Make It Last – Ep 59 – Why Taking 4% Annually Might Destroy Your Retirement

The news outlets like to tell you that you can take 4% a year from your retirement portfolio and not run out of money, but is that true? This week shares with you why taking 4% every year might destroy your retirement.

Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and certified elder law attorney and Certified Financial Planner™. Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.

For more information, visit Medina Law Group or Private Client Capital Group.

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Click below to read the full transcript..

Make It Last Ep 59 Why Taking 4% Annually Might Destroy Your Retirement

Victor Medina:  Everybody, welcome back to Make It Last. I’m your host Victor Medina. I’m so glad you can join us. Today, by my calendar, it is going to be June 16th. It’s such a lovely, lovely weekend going on.

I have a really exciting show where people talk about retirement all the time. I ask them, “How much can you safely take out in retirement?” and they will tell me that it is four percent per year. I’m just going to share with you some information on this show that will sort of challenge that belief and make you think a little bit more about whether or not that’s what you can do.

Before I get to that topic for today, I did want to let you know about a couple of things that are coming up. One of them has to do with something personal that I want to invite you to. The other thing is a notice that the IRS has given us that I want to share with you about upcoming tax scams.

Let me tell you first the personal thing. Some of you know that I like to sing. [laughs] The thing that I like to sing is a cappella music. What I do is, I will sing with a local a cappella group that has been together for the last 30 or so years.

It’s been around for a very long time. In fact, just in this last May, if you’ve been a long‑time listener you know that I’ve invited you to join us at a concert that we put on in Kingston with other a cappella groups. We kind of put this together.

If you heard that show and you’re interested in coming but you weren’t able to make it, in fact, I’ve got another invitation for you. We are going to be at the Lawrenceville Library, the Lawrenceville Library on July 2nd at seven o’clock. A free concert. It’s about an hour long.

If you’d like some great a cappella music and listen to that, we’re a very high‑quality group. I do invite you to come and see it. The people that are members of the group often have degrees from music institutions. They’ve got a bunch of stuff that they’ve done professionally in the music world.

I’m proud to say that I’m the musical director so I lend a little bit at least to how good that they sound. We’re going to be there doing a wide array of music. It’s about an hour long. Absolutely free. You should think about coming if you’re in fact interested. That’s a big personal thing.

I’ll remind you next week on the 23rd, and maybe even on the 30th before we go. You’ve got three reminders off of that. We also do have an upcoming seminar that we’re going to be hosting on July 11th. If you’re interested in coming to that, I’m going to go pretty deep in the whole topic of asset protection planning and estate planning.

It’s going to be a good survey course, like a 101 course for estate planning and eligible asset protection planning.

If you’ve ever been curious about how you might be able to protect assets if you became sick sometime in the future, if you had to go to a nursing home, or how you make sure that your spouse isn’t someone that becomes impoverished because of your illness, something like that.

Preserving your inheritance for the next generation. Many times, people are trying to make sure that they leave something behind after they’re gone.

If you’re interested in those topics, and you want to make sure that your ducks are in a row, I can invite you to an upcoming seminar on the 11th. If you want more information about that, we don’t quite have the link up ready to go to register, because it’s a little bit far out. If you are interested in coming to that, you can reach out to my law firm at

There’s contact information on that page. Just send an email saying, “Interested in the seminar.” We’ll put you on the distribution list, and we’ll let you know when that is coming. Finally, we also relaunched, excuse me, a video newsletter that we send every other week about five interesting facts including a couple on legal and retirement, things that I don’t cover in the radio show.

If you’re at all interested in receiving that, again, you can reach out and we’ll add you to the distribution list. Just go to the law firm at, click on the contact form and say, “Interested in the newsletter.” Or you can do both, the seminar and the newsletter if you want, whatever. It’s fine.

Let us know about that and we will add you on there. We want to be invited into your inbox. We don’t want to appear there without invitation, so just let us know. I wanted to start the show talking about an alert that came out by the IRS. We are well‑done with tax season.

That was done in April unless you filed an extension, in which case you’re counting down the days to October.

Victor:  Even though we’re done with the tax season, the IRS is warning taxpayers to remain on alert for phishing emails and telephone scams. According to the IRS, summer attracts the attention of scammers since so many people are waiting to hear from the tax agencies.

They’re expecting to hear from the tax agencies, especially if they filed something and they’re curious whether or not what they filed was accepted. They would call this correspondence season. That’s what tax professionals call the summer. It’s correspondence season.

Scammers continue to change up their tricks to stay ahead of law enforcement, to try to get information from taxpayers. Personal information like your Social Security number, or information about your account, or pins and passwords. You should stay diligent. The IRS is letting you know there’s a few things that you should be wary of.

The first is any prerecorded messages. For most variations of this scam, scammers are calling and they’re leaving phone messages that suggest if you don’t call back, a warrant will be issued for your arrest. Remember, the IRS does not call and leave prerecorded, urgent messages asking for a call back. If they want to arrest you, they’re going to show up. [laughs]

They’re not going to let you know ahead of time. Be wary of that. Another kind of phishing scam can be what we call a demand for payment scam. What they’re doing there is, scammers call, and they claim that you have an outstanding tax bill, and they want payment over the phone using a gift card, prepaid debit card, wire transfer.

The IRS does not call you and demand payment using specific methods or threaten any kind of law enforcement intervention. In fact, if you get something from one of these places, if the IRS is looking for you for payment, they’re going to send you a certified letter. That certified letter is going to take money any way you will send it to them, including a personal check. That’s OK for them.

If you’re hearing about this and you’re hearing about it from the perspective of a prerecorded message or a gift card, or demand for payment on wire transfer, scam. Stay away from it, not at all legitimate by the IRS. They certainly don’t threaten deportation or anything like that, which is a big topic in the news.

Another one is to help you believe that the taxpayer call is for real. The criminals will often spoof caller ID numbers from something called a Taxpayer Assistance Center.

If you go in and they call, and you pick up the phone, and you question their legitimacy, they will tell you to double check the Taxpayer Assistance Center with the IRS governor website and it would line up. Total scam, they’ve spoofed everything.

They can do it all on the phone. They can look like a local sheriff’s office. They can look like Department of Motor Vehicles, federal agencies, any of those things. If they’re not calling you, the next thing that they’re going to do is send an email on that. It’s very popular because it costs nothing.

Even calling you might be a long‑distance call, but to send an email costs nothing at all. A very popular variant of this is to send you an email that appears to be from the IRS, or a programmed link to the IRS, such as the Electronic Federal Tax Payment System, or EFTPS. That’s a real thing, by the way, but they will spoof the email saying that it’s from there when in fact, it’s not.

The email will prompt you to click on links which will take you to a website, have you put in your personal information and then return the information versus email. Again, the IRS does not initiate contact with people by email to request any personal or financial information. Don’t click on any links that you don’t recognize at all.

If they’re asking for personal information, pin codes or passwords, run away. If they’re demanding payment, run away. If they’re threatening to bring in law enforcement if you don’t do something about it, again, run away. Not at all a legitimate call, whatsoever. We definitely want to stay away from those.

If you do receive a suspicious phone call, letter, or message on an email, first of all, don’t engage with them just hang up. Don’t call them back. You can call the IRS directly to discuss your information. There’s no real place to report this, I don’t know what to tell you. I don’t think you’re going to stop them from doing what they want to do.

What you can do is essentially, if you have any question about it, you contact the IRS yourself, and you check in with them on your situation. You can do that at 800‑829‑1040. That’s 800‑829, and then remember your tax form annually, 1040.

Victor:  Stay away from this. Don’t fall for the tricks. Keep your information secure. This is the Wild, Wild West out there and I’m hoping that you will keep yourself protected.

When we come back I’m going to talk to you about why taking four percent out a year may not be the best strategy for retirement. We call that systematic withdrawal. I want to talk to you about a risk that’s associated with that. Just stick with us. We’ll be right back on Make It Last.

Victor:  Welcome back to Make It Last. I’m talking today about what we call systematic withdrawal risk. In order to understand that, we need to understand what systematic withdrawal is, any concept we call sequence of return.

This is an opportunity for you to grab paper and pen. I mean, not while you’re listening right now. You’re listening to a podcast, pause, then come back and hit it.

I want to talk about these two things because this is not like when you are accumulating assets. When you are saving, you are doing something called dollar cost averaging. You just contribute. You don’t care what the market is doing at any time. If it’s high, you contribute money. If it’s down you contribute money and know that you’re getting things on sale, but you keep contributing money.

When you are in retirement, when you are in decumulation, what is going on in the market is very important to making sure that your portfolio survives as long as you need it. There is three risks that are tied together in retirement. We have what’s called a systematic withdrawal risk, a sequence of returns risk, and those are related to a market risk.

Let’s talk a little bit about sequence of returns for people, especially if they’re retiring early. Sequence of returns basically is this idea that what the market is doing at any time might impact how long your money last.

The sequence of returns, whether you go up, up, down, down, down, up, up, down, up, at any given time is going to effect how long your money lasts. This is particularly the case for early retirees. If you retire and immediately afterwards the market starts to go down…let me back up.

When you retire, what the market does in the first 10 years have a much greater say on your final portfolio value than what the returns are in later in the market. If you have a long bear market, a series of poor or negative returns, followed by a long bull market, a series of great, positive growth, you yield a portfolio that is significantly less than the other way around.

That’s even true when the average annual return is held steady against both scenarios. This is the case and it really is impacted when you take a fixed amount from your retirement portfolio to cover your living expenses. If there’s no withdrawals, your account value will be exactly the same. But then, that’s not retirement.

You’re not using the money in retirement. It only comes in when that series of returns starts on the low end for the first 10 years and then goes back up, and you’re taking money. If you’re not taking any money then mathematically, the value of the portfolio is essentially the same on the average amount of return.

If it’s average seven percent, whether it starts low first and then goes up or goes up and then goes down, the values going to be the same on the average if you’re taking no returns.

As long as you don’t sell, during any of those phases, you will be exactly at the same. But here’s the thing, most people are using their money in retirement. What they’re doing is doing everything wrong on conventional wisdom for investing.

They’re selling low in order to use the money in retirement. That is the sequence of returns risk. That’s essentially this idea that when you have to take out money and what the market is doing in that period of time significantly affects how much your money will last. Let’s pull a thread of this a little bit to have you understand it.

If you run into a tough bear market for 10 years immediately following your retirement but then continue, continue to blindly withdraw four percent from the original amount year after year after year, you run the risk of running out of money. Once your portfolio reaches zero, there are no more equities to build it back up.

You’ve jumped off the roller coaster and therefore you cannot ride it back up again. That’s the case whether you’ve taken everything else out immediately, early, or if you’ve got a little bit left over. Either way, it is a problem. It is a problem. How do we combat it, because that’s really the issue.

This is a mathematical thing. It exists. It is a risk. How do we control for the risk? Well, here’s the thing, we have no idea what the sequence of returns is going to be. We cannot predict what to do when because our crystal ball is broken. The crystal ball in my office is broken, I can’t tell you what to do in which order.

Certainly, if you knew ahead of time, whether the current year was going to be up or down, you could reconstitute your portfolio to sell whatever was going to be high at that time to replace what was going to be low and coming back up. Nobody knows what the next year is and it’s even harder to predict what the next 3 or 5 or 10 years are going to be.

We are in the third largest economic expansion in history. Do we think that it will last forever? No. The academics of it suggest that, in fact, it won’t last forever. But when? When will it change? We don’t know. The biggest predictor of your final portfolio value, if you are on systematic withdrawal, is the withdrawal rate.

Even if you start out by taking four percent of your original portfolio value when the market goes down and you still need the same money to live, when you draw that dollar amount…let’s say that you’re going to take out $50,000 a year. $50,000 a year. When you take that out as a beginning amount, that’s a percentage of, let’s say, four percent.

Say it start at four percent. When you take it out, it’s four percent. But when you take $50,000 out and the market’s down, the percentage of your portfolio goes up. I hope that makes sense for everybody because if you’re still taking 50,000 out, then 50,000 of a smaller number is going to be a higher percentage.

One of the things that you can do to combat this, of course, is change your withdrawal rate. Some of the money that you withdraw every year may need to go to necessities like food, rent, gas, your car. But the rest of the money is going to luxuries such as vacations, shopping for new clothes, discretionary things, giving gifts, giving tips, whatever else.

Gourmet coffee, go to Starbucks. If you can cut down on your non‑mandatory, the not‑necessary expenses during those years, you can keep the withdrawal rate down to the same percentage even when the portfolio value goes down.

It’s even better if you can move to a place that has got a lower cost of living, in which case you have the flexibility to move to a rural area or some place that doesn’t cost as much, out of New York City.

You can move to that area when the market’s down and then come back again. You can move back to your hometown after things back up again. At the end of the day, we’re talking about flexibility in your withdrawal amount.

When people say that the long‑term return of a market is between seven and eight percent, we use seven percent in our office to be conservative about it, they mean that over several decades. Over the short‑term, the returns could swing drastically between negative 40 percent and positive 40 percent. One of the ways that you can combat this is to be flexible in your own spending.

This is especially the case, obviously, in the beginning of your retirement because as I started this segment off in saying, is that, what the returns are in the beginning are a better predictor of your success than what they are at the end.

Victor:  Especially, the portfolio value, that if you start with a downturn in the beginning, then it means that you have less of a chance for this to actually last as long as you need it to last in retirement.

When we come back, I’m actually going to give you another strategy to help combat this, and it’s going to be one that turn the whole idea about systematic withdrawal on its ear, kind of. I’m going to explain that when we come back. Stick with us with Make It Last. We’ll be right back.

Victor:  All right. Welcome back to Make It Last. We’ve been talking about what the risks to your retirement are in systemically withdrawing money every year, every year, every year.

What I did in the last segment is I talked to you. I said, “Listen, if you’re somebody that wants to take out four percent of your portfolio every year and the returns in the beginning are low, there’s a risk that, in fact, this money will not last as long as you need it.

We talked about one of the ways to combat that was to be flexible about what the withdrawal rate was, so you could change your lifestyle, based on what the market returns were doing. While that is an acceptable strategy, I got to tell you I don’t like it.

The reason why I don’t like it is because it makes you somebody who’s a slave to what the market is doing at any time. You have to watch the returns. Then look at the returns, and then change your behavior based on the returns.

I don’t like that because it makes you an emotional investor in your retirement. We want to stay away from emotional investing. You have to change your mood, your attitude, and your action based on whatever the market’s doing at the time.

I’ve got a better solution for you. This is what we would call bucketing or time segment investing. The idea is that as you approach retirement, it’s the opportunity for you to change what your portfolio looks like.

In the beginning, you kept a portfolio that was well‑diversified. Then when you were saving money, you just kept buying more and more of that portfolio. You tried to represent as much of the market. You were always in the entire diversified portfolio, meant to make that a magical seven or eight percent every year.

When you reach retirement though, you’ve got to change around your thinking because this money needs to be used for a particular purpose. It’s not just one bank to go to and make a withdrawal every time that you need money.

In retirement, what we’re going to be thinking about is what are we going to be using the money for. There’s two things that we need them for. Of course, we need them for necessary expenses. That’s one way of thinking about it.

We also need them on a certain time horizon. You don’t need the money 20 years from now today. I’ll say that one more time because I know it sounds like a throwaway line, but the money that you need 20 years from now you don’t need today.

What that means is that you don’t have to have today’s money invested like you need it 20 years from now. The converse is true. If you think about time segmenting your investments, essentially what you’re trying to do is think about a short, mid, and long‑term bucket.

Your time horizon is going to dictate how it is invested. Things that you’re going to need in the short‑term are going to be invested in stuff that are going to have no impact by the market whatsoever.

If you have it in cash or cash equivalent for that first year, six months, that means that you don’t care what the market’s doing for that money because you have enough money in that period of time to meet all of your short‑term needs.

Of course, if we kept all of the money there, we wouldn’t grow as much as we need to in retirement. We need the money to grow into retirement in order for us to have enough. If we have that in that short‑term bucket but we put more than a first year or two into that, it’s going to affect our long‑term success. We don’t want everything there.

In the short‑term money, we don’t want any market performance or risk applied to that bucket. Then we’ve got a mid‑term bucket. The mid‑term bucket is a bucket in which you are going to fill the short‑term bucket. As you consume the short‑term bucket, you are going to fill it back up with the mid‑term bucket.

It means that we’re going to be taking money out of the mid‑term bucket to put it in the short‑term bucket. The reason why I’m lining that up is if you’ve been listening to this whole show, we know that the returns on the mid‑term bucket are just as important as they are on the short‑term bucket.

We can’t have a series of low returns from the beginning and still feel like we’re going to be successful in our retirement. We need to have a strategy for that that will insulate it from market returns.

We’re running up towards the end of what we’re going to be doing on this show. What I’m going to do is I’m going to tease that the next show I’m going to tell you with that mid‑term bucket is going to be. There’s a specific strategy for that mid‑term bucket so that we’re sure that it’s never going to go down, regardless of any market performance.

Then there’s the long‑term bucket. The long‑term bucket is the stuff that’s on the roller coaster that will be invested over a number of decades that will get that average seven to eight percent. It will continue to grow.

The nice thing about splitting it up this way is that it changes your emotional attachment to what’s going on to your money. You feel a sense of peace and calm knowing that your short‑term money is safe, your mid‑term money, which you’re not using right now but you know you’re going to use in the future is safe. Then your long‑term money, you don’t need right now.

In part, you don’t care what it’s doing or how it’s doing at that time. You know you have faith that the market will return what the market’s supposed to return over the long haul. It will make it seven or eight percent over decades. Since you don’t need it right now, you’re not looking at that account. You’re not emotionally invested in that account.

When you have this time segmenting, this bucketing approach, short, mid, and long‑term bucket, sometimes what happens is that, in fact, you don’t spend as much as you thought you were going to spend in retirement.

The question comes up from clients that says, “OK well, what do I do in that circumstance?” I say, “Well, look, if you’re not consuming the short‑term bucket and the mid‑term bucket’s not filling the short‑term bucket, but it’s growing somewhat, insulated, protected, growing somewhat, we’re going to take the overage on that.”

The stuff that it’s throwing off that we don’t need in the mid‑term, we’re going to reinvest it in the long‑term. We’re going to reengage on this dollar cost averaging like we’re saving again because we’re like squirrels. We’re putting nuts away for the future.

We want that account to be larger because if we are fortunate enough to get the bull market in the beginning, we expect that there will be a bear market that comes later that’s just going to be what happens. We’re saving up for the rainy day.

Sometimes we’re rowing, sometimes we’re sailing. It depends on what the weather is. In this case, when the winds of the growth are sailing us forward, we’re conserving that energy for some time in the future. It’s important to do that.

This helps us insulate, too, because that way you don’t have to be walking around nervous that a bull market is going on, and while you know that means your account’s growing. You’re worried about what happens when the account backtracks.

In this time segmenting approach, we’ve got the system that allows us to take the stuff that we generated in the mid‑term bucket. It’s extra that we don’t need, and we throw it into the long‑term bucket for the rainy day and allow that to continue to grow.

The last question that comes out is, “OK, what happens when the mid‑term bucket is consumed, or how long should I be thinking about this?” Well, it turns out that that mid‑term bucket is about 10 years.

The way that we do it, it’s meant to last about 10 years. Over that period of time, you are likely going to have some gains in the long‑term bucket. The long‑term bucket is going to have done something positive over those 10 years in some fashion. Those are the things that we harvest first.

When it comes back to refilling the mid‑term bucket, when we go from the long to the mid, because the mid went to the small. We go backwards again. Then we will, in fact, be able to fill that mid‑term bucket from the long‑term bucket gains all along the way.

This time segmenting is a core concept in our retirement in a decumulation strategy. I’ll just make a brief pitch here that if you’re not working with an advisor that’s talking to you about this decumulation strategy, I think you ought to start to go shopping for one that will.

Because decumulation is the riskiest part of your investment life. If you just invest and you do it early, and you do it consistently, the accounts will do what it needs to do. It doesn’t require a lot of professional intervention. Just keep saving, just keep investing, and it will be there when you need it.

However, if you’re in decumulation and you don’t understand how sequence of returns risk, and you don’t understand how to time segment your investments, and your advisor is not talking to you about those things, that’s a signal for you. That’s a signal for you to reexamine what your strategy is and where you’re getting professional advice.

Get yourself in a position where the person who’s giving you that professional advice is an expert in this whole decumulation strategy. This is where they spend their time, and they can help guide you to do that. That’s my advice for you.

Listen, I hope that you found this to be an exciting show as I teased when we come next week. I’m going to tell you what that mid‑term bucket needs to be. It’s a very specific investment. It needs to be what we’re recommending for it to serve all of the goals that we need it to serve, including always being there and never being at risk to suffering the downside of a sequence of returns risk.

You’ve got to listen next week. If you’re not going to be around this Saturday morning at 7:30 AM, then I need you to subscribe to the podcast. Go to iTunes. Go to Android. Go to Spotify. We’re on all those places.

Do a search for Make It Last with Victor Medina. You’ll see the blue box of the logo. Hit subscribe and you will get the next episode automagically delivered into your inbox or onto your device. Then you won’t miss this super important episode where we finally reveal what that mid‑term bucket/s going to be.

Thanks for listening today. Again, if you’re interested in learning more about our legal planning side, we have a seminar coming up on July 11th. Email our office. Go to Send a contact request. Just tell us that you’re interested in the seminar. We will subscribe you for that.

If you’d like to receive our biweekly newsletter and video newsletter discussing topics of interest, again, the same thing. Go to the website, go to Click the contact, say interested in newsletter. We will add you to both of those.

Other than that, it’s been Victor Medina on Make It Last where we help you keep your legal ducks in a row and your financial nest egg secure. We will catch you next Saturday. Bye‑bye.