Using the Prudent Man’s Rule to guide your retirement planning

With today’s market feeling topsy-turvy for many investors, it’s easy to feel nervous about outliving your income or having it disappear when the market goes down. Fortunately, there’s an easy principle, called the Prudent Man’s Rule or the 4% Rule, that can help you figure out how much you can take from your investments and continue to have enough income.

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Background information on the Prudent Man’s Rule:
Before you can fully understand the Prudent Man’s Rule, there’s some background information you should know first. This will help you understand how the rule can help you in a practical way, so that you feel reassured about your income and how long your money will last.

There are three main categories of investment, based on how much risk is involved. The most aggressive investment vehicles are stocks, mutual funds, exchange trade funds, and variable annuities, which will go up and down with the market. Then, there are moderate risk investments, like corporate bonds, preferred stocks, indexed fixed annuities, REITs, and investment trusts, where you can make 5-8% each year.

Finally, there are the safest investments, which fluctuate the least based on the market. These include CDs, government treasuries, T-bonds, fixed annuities, and tax-free municipal bonds. However, you pay for your safety because these only grow 2-4% every year. There are good and bad aspects of each of these categories of investment, and you don’t want all of your money in any one category.

It’s also good to remember that there are two ways to make money. You can take a lot of risk, or you can commit to leaving your money in the investment for a period of time. If you’re unwilling or unable to take the risk, you’ll need to commit to a time investment.

Finally, it’s important to remember the Rule of 100. If you subtract your current age from 100, that is the percent of your money that you should have in the market, or in aggressive investments. The rest should be in moderate to low risk vehicles.

What is the Prudent Man’s Rule?
The Prudent Man’s Rule, or the 4% Rule, is actually very basic. It states that, provided you are not moving for aggressive growth, you can take 4% of your money out in income every year without worrying about outliving your money or having it disappear out from under you. Some planners say that you can take up to 5%, depending on the structure of your portfolio.

How does the Prudent Man’s Rule help investors?
The easiest way to understand how the Prudent Man’s Rule can help an investor is to look at an example. For this example, a man gets $1500 each year from social security and his wife receives $1000, and they do not have a pension. This gives them $2500 per month or $30,000 per year in income.

This couple also has a portfolio of approximately $400,000. In the past, their advisors specialized in stocks and stock funds, and so they have diverse and aggressive investments. Over the last 10 years, though, with market fluctuations, they didn’t make money and their principal actually eroded, to the point where they are now concerned about outliving their money or having to make major lifestyle changes.

Using the Prudent Man’s Rule, you can determine that they can take $20,000 out of their money every year, as long as their investments aren’t too aggressive. Since they had 85% of their money in the market, that percentage was too much. So they moved 70% into low to moderate risk investments, generating a 5-7% yield. This covers the extra $15,000-$20,000 that they want to take out each year. Since they didn’t need an 8-12% yield, they didn’t need to leave their money in the market and bet the whole house.

If you would like to see how the Prudent Man's Rule can help you plan your retirement, Simply call 602-750-3891 or 520-705-4596. 

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To get more information, so you can make the best decision for you and your family, call:

Scott Financial Solutions

Your Wealth Preservation Experts

602-750-3891 or 520-705-4596