Mark has a theory about business owners and retirement planning.

Most of them have been using the supplemental plans as the main strategy.

The 401(k), the 4% rule, the Monte Carlo simulation – these were never actually designed to replace the income of a high-earning entrepreneur. They were designed as a supplement. And somewhere along the way, they became the whole plan.

If you have ever maxed out your 401(k) contributions and still felt like something was missing, this is why.

Two Schools of Thought

Ro describes it as two religions. Two fundamentally different ways of thinking about how to turn a lifetime of building into a retirement that actually works.

The first is the probabilistic school of thought. This is the world most financial advisors live in. It is built around the 4% rule, a concept that came from a landmark paper published in October 1994 by a researcher named William Bengen. Bengen analyzed 70 years of historical market data and determined that if you withdrew 4% of your portfolio annually, adjusted for inflation, you had the highest probability of not running out of money over a 30-year retirement.

The industry took that finding and turned it into gospel. The problem is that it was never a guarantee. It was a probability. And even Bengen acknowledged there were periods in the historical data where people ran out of money at 3%, at 2.5%, even lower. The 4% rule is the best guess, not the promise.

The second school of thought is the safety-first school, sometimes called the contractual school. It is built around guarantees rather than probabilities. It dominated retirement thinking before 1979, and it is making a significant comeback, particularly among business owners and physicians who have watched the probabilistic world fall short.

The safety-first school says: cover your basic needs with something contractually guaranteed, then let everything else grow.

Why the Probabilistic World Is Getting Harder

The 4% rule was developed at a specific moment in financial history. In 1994, you could still earn a respectable return holding bonds. The bond market has changed dramatically since then. The Barclays Aggregate Bond Index, the broadest measure of the bond market, delivered roughly half a percent annually over the last decade after accounting for inflation. Bonds, the traditional ballast of a retirement portfolio, have essentially stopped working the way they used to.

At the same time, lifespans have increased significantly. Bengen designed the 4% rule for a 30-year retirement. Many people are now looking at 35 or 40 years. The math that worked in 1994 is under real pressure today.

There is also the sequence of returns problem. Markets do not deliver a smooth 10% annually. They deliver a lumpy 10%, meaning some years are up dramatically and some years are down dramatically. If you retire into a down year and you are pulling 4% of a shrinking portfolio, the damage compounds in a way that is very difficult to recover from.

Ro put it this way: would you get on a plane if the pilot told you 4 out of every 100 flights (aka 4%) do not make it?

That is the honest version of the probabilistic school. It is not a reason to abandon it entirely. It is a reason to understand it for what it is.

What the Safety First School Actually Means

The safety-first school is not about being conservative with your money. It is about being strategic with how you structure it.

Identify your basic needs in retirement. Housing, food, and healthcare. Then cover those needs with something that is contractually guaranteed to be there no matter what the market does, no matter how long you live, no matter what happens to interest rates. Once those needs are covered, everything else can stay in growth mode because the behavioral pressure of a down market is removed. You are not forced to sell at the wrong time. You are not making fear-based decisions. You have a floor.

Annuities are one contractual tool. Dividend-paying whole life insurance is another. Social Security itself, as Ro points out, is essentially an inflation-indexed annuity.

The challenge with Social Security is that it is a pay-as-you-go system, not backed by actual assets, making it structurally riskier than a private annuity.

And as many business owners discover too late, Social Security income can be taxed at a surprisingly high rate depending on what other income you are pulling in retirement.

The Pension Comeback

Before the 401(k) existed, pensions were the dominant retirement vehicle in America. They are defined benefit plans, meaning you are told what you will receive on the way out, not just what you can put in.

They felt like the utopia of retirement planning.

They largely disappeared because the 401(k) gave companies a way to shift the retirement risk from the employer to the employee.

What most business owners do not realize is that pensions have not disappeared for everyone. They are simply unavailable to most W2 employees. For business owners, 1099 earners, and physicians with their own practices, the pension system is still very much alive and, in many cases, offers larger deductions than a 401(k).

Cash balance plans, which Ro describes as hybrid plans combining features of both defined benefit and defined contribution plans, can allow contributions that are 17 to 20 times higher than a standard 401(k) limit, depending on age and income. That is not a small difference. For a business owner paying six figures in taxes every year, a cash balance plan can change the entire picture.

The Question Worth Asking

If you have been building your retirement entirely in the probabilistic column and something still feels off, that feeling is worth paying attention to.

The goal is not to abandon the 401(k) or stop investing in growth assets. The goal is to understand that there are two sides to this equation, and most business owners have only ever been introduced to one of them.

The safety-first school is not about driving a Honda and living small until age 65. It is about building a contractual floor under everything you have worked for so that the rest of it can grow without the weight of uncertainty pushing down on every decision you make.

That is what Mark and Ro built The Owner's Asset to do. And the conversation is just getting started.

Part 2 drops in August. In the meantime, if you want to understand what the right mix of probabilistic and contractual looks like for your situation, a deduction call is the place to start.

Book a call at ownersasset.com/contact.

This content is for educational purposes only and does not constitute tax, legal, or financial advice.