For example, if you have $1 million saved, your first-year withdrawal would be $40,000. In subsequent years, you adjust that amount for inflation. If inflation runs at 3% after your first year, you’d add $1,200 to your withdrawal, taking out $41,200 in year two, and so on throughout retirement.
This approach was designed as a worst-case scenario. In Bengen’s research, a portfolio with this withdrawal strategy would have lasted at least 30 years, even for those unfortunate 1968 retirees who faced particularly challenging economic conditions.
How the 4 Percent Rule Has Evolved: Bengen’s New Research
In his new book “Richer Retirement,” Bill Bengen has updated his research with some interesting findings. One key change is that he expanded the asset classes in his analysis.
The original 4% rule study used a simple portfolio allocation:
50% in S&P 500 (large-cap US stocks)
50% in intermediate treasury bonds (either 5-year or 10-year)
In his updated research, Bengen added several additional asset classes:
Mid-cap stocks
Small-cap stocks
Micro-cap stocks
International stocks
Additional bond types
The results? That same 1968 retiree could have actually started with a 4.7% withdrawal rate and still had their portfolio last beyond 30 years.
Even more interesting, in recent interviews promoting his book, Bengen has suggested that withdrawal rates of 5.25% or even 5.5% could be reasonable starting points for today’s retirees. That’s a substantial increase from the original 4% guideline.
Why the 4 Percent Rule Has Limitations
While the 4 percent rule provides a helpful benchmark, there are several important limitations to consider before applying it to your own retirement planning:
It Ignores Other Income Sources
The 4 percent rule assumes your investment portfolio is your only source of retirement income. In reality, most retirees have multiple income streams, with Social Security being the most common.
For example, if you retire at 60 but delay Social Security until 70, you might need to rely more heavily on your portfolio during that 10-year “bridge period.” Your withdrawal rate might be higher initially (perhaps 6-7%). Once Social Security kicks in, your portfolio withdrawals could drop significantly.
Let’s say you need $100,000 annually and have $1.5 million saved. That’s a 6.67% withdrawal rate—well above the 4% guideline. However, if Social Security later provides $50,000 annually, you’d only need to withdraw $50,000 from your portfolio. Your withdrawal rate drops to just 3.33% (assuming your portfolio hasn’t depleted).
It Doesn’t Account for Tax Efficiency
The 4 percent rule assumes all your retirement assets are in tax-deferred accounts like 401(k)s or traditional IRAs. While this is common, many retirees today have a mix of account types:
Tax-deferred accounts (401(k)s, traditional IRAs)
Tax-free accounts (Roth IRAs, HSAs)
Taxable brokerage accounts
By strategically withdrawing from different account types based on tax considerations, you can potentially increase your effective withdrawal rate well above 4% while maintaining the same after-tax income.
It’s Based on Retirement Spending Phases
The 4 percent rule assumes consistent spending throughout retirement, adjusted only for inflation. However, retirement spending typically follows three distinct phases:
Go-Go Years: The early, active phase of retirement with higher discretionary spending on travel, hobbies, and bucket-list experiences.
Slow-Go Years: The middle phase where activity levels and spending naturally decrease.
No-Go Years: The later phase with limited mobility where spending on discretionary items decreases significantly.
A Morningstar study found that retirees’ spending typically lags inflation by about 1% per year. This means your spending power might naturally decrease over time. This pattern could allow for higher initial withdrawal rates that gradually decrease.
It Uses a Conservative Asset Allocation
The original 4% rule was based on a 50/50 stock/bond allocation, which Bengen considered the minimum acceptable stock percentage. In his research, portfolios with 75% stocks and 25% bonds often supported initial withdrawal rates of 5%, 6%, or even higher.
Your risk tolerance and capacity should guide your asset allocation. If you’re comfortable with more equity exposure (60/40 or 75/25), you might safely support a higher withdrawal rate.
It’s Based on Worst-Case Scenarios
Perhaps most importantly, the 4 percent rule is based on the worst retirement timing in modern history. The average safe withdrawal rate across all the historical periods Bengen studied was actually 7%—not 4%.
This means most retirees following the 4% rule not only preserved their principal but significantly increased their wealth throughout retirement. While having a backup plan for worst-case scenarios is prudent, planning your entire retirement around the worst possible outcome might lead to unnecessary sacrifice during your go-go years.
Practical Approaches to Retirement Income Planning
So how should you approach retirement income planning given these insights? Here are some practical strategies:
Use the 4.7% Rule as a Benchmark, Not a Rule
The updated 4.7% guideline should be viewed as a starting point, not a rigid rule. Compare your planned initial withdrawal rate to this benchmark. If you’re significantly higher (like 10%), that might be a red flag. But if you’re at 5.5-6% with Social Security starting in a few years, you’re likely on solid ground.
Optimize Your Tax Efficiency
Consider the timing of your distributions from different account types. For example, the period between retirement and age 75 (when Required Minimum Distributions begin) presents a potential “Roth conversion window” where you might be in lower tax brackets.
Strategically converting some tax-deferred assets to Roth during these years can potentially reduce your lifetime tax bill and enhance your legacy if that’s important to you.
Balance Risk Tolerance with Risk Capacity
Determine both how much risk you need to take (risk capacity) and how much risk you’re comfortable taking (risk tolerance). If your retirement is well-funded, you might not need to take on as much market risk, even if that means a slightly lower withdrawal rate.
Consider your different “buckets” of money and their time horizons:
Just be careful about overloading bonds in taxable accounts, as this can create tax drag on your returns.
Consider a Guardrails Approach
The “guardrails” strategy, developed by Guyton and Klinger, offers more flexibility than the static 4% rule. It allows for a higher initial withdrawal rate (perhaps 5-5.5%) with rules for when to reduce spending if your portfolio performs poorly or increase spending if it performs well.
This approach can be particularly valuable if you’re retiring early with a longer time horizon. It can also help if you’re borderline funded but don’t want to sacrifice your go-go years.
Develop a Long-Term Care Plan
Long-term care costs can derail even the best retirement income plan. About 70% of retirees will need some form of care in their later years. Without a specific plan for these costs, many retirees underspend throughout retirement out of fear.
Strategies you may consider include:
Insurance
Self-funding
A combination approach
Having a dedicated strategy for potential care needs is essential. It can also give you more confidence to spend and enjoy your early retirement years.
Is the 4% Rule Dead?
So, is the 4 percent rule outdated retirement planning advice? Not exactly. It remains a useful benchmark. The better question might be:
The answer depends on your personal circumstances. Starting with a higher withdrawal rate early in retirement (perhaps 6-7%) and then reducing it once Social Security begins could be a reasonable approach for many retirees.
Remember that no one can predict the future. The key is having a disciplined, unemotional, and repeatable process for managing your retirement income—not just at the beginning of retirement, but throughout your retirement journey.
Final Thoughts
Retirement planning isn’t one-size-fits-all. While the 4% rule retirement strategy provides a helpful starting point, your personal retirement income plan should consider your unique circumstances, including:
The timing of different income sources
Tax efficiency across various account types
Your spending patterns and priorities
Your risk tolerance and capacity
Your legacy goals
Your long-term care strategy
By taking a more nuanced approach to retirement income planning, you can potentially enjoy a richer retirement without sacrificing long-term security.
Remember, the goal isn’t to die with the biggest possible portfolio—it’s to use your resources to live your best life while ensuring you don’t outlive your money. With thoughtful planning and regular reassessment, you can strike that balance and enjoy the retirement you’ve worked so hard to achieve.
This is for general education purposes only and should not be considered as tax, legal or investment advice. At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions.
If you are looking to maximize your retirement spending, minimize your lifetime tax bill, and worry less about money, you can start with our Retirement Readiness Questionnaire linked on our website at www.imaginefinancialsecurity.com. Click the “Start Now” button to learn more about our process and how we might be able to help you achieve a more confident retirement.
Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.
As you approach retirement, or even when you are in the beginning phase of retirement, there is this natural feeling of concern about market uncertainty. After all, the market can turn south in a heartbeat, potentially even leading into a recession. Or worse, a prolonged recession. This term is also known as “Sequence of Returns Risk.” It’s not about your long-term average return, it’s about the ‘sequence’ those returns are generated.
I’ve been stress testing different rates of withdrawal with different starting periods. And the ‘Lost Decade’ of the 2000s is a perfect example of why sequence of returns is so important for retirees to protect against.
In this episode, I’ll highlight some of the major downturns since the 2000s. Then, I’ll talk about some real strategies that you can implement as you protect against sequence of returns risk. I hope you find this one useful!
And let me know what YOU plan to do to hedge against this risk. Also, make sure to share this episode with someone who is also approaching retirement, or who has recently retired! I’m sure they’ll also find it useful.
Thanks for tuning in.
Kevin
Key Topics:
• What Sequence of Returns Risk really means and why it matters more than long-term average returns.
• How the “Lost Decade” of the 2000s demonstrates the dangers of poor return sequencing.
• Practical strategies to protect your retirement portfolio from early losses.
• Tips for stress-testing withdrawal rates and planning for different market scenarios.
Are you interested in working with me 1 on 1?
PFR Nation,
Many of you have adult children or loved ones you hope will benefit from your financial success. But how confident are you in their financial skills? Will they be good stewards of the wealth you leave behind? Even if you don’t plan to leave a fortune, your careful retirement planning might still create a sizable legacy.
I just celebrated 17 years in financial services on 8/28! It’s been a journey full of highs and lows, shaping my perspective on money and life itself. To mark the milestone, I’m sharing 10 key lessons I’ve learned as a financial advisor, entrepreneur, and content creator. My hope is that these insights can help you in your conversations with your adult children or beneficiaries!
I hope you find it useful!
~Kevin
Are you interested in working with me 1 on 1?
