You may have heard of the 4 percent rule: If you have a diversified portfolio, you should be able to withdraw 4 percent each year during retirement, and still have enough money to last you the rest of your life.

That rule/percentage is generally accepted by the investment community, or at least it was. After Y2K, people began to say it should now be the 2 percent rule, which in essence means you have to have twice as much money. Why? During the Y2K bear market we had a huge drop and many investors didn’t get back to even for approximately 7 years. Then 2008 came along: The S&P fell 57 percent, and didn’t come back to even until 2013. If you had stayed invested during those bear markets while taking out 4 percent to cover your cost of living, you probably would have run out of money.

In my opinion, the problem isn’t the percentage, but the big losses. If you had a million dollars and took out 4 percent, you’d have $40,000 (plus Social Security, etc.) to live on. If your investments dropped by half, you’d have $500,000. Four percent of that is $20,000—half of what you had before. Could you cut your living expenses by half? I don’t think too many people could, which is why they’d run out of money.

But I also think that many people take more risk than is necessary. When you are retired or retiring soon, I believe you should play the protection game, rather than chasing after maximum returns, to preserve what you have. If you don’t suffer big losses, I think you can continue to withdraw from your investments at 4 percent.

That’s why we employ a Buy, Hold, and Protect strategy, and why we’re out of the market right now. We may miss some gains, and we may even take a small loss, but our strategy is designed to have tolerable losses and unlimited upside.
We’d rather lose 3 percent than 57 percent. And even if our strategy sounds a false alarm, it would take a lot of 3 percent losses to equal one 57 percent drop.

If you’re in the growth game, you may want to stay in the market and take the associated risk. But if you are within 5 years of retirement or already retired, I suggest you switch to protection game. By doing so, I think you have a much better chance of having money when you’re old.