It almost went away, but in the past decade (or so) the LP has made a comeback among some music listeners. Which on some level is cool. Having grown up with the LP, I get the appeal. For the vast majority of music fans, digital formats have taken over the industry.

Source: RIAA

The data above show the people have spoken. Digital is better. Digital is more convenient. It doesn’t scratch like an LP or need cleaning and you don’t have to get up every 25 minutes or so to flip the record.

The same is true in financial planning. For a long time, the 4% rule, was the go-to for financial planners. The 4% rule dictates that you spend the same amount from your portfolio each year in retirement (after inflation). This rule-of-thumb was important, because as Blair duQuesnay at the Belle Curve writes:

The number one risk retirees face is that their living expenses will increase at a faster rate than their investment portfolio can grow to sustain those withdrawals.

For very good reasons the rule has come under greater scrutiny, see ‘Revisiting the 4% rule‘ and ‘Beyond the 4% rule.’ The 4% rule isn’t in some sense wrong, but it does leave out a lot. Moving from a rule-of-thumb to a dynamic model is like moving from analog to digital. While we may pine for the simplicity of the good old days, the fact is today we have much better tools to get the job done.
Modern financial planning tools can help you model out lifetime income and spending. It’s just a matter of how much time, effort and granularity you want to put into the process. The major point being that it is a process, not a one-off effort. As Ben Carlson writing at A Wealth of Common Sense said:

Financial goals are typically far off into the future so it can be difficult to measure progress along the way (especially since life invariably gets in the way and changes those goals). That’s why financial planning is always a process and not an event.

It’s also why the most important aspect of a good plan comes from periodically benchmarking progress towards the client’s financial and life goals. It becomes easier to take avoidable risks if you don’t know how close you are to achieving financial success.

For those of you who want to take a deeper dive into the topic of flexible spending rules in retirement. Here are a couple of recent articles on the topic*:

There is no reason to rely any more on an inflexible, but well-meaning, spending rule in retirement. A 4% rule, or pretty much any inflexible rule, is like relying on LPs for your music needs. Modern financial planning software and the help of a financial planner, can help you craft a retirement spending plan that better meets your needs. There are no guarantees in life, but there is no need to remain analog in a digital world.

*I recommend checking out the RiversHedge blog for those of you interested in some of the math behind retirement finance.
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