This article was originally published in our weekly newsletter.

I recently heard a “personal finance expert” say the following:

“If you invest in the market, you should get around 12% average annual returns. That means you can take 8% as income and be fine.”

This individual then proceeded to say, “Financial professionals recommend a 4% withdrawal rate on your portfolio because they build crappy portfolios that only give you around 6% average returns.”

Keep in mind, this person is not licensed and is considered an entertainer.

Before we get started, here are a few quotes that set the stage for today’s newsletter.

“When pride cometh, then cometh shame: when with the lowly is wisdom,” Proverbs 11:2

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so,” Mark Twain.

“Be fearful when others are greedy and greedy when others are fearful,” Warren Buffett.

Let’s start with market averages.

When people talk about the market, it usually means the S&P 500.

The S&P 500 has averaged around 12% year-over-year for the past 10 years.

So you could say this “expert” was accurate in their cherry-picked data.

There are other periods when the market did really well.

For example, between 1990 and 1999, the S&P 500 averaged approximately 16% year-over-year.

However, this kind of growth is not always the case.

Between 2000 and 2010, the S&P 500 averaged a 0.61% annual return, year-over-year.

The flat market from 2000 to 2010 is not a one-time occurrence.

Historically speaking, markets go flat for 10+ years every 20 years or so.

If you pull back the timeline and measure average market growth, you get a different story.

For example, between 2000 and 2024, the S&P 500 averaged around 7%.

Now let me ask you a simple question, “Does it make sense to take out 8% from your portfolio when over a 20 to 30 year timeframe, the ‘market’ averages around 7% or so?”

Probably not.

At risk of kicking the dead horse, let’s run through a scenario.

Let’s say it is the end of 1999, and you have enjoyed an average of 16% annual returns for around a decade.

You plan to retire on January 1, 2000.

You know the markets have been averaging around 16%.

As a modest individual, you decide to take only 8% (half) of the expected growth each year.

Assuming you have a $1,000,000 portfolio, that means you’ll take $80,000 out each year as income.

You also plan on increasing your income by 3% each year to offset inflation.

If you had followed this strategy and line of thinking, you would have run out of money in 8 years.

If you had started with a 6% initial withdrawal rate, you would have run out of money in 12 years.

If you had started with a 4% initial withdrawal rate, you would have run out of money in 19 years.

Currently, it appears as though investors are becoming increasingly greedy.

They are taking on more risk than they realize.

If/when the markets crash next or go flat, the average person will likely suffer, not the talking heads who offer oversimplified advice.

The Takeaway

There’s a reason why we believe all of your money should probably not be in the stock market.

There’s a reason why we believe retirees need to have a portfolio of their assets protected from market risk.

The question is, are you willing to learn why we make the recommendations that we make?

Or, will you seek out the individual who will tell you what you want to hear so you can justify your decisions?

If you want the truth and are willing to spend the time exploring what is right for you, then click here and schedule a 30-minute call with one of our advisors.

The markets are up, making it a good time to create and/or finalize your retirement plan.