You might have heard of the “4% rule.”

It’s a popular rule of thumb in financial planning circles. In a nutshell, it says that you can take annual distributions of 4% based on the value of your portfolio at the time you retire. You then adjust the payout for inflation in subsequent years.

It’s designed to be a “safe” number. You should be able to withdraw that amount over your retirement without depleting your nest egg.

4% Rule Isn’t What It Used to Be

Let’s say your retirement portfolio is worth an even $1 million on the day you retire. You’d take a $40,000 distribution the first year (4% of $1 million).

If inflation was running at 5%, you’d take a $42,000 distribution the second year, a $44,100 distribution in the third year and so on.

Again, the idea here is that 4% should be a safe number. Regardless of what happens over the course of your retirement, you shouldn’t be able to deplete your portfolio.

But here’s the dirty little secret.

That rock-solid 4% rule used to have another name.

Not that long ago, it was called the 6% rule…

Then it became the 5% rule…

And while 4% rule is the popular rule of thumb now, I’ve seen plenty of financial planners err on the side of caution and recommend something closer to 3.5% or even 3%.

So … what happened?

It’s a Different Time

Unfortunately, it’s basic math.

The 6% rule was born at a time when bond yields were higher and stock valuations were lower. Using history as a guide, a diversified portfolio of stocks and bonds was expected to clear the 6% (or 5% … or 4% …) hurdle without the risk of depleting your portfolio in a bear market.

Sure, the portfolio would return less than 6% some years and more in others. But on average, it would cover the distribution and allow the portfolio to keep growing.

But how certain of that can we be today?

Even after a major climb higher, the 10-year Treasury only yields about 2.7%.

Assuming you ran a typical 60/40 portfolio (60% stocks, 40% bonds), you’d need the stock portion to generate just shy of 5% per year to cover the 4% distribution. And we still have to cover inflation.

That sounds doable, right?

Well, normally it is. But what if you happen to start your retirement just as a bear market is setting in?

Bear Markets Aren’t Kind to Nest Eggs

Just for grins, let’s play with the numbers.

I assumed a $1 million portfolio and $40,000 annual withdrawals, adjusted 5% higher for inflation each year.

I then assumed a steady bond return of 2.7%. And I modeled stock prices after the path they took between 2000 and 2020.

Finally, I rebalanced back to a 60/40 allocation at the end of each year.

It’s not pretty.

The portfolio would have been bone-dry in less than 20 years.

Now, I can tell you with 100% certainty this is not what the next 20 years will look like.

Stock returns might be higher … or lower. It’s the same story for bond yields. There are infinite possibilities.

But the takeaway is simple: A bear market early in retirement can wreck your golden years.

We don’t know how bad this market might get. Only time will tell.

But should you find yourself retiring in the midst of a bear market, these are two of your best options regarding your nest egg:

  1. Reduce your living expenses and take less out of your portfolio.
  2. Change the way you invest to make your portfolio more bear-proof.

Now, I can’t speak for you, but I’m more in favor of that second option. That’s why I focus on dividend stocks. I can enjoy a rising stream of dividends and not have to worry what happens to stock prices in any given year.

And my colleague Adam O’Dell has his own tricks. Rather than buy, hold for decades and hope for the best, Adam trades his way through whatever the market throws his way.

Adam is putting the final touches on the strategy he’s using to find stocks with the potential to run 1,000% higher out of this bear market.

And he’s looking for ones that will do it quick!

If you want to switch up the way you invest, click here to put your name on the guest list for his upcoming presentation. It’s on June 9, which will be here before we know it.

To safe profits,

Charles Sizemore_Sig

Charles Sizemore, Co-Editor, Green Zone Fortunes

Charles Sizemore is the co-editor of Green Zone Fortunes and specializes in income and retirement topics. He is also a frequent guest on CNBC, Bloomberg and Fox Business.