We're going to talk about the 4% rule, retirement planning, and why I think retirement planning is a total joke, especially the 4% rule, and why I believe it's going to fail most people. And then we're going to talk about a paradigm that I hope everyone can apply to their life to maybe reframe this retirement game, reframe this 4% rule, and hopefully give you more hope and control over your wealth.
My name is Caleb Williams. This is the BetterWealth blog, and the purpose of this blog is to make videos on money, business, and finance to help you live more intentionally. I can't think of a word that crushes intentional living like retirement. This concept of retirement is the idea of being taken out of service and to stop providing value. It's a very icky word to begin with, and I think the idea of retirement and being taken out of service has really created a lot of problems in our society.
A lot of people when they retire just lose a sense of purpose and you could ask the question, why do I do what I do and what's the point of life? I know this might be extreme, but I've seen so often people hate what they do on a day-to-day basis for a someday future to retire, and then realize when they hit retirement that it's not fulfilling at all.
When I was working at the bank, I sat down with a couple that was near retirement and after asking them a few questions I realized that they were both miserable and they've never been asked what they've truly wanted out of life. Then to make matters worse, I had to let them know that their retirement wasn't going to be a fraction of what they thought. When they were leaving my office I was just thinking to myself, what am I doing? Why would I want to dedicate my life to making money in a system that I don't believe is truly helping people?
This video might not be unique or life-changing, but I hope I can share a concept in a way that gets you thinking no matter what age you are. You might be in retirement, nearing retirement, or in your 40s or 30s and able to make some pivots that can make a big difference in your life. I'm going to draw and do this 4% rule 101.
The concept of retirement planning is you have this mountain that you're climbing up. The idea is you're going to hit a day where you'll spend down your nest egg and come down the mountain. Wall Street planning often paints this picture: you lock up your money, give control of your money with the hope of appreciation and compound interest. One day, whether you hate your life or not, you will supposedly achieve a number that can be spent down. The 4% rule is used to determine what kind of income you can spend down when included with inflation to have a pretty good chance of not running out of money.
Now, it's ironic because people say 4% is too aggressive due to volatility, interest rates, and people still running out of money. Some now say 3% or even 2.5%. Let's assume you have your rosy $1 million at retirement. This hypothetical million dollar asset, after 40 years of investing, would produce $40,000 a year using the 4% rule. Just divide $40,000, the actual cash flow, by the distribution rate of 4% to get a million dollars.
With your resources, it becomes a cash flow game. Instead of spending your whole nest egg tomorrow, think about what can you do that can get a greater cash flow than $40,000? Many people might look at real estate, for example, for greater cash flow and higher returns compared to just a stock portfolio.
The real question should be: how quickly can I generate desired cash flow? A friend of mine generates $16,000 from his investment portfolio—equivalent to a $400,000 portfolio using the traditional 4% rule. This showcases how creativity and opportunities can yield higher cash flow without needing massive portfolios.
The purpose is not to give investment advice, but inspire different thinking about money. Don't default to the 4% rule; strategize and work with someone who can help you find ways to potentially increase cash flow.
If you want to rethink retirement and enhance cash flow strategies, focus on creating a higher income and cash flow rather than on net worth. Cash flow is ultimately what supports us financially, not net worth.
Again, I hope this post was helpful and sparked some new thoughts about retirement and financial planning. I'd love to hear your biggest takeaways, questions, or if you'd like more posts on cash flow and retirement planning for the BetterWealth blog.