Is the 4% Rule Dead?

Hi there, Stan The Annuity Man, America's Annuity Agent, licensed in all 50 states. I'm so happy you're here for this one because this is a big topic: the 4% rule is dead. You know the one—your advisor says, "Oh, if you just keep your money in the portfolio and let me manage it, we'll peel off 4%…" That's garbage. It's over.

The History Behind the 4% Rule

As you probably know, you've done your homework on Stan The Annuity Man, and you're saying, "Where did he come from? Is he from the planet Mars or Annuitum?" No, I'm not. I worked at Morgan Stanley, Dean Witter, Paine Webber, and UBS—all those firms. And when I was there, I was a master of the universe, managing stocks, bonds, and everything else. What we were taught back then was the 4% rule. The 4% rule told us that you didn't need an annuity; just keep your money in stocks, bonds, and ETFs, and peel off 4% every year, and you'll always have money.

The 4% Rule's Struggles During Market Crashes

Then came 1987, and that hurt. The 4% rule hurt because you had to take that 4% from money that had just gone down. Then came 2008, and it was the same thing. So, the 4% rule has been shot down multiple times. The reason why your master of the universe still clings to it is that it allows them to avoid buying an annuity, not transfer risk, and not lock in a contractual guarantee. They can manage the money and get paid a fee on it. There's nothing wrong with that, except for the fact that the 4% rule has been disproven.

Academics Agree: The 4% Rule Is Dead

And let me tell you why it's been shot down. It's not just me, Stan The Annuity Man, shooting it down—it's been shot down by academics, intelligent people, the ones with ascots and pipes. Who are those guys? Well, on a podcast episode of mine (yes, I have a podcast called Fun With Annuities), I had a guest who just blasted the 4% rule with a double-barreled shotgun. His name is Wade Pfau. If you don't know who he is, his last name is P-F-A-U. He's a smart guy with a doctorate in economics from Princeton. He's written tons of stuff on retirement planning, and he's a contrarian. What I like about Wade is that he takes the information that's out there and digs deeper, asking if it really works.

Wade Pfau and the Downfall of the 4% Rule

I asked Wade on my podcast, "What was the turning point for you? What made you passionate about retirement income and planning?" And he told me it was the 4% rule. Wade did research in Japan, and let me tell you, this guy is brilliant. When Wade speaks, he's speaking from facts and research, not just emotion. He found that the 4% rule doesn't work in Asian and European markets. It doesn't work globally. It was designed for North American markets, but now, with global portfolios, it just doesn't work. Wade has written several books explaining why the 4% rule doesn't work anymore, and you can read those to get the full explanation.

Why the 4% Rule Doesn't Work Anymore

The 4% rule was put out there before global markets. Now, with a worldwide asset allocation portfolio, it just doesn't work. If an advisor or a so-called "master of the universe" tells you they're using the 4% rule, they aren't staying up to date with current research. They're not reading Wade Pfau's work. The research says it's dead.

What's Replacing the 4% Rule?

So, if the 4% rule is dead, what's replacing it? Well, Wade Pfau will tell you too—and he doesn't sell anything. He's just the smartest guy in the room. The replacement for the 4% rule, according to Wade, is annuities for income flooring.

Income Flooring: The New Approach

Now, let's talk about income flooring. I've said this before, but if this is your first time watching me, the income floor is the amount of money hitting your bank account every month, regardless of what happens. It's your pension, Social Security, dividend, or rental home income. And annuities for lifetime income fill in the gap to complete your income floor. That's what's replacing the 4% rule.

Annuities Are Not a Sales Pitch, They're Part of the Solution

If you're out there thinking, "That sounds like a sales pitch, Stan. You're just trying to sell annuities," let me tell you—I'm the top guy in the industry because I sell annuities when they're appropriate and suitable. But I'm telling you the facts. Here's another fact: if you fill in your income floor, you become a better investor.

How Income Flooring Improves Your Investing

Let's say you need $5,000 a month for your income floor. If you're already getting $3,500 from Social Security, pension, and dividends, you need $1,500 more per month. You can reverse engineer a quote using my calculators to fill in that gap. When that income floor is in place, guess what happens? You become a better investor. Whether you're investing in stocks, bonds, ETFs, or crypto, you won't need to disrupt that side of your portfolio to make up for the income floor.

Wade Pfau's Game-Changing Advice

Wade Pfau goes one step further, and this blew my mind when I heard it on my podcast. He suggests setting up a reverse mortgage or a line of credit on your home if you're over 62. Listen to this carefully: if you need extra money, you can take it from there to fill the income floor instead of pulling it from your investments. This prevents you from disrupting your investment strategy.

Annuities and Retirement Income Planning

Annuities aren't the cure-all for everything. When I talk about your finances and bring experts onto my podcast, we discuss the overall picture of your portfolio—your markets, interest rates, and the decisions you need to make. But one thing is clear: the 4% rule is officially dead.

Eulogy for the 4% Rule

I can do the eulogy right now. The 4% rule had a good run, but it's time to bury it. It served people well, but now we need to move on. We've hit the point where the 4% rule has outlived its usefulness. So, thank you for joining me today. The 4% rule is dead.

The choir is singing. The 4% rule is dead, and I'm sure some of you are moved to tears. Thanks to Wade Pfau for officially shooting down the 4% rule so that you can think outside the box—maybe consider including annuities in your income floor or look at reverse mortgages and home equity lines as part of the solution.

Thanks for joining me, and I'll see you on the next Stan The Annuity Man blog.