The 4% Rule is Broken

by Dr David Phelps

by Dr David Phelps


 found an interesting article from a recent Wall Street Journal, titled “The 4% Nest Egg Rule is Cracking. A well-established strategy for funding our golden years is no longer foolproof. Retirees need to get creative.” 

 This is interesting because this is exactly what we have been teaching at Freedom Founders for the last ten years

The old model – the “accumulation model” that uses a tax deferral strategy, 401(k)s, cash balance plans, defined benefit plans, etc. – is not working anymore for retirees. 

These are all the strategies that your financial advisors tell you to do because they get to manage your money. We call it “assets under management” because they get you to put your money in these lock boxes that you can’t touch until you’re 59 1/2 years old.

With that old model, you can’t do anything with your own money. It takes it out of your hands. Their plan is for you to build up a certain amount of assets, then when you retire you have to live on that nest egg. They always talk about this “nest egg,” but how big should the nest egg be? And that’s the problem.

Your financial advisors will use these algorithms and sophisticated proprietary software to try to predict how much you’ll need. The problem is that this model was created back in the ‘90s during very different economic conditions.

Back in the ‘90s, we still had relatively high interest rates from the high rates used to counteract the extreme inflation of the ‘80s. That downward trend of interest rates has only continued. We have historically low interest rates today, and until about twelve months ago, we had low inflation rates too.

The tide is shifting, is it not? People are finally starting to wake up and say, you know, this 4% depletion model that we thought could get most people through their retirement years is not going to cut it

The article’s author Anne Tergesen says, “Conventional wisdom recommends spending no more than 4% of savings in the first year of retirement and adjusting that amount annually to keep pace with inflation.” 

“The 4% rule emerged as the wealth-management industry’s standard in the 1990s… The 4% strategy would have enabled investors holding 50% in stocks and 50% in bonds to make their money last over the vast majority of 30-year retirements from 1926 to 2020. That, however, is no longer as likely because future returns are expected to be lower following an extended period of above-average gains.”

Many people are considering retiring right now because their assets are as optimized as possible. We've had this long run up of the market for the last decade that makes their nest egg look really good, but it’s actually a terrible time to retire. “It’s counterintuitive, but when the stock market and stock valuations are high, it’s the worst time to retire,” a Morningstar personal finance director explained in the article.

It's a reversion to the mean issue. Whenever you have extraordinary or above-average returns like we've had for the last decade, the likelihood of those returns continuing decreases. Then what happens is, in the near future, the markets take a tumble—they go through a correction—and now this 401(k) nest egg you are dependent on becomes a 201(k). Then what are your options? Either you’ve got to greatly diminish your lifestyle in retirement or it’s Hi-ho hi-ho back to work you go! That’s not really the time you want to do that, but I’ve seen this happen over and over again.

Over the years, many who thought they were retiring at a high point, had no predictability of future wealth management or preservation of capital. They had no understanding of how to preserve their nest egg through different market environments.

Why? Because they abdicated it. They did what everybody else said to do – their CPAs or financial advisors, financial planners, etc. “Yeah, just put your money on Wall Street. We've got these models – they'll work out fine.” Those models (if they ever worked) flat out don't work today. You've got to have a new playbook.

So why don’t those models work today? Because we've had unprecedented federal stimulus, money printing, digital printing, and fiat currency in the markets. Well, of course you're going to create asset bubbles. Of course you're going to create inflation. So none of this growth is real, but the point is we're going to have a reversion to the mean, which means a correction.

When you have a long upmarket like we’ve had, the correction is likely to be pretty significant.

Now, I have no magic crystal ball. I'm not telling you when or how the correction is going to happen, but if you're not at least thinking about needing to hedge your downside risk, you need to be. Do you know how to hedge? Do you know how to put your assets in a model that can sustain you through the volatility ahead?

In Freedom Founders, we learn how to orchestrate our capital preservation and wealth management in alternative assets. Without this skill set, you don’t have the ability to recover in downturns or hedge against inflation. I won't go into the rabbit hole of what we do with real estate, but there's a lot more opportunity to hedge your downside risk and keep the cash flow coming in through a downturn. It's all about cash flow, not accumulation. Your financial advisors will never talk about cash flow. Sure, there are a few dividend paying stocks, but those aren’t going to protect your wealth through a serious downturn.

Tangible assets are what's going to carry the day for you, but you've got to learn how to do it. You've got to have connections. You’ve got to have access to deal flow, and that takes a little bit of work. It takes more time. It takes due diligence. It takes doing a little bit of work, but learning these skills before you get to retirement is life changing. It's absolutely life changing.

And these are skills that you can pass on to your kids and grandkids. If you care about legacy, you don’t want to give them money if they don’t know what to do with it. If you pass these skills on to them as well, your legacy will be preserved long after you.

The times have changed. People don't realize how much they're being left behind because of the volatility that our government has created. It’s no fault of ours, but we have to live with it. You have to learn some skill sets. You have to do a little bit more than just putting your money with the market, giving it to financial advisors, or putting it in a 401(k). That model is far gone. It's up to you to govern and advocate for your future. No one else is going to do it for you.

That's what we do in Freedom Founders. We have models that utilize alternative assets, and we have the connections and access to make them really work. The peace of mind and security and certainty that it gives to our members? 

They will tell you it’s life-changing. 
To your freedom!

P.S. Whenever you’re ready, here are some other ways I can help fast track you to your Freedom goal (you’re closer than you think) :

1. Schedule a Call with My Team:

If you’d like to replace your active practice income with passive investment income within 2-3 years, and you have at least $1M in available capital (can include residential/practice equity or practice sale), then schedule a call with my team. If it looks like there is a mutual fit, you’ll have the opportunity to attend one of our upcoming member events as a guest.

2. Get Your Free Retirement Scorecard:

Benchmark your retirement and wealth-building against hundreds of other practice professionals, and get personalized feedback on your biggest opportunities and leverage points. Go to to take the 3 minute assessment and get your scorecard.

3. Ready to Step Away?

“How Much is Enough?” This simple question keeps hard-working professionals at the hamster wheel of active income far longer than they need to be. Watch this free training, and discover a proven model for determining how much you really need before hanging up the handpiece!

4. Apply To Visit The Mastermind:

If you’d like to join dozens of dentists, docs, and practice professionals on the fast track to Freedom (3-5 years or less), visit to apply for a guest seat.

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