Morningstar's 3.9% Rule, Estate Planning Conversations & Federal Reserve Drama | Ep 29

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Morningstar's latest retirement study grabbed headlines by shaving one-tenth of a percent off the so-called "4% rule." The new number: 3.9%. Retirees everywhere started panicking about whether their spending plans still work.

Before you revise your entire retirement budget, Adam talks through what's actually behind that headline number. Essentially, the assumptions matter far more than whether it's 3.9% or 4%.

Unpacking the Assumptions

The Morningstar study tested retirement scenarios using a 30-50% stock allocation. For context, that's pretty conservative. Adam and Andy regularly work with retirees holding 60-70% in equities, depending on their specific circumstances and risk tolerance. When you're planning for a 30-year retirement (which the study assumes), keeping half your portfolio in bonds and cash drags on long-term returns.

The study also assumes mean reversion in stock returns. Translation: because markets have done well recently, Morningstar assumes future returns must be weaker to bring the long-term average back to historical norms. That's a market timing guess plus some fancy math. Stocks can stay expensive (or cheap) for extended periods. Valuations tell you almost nothing about what happens next year or even the next five years.

The most problematic assumption, however, is linear spending. The study models someone withdrawing the same inflation-adjusted amount every single year for three decades. No adjustments for good market years, no belt-tightening in bad years, just robotic, unchanging withdrawals regardless of circumstances.

We all know that that's not how retirement works. Adam described the go-go years (early retirement with more travel and activity), slow-go years (moderating spending as you age), and no-go years (limited mobility means lower costs even with healthcare expenses). Real retirees don't operate on autopilot for 30 years.

When Morningstar tested scenarios where retirees showed spending flexibility, the safe withdrawal rate jumped to 5.5-6%. That's the same study, same market assumptions, just allowing for the common-sense idea that people can adjust spending based on how their portfolio performs.

The Personal Finance Part of Personal Finance

Andy made the point that withdrawal rates aren't one-size-fits-all. Each person’s unique situation determines what's sustainable. How much equity exposure can you stomach? Do you have other income sources like pensions or Social Security that reduce pressure on the portfolio? Can you be flexible with discretionary spending if markets hit a rough patch?

A client spending 2% of their portfolio annually with high risk tolerance can maintain significant equity exposure. Someone drawing 6% yearly with low risk tolerance needs a different approach. The 3.9% headline doesn't account for any of that.

Adam emphasized that this study should prompt a planning conversation, not a panic reaction. Review your actual spending needs, confirm your portfolio allocation still makes sense, and stress test different scenarios. But don't let a generic research paper dictate your specific strategy.

The Estate Planning Conversation Nobody Wants

The discussion shifted to a Wall Street Journal article about Kenn Ricci, CEO of FlexJet, who holds quarterly family meetings to review finances. Every quarter, he walks his kids through balance sheets, cash flow, assets and liabilities. Annually, they review the entire estate plan.

Quarterly might be overkill for most families. But the principle applies at every wealth level: communication prevents chaos.

Adam and Andy pointed out three reasons people avoid these conversations. First, nobody likes thinking about their own death. Second, parents worry about creating entitled children who stop working hard if they know money is coming. Third, it feels uncomfortable to shift the parent-child dynamic by opening up about finances.

The cost of avoidance shows up after someone dies. Even in best-case scenarios where there's plenty of money and a solid estate plan, families struggle when nobody communicated the basics. Where are the accounts? What are the passwords? Who's the executor? Where's the estate plan document? Who are the advisors to contact?

Andy added that this isn't about giving your 10-year-old anxiety over the family finances. It's age-appropriate. But once children reach adulthood, especially if they'll have executor or trustee responsibilities, they need to know the plan.

At minimum, every couple needs this conversation with each other. Where everything is, how to access it, who to contact. Put it in writing. Keep it somewhere safe. Update it periodically.

Adam was emphatic: even if you do nothing else, have the conversation with your spouse. Because once you get past the initial awkwardness, maintaining the information becomes straightforward. And when the time comes, your family won't be scrambling.

Federal Reserve Drama That Moved Nothing

The weekend brought news of a DOJ investigation into Jerome Powell and the Federal Reserve. The headlines screamed. Markets opened Monday morning and shrugged.

Andy walked through the context. President Trump has been vocal about wanting rate cuts. The Fed, operating independently, makes decisions based on economic data (employment and inflation) rather than political pressure. Powell's term as Fed Chair ends in May, and speculation about his replacement has intensified.

Some view the DOJ investigation as a direct challenge to Fed independence. Powell views it as politically motivated, a way to pressure the Fed into cutting rates faster than the economic data supports.

Andy's take: it's legitimately interesting from a governance and checks-and-balances perspective. But for investors? Markets barely reacted. By Monday afternoon during the recording, stocks were actually up despite the "tanking" that pre-market headlines promised.

The Fed chair candidates being discussed seem reasonable. There's drama, sure. But drama doesn't always translate into market impact. This appears to be one of those cases where the headlines outpace the actual investing implications.

Adam joked that Powell isn't the first contractor threatened with being fired for going over budget. Andy countered that his basement renovation plans might be the real market indicator to watch. Every time he gets serious about finishing his basement, the market sells off. He saved in 2020, then 2022, watched the market drop, and put the money back in stocks instead of hiring contractors.

Reading Past the Headlines

This episode reinforced a consistent theme: headlines demand attention, but context determines action. The 3.9% withdrawal rate sounds scary until you examine the assumptions. Federal Reserve drama sounds market-moving until you watch stocks rally anyway. Estate planning sounds morbid until you realize it's just organized communication.

Adam and Andy keep coming back to the same advice. Look under the hood. Understand what's actually happening versus what's being sold, and make decisions based on your specific situation rather than generic rules or alarming headlines.

For retirees, that means reviewing your plan regularly and adjusting as needed. For families, it means having the estate planning conversation even though it's uncomfortable. For investors watching Fed drama, it means recognizing that markets care more about economic fundamentals than political theater.

The specifics matter. The assumptions matter. Your situation matters. Remember that generic headlines rarely tell the whole story.

Listen to the full conversation on Long Story Short: