Say Goodbye to the 4% Rule
Conventional wisdom says it’s safe to rely on income drawn from your brokerage account during retirement. Most Advisors will tell you that you can safely withdraw 4% per year and never run out of money. In fact, the “4% Rule” as it is called, has been the standard in retirement income planning for decades. The problem is that in today’s financial world, the rules have changed.
In a recent Wall Street Journal article titled “Say Goodbye to the 4% Rule” by Kelly Greene, she states:
This so-called 4% rule was devised in the 1990s by California financial planner William Bengen and later refined by other retirement-planning academics. Mr. Bengen analyzed historical returns of stocks and bonds and found that portfolios with 60% of their holdings in large-company stocks and 40% in intermediate-term U.S. bonds could sustain withdrawal rates starting at 4.15%, and adjusted each year for inflation, for every 30-year span going back to 1926-55.
Well, it was beautiful while it lasted. In recent years, the 4% rule has been thrown into doubt, thanks to an unexpected hazard: the risk of a prolonged market rout the first two, or even three, years of your retirement. In other words, timing is everything. If your nest egg loses 25% of its value just as you start using it, the 4% may no longer hold, and the danger of running out of money increases.
Greene offers 3 points of advice on how to compensate for the lack of trust in the 4% rule, the first of which is to “use annuities instead of bonds”. One of her sources to back up that advice is Professor Wade Pfau who researches retirement income at the American College of Financial Services in Bryn Mawr, PA. Pfau states, “There is no need for retirees to hold bonds. Instead, annuities, with their promise of income for life, act like super bonds with no maturity dates.”
In a MarketWatch.com article titled “Retirement Income: What’s Wrong with the 4% Rule“, Robert Powell states, “The portfolio withdrawal strategy known as the 4% rule is an appealing rule of thumb, but it can steer investors wrong, according to panelists at a MarketWatch Retirement Adviser panel discussion.” One of the panelists, David Blanchett, the head of retirement research at Morningstar Investment Management, noted that using a systematic withdrawal program cannot guarantee that a retiree will have income for life. He stated, “You cannot guarantee that [income for life] with a withdrawal program from a portfolio without an annuity.”
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