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Because the primary objective for retirement is to build a safe and secure income floor for the entire retirement planning horizon, safety-first advocates recommend you consider pensions, bond ladders, and income annuities when meeting these requirements.

Once the foundation is laid for your basic income needs, you can then invest the rest of your money in more volatile assets (like stocks) that will fund your discretionary purchases.


For the sake of argument, let’s consider what would happen if you took your entire nest egg balance and purchased an annuity.

Using a simple generic online quote provider (note that this link is NOT an endorsement; it’s just for the sake of gathering numbers to illustrate my point), at the time of this publication, we find that a 45 year old couple could purchase a $1 million dollar immediate annuity from an A++ rated insurance company that would pay just over $40,000 per year.

That’s not too bad!  Notice that we’re getting basically about the same 4% return on investment that we would have received with the 4 percent rule.  Of course, the exception is that here the money is guaranteed for life.  You will never stop receiving payments for as long as you’re alive (and the insurance company remains in business).

The bad news is that if you and your spouse get hit by a bus tomorrow, then the money is all gone.  The annuity payments stop, the money stays with the insurance company, and that leaves you with nothing to leave behind to your heirs.

(Note: You can buy annuities that leave behind some or all of your initial investment to heirs.  However, the payout is considerably less.)

Recall that in the safety-first philosophy, legacy endowments like this are a secondary consideration.  In this example, the primary goal of secure, guaranteed payments for life has been achieved.


How Does This Change Our Target Nest Egg Goal?

The reason I have included this chapter in our discussion is because, again, I think that it is absolutely vital to understand the meaning behind the numbers you plan to use for determining your nest egg goal.  Whether those meanings have positive or negative connotations, it would be irresponsible not to consider the topic from all perspectives.

While I tend to lean more towards the probability-based school of thought, I don’t think you can (or should) dismiss what the safety-first approach is trying to accomplish: Confidence.  Therefore, there is no reason you can’t combine elements of both strategies to come up with a winning, power-house combination!


Let’s say that you plan to retire by age 50 and would (again) like to shoot for a passive income goal of $50,000 per year.  But this time you’d like at least half of our income ($25,000) to come from a guaranteed source.  This way, applying an element of safety-first logic, you’d always know that your basic needs will be met.

Using the same online, generic quote tool as above, we find that we’ll need at least $550,000 to purchase an immediate annuity from a reputable source that will bring in this level of income.

To fund the remaining $25,000 of our desired income, we could then switch to a more probability-based approach.  Using Kitces withdrawal rates as an example, we’d also need an additional:

  1. a) $555,556 assuming a safe withdrawal rate of 4.5%, or
  2. b) $454,545 assuming a safe withdrawal rate of 5.5%

This means that our total nest egg goal should be anywhere between $1,004,545 and $1,105,556 in order to execute this strategy.

(Note that these figures are not that far off from the goals we concluded we could use in the previous chapter.)


As I said, I included this chapter to give you broader perspective on retirement planning security in general.

Ultimately, the decision on how you’d like proceed is yours.  Only you can define what “safe” really means to you.

If you are more comfortable with risk, then probability based methods may be more suited for you.  But if having an absolute guarantee that you will always receive money every month no matter how the markets behave, then perhaps considering some or all parts of a safety-first philosophy may not be out of the question.…

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Up until now, everything that we’ve been talking about with “safe” withdrawal rates comes from something called the “probability-based” school of thought for retirement income planning.

To put this in context, for every withdrawal rate we’ve analyzed, there is always a rate of success associated with it.  There is some inherent element of a “gamble”; even if it’s very small.

The safety-first school of thought takes a different approach.  First and foremost, it puts the goal and certainty of retirement income before all else.  Period!

A safety-first approach is not concerned with reaching retirement as quickly as possible, having the most retirement income possible, or even building the most amount of wealth.  Its primary purpose is singular:

To find a way to ensure that the money you need for your basic essentials and contingencies are met under all circumstances!

Secondary priorities such as leaving money behind to heirs or wealth growth are held to a much lower priority; or in some cases dismissed altogether.  These would be considered discretionary or legacy priorities, and are far behind the first two.

Because there can be no risk, it is not acceptable to use a variable asset source to generate income.  Translation: A retirement nest egg based on market returns is far too risky!  In the safety-first approach, there is no such thing as a safe withdrawal rate.  To truly have 100% certainty, the income source must be guaranteed.

The safety-first school of thought is not something new.  It has been around since the 1920’s with the research of people like Frank Ramsey and Irving Fisher. In recent years, one of the bigger advocates for the safety-first approach is financial researcher Dr. Wade Pfau.  You can learn more about a safety first approach at these posts here.

  1. What is a Safety First Retirement Plan?
  2. Two Philosophies of Retirement Income Planning

Could the 4 Percent Rule Be Unsafe?

Is there any truth to the 4 percent rule or a probability-based approach being flawed?

Unfortunately, going forward, there may be some chance for uncertainty.

As Dr. Wade Pfau put it in the NY Times:

Because interest rates are so low now, while stock markets are also very highly valued, we are in uncharted waters in terms of the conditions at the start of retirement and knowing whether the 4 percent rule can work in those cases.

FYI: Here’s a chart of the Federal Interest rate over time.  As you can see (over on the highlighted area in the right), they’ve been at a historic low for quite some time.

Dr Pfau was also part of a paper from 2013 in the Journal of Financial Planning with co-authors Michael Finke and David M. Blanchett called “The 4 Percent Rule Is Not Safe in a Low-Yield World.”  In it, they warn that if current bond returns don’t spring back to their historical average until ten years from now, up to 32% of nest eggs would evaporate early.

Of course, these points are only a matter of opinion since the future always remains uncertain.

In support of a traditional probability based method, Michael Kitces argues that:

The 4 percent rule was built around some rather horrific bear markets of the past already.  Do we necessarily know or expect that the next one will be so much worse than any of the other terrible historical bear markets we’ve seen?…

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