The 4% rule is being debated – again – but here’s what you should do

The 4% rule – the latest analysis of this popular strategy shows retirees withdraw 4% of their retirement savings each year towards the cost of living – may be too high.

Retirement Tip of the Week: Don’t just assume you need to withdraw 4% in retirement because that’s been a long-standing rule of thumb. Assess your income needs for retirement first and adjust your withdrawal rate as needed.

With the 4% rule, retirees will withdraw no more than 4% of their retirement assets, adjusted each year thereafter for inflation. It’s a strategy for retirees to avoid spending their retirement savings before they die.

See: The FIRE movement confronts the 4% rule

But a new analysis from investment research firm Morningstar suggests withdrawal rates could fall. In fact, the researchers suggest the ratio should be as low as 3.3% for those looking to ensure their retirement savings last a lifetime. The 3.3% figure assumes a balanced portfolio and fixed withdrawals over a 30-year period, the estimated length of retirement years, resulting in a 90 percent probability of not running out of money in retirement. %.

“Given current conditions, retirees will likely have to rethink at least some aspects of how they determine ‘safe’ withdrawal rates to keep their assets alive for long.” research notes said. “Our research found that retirees can have higher initial withdrawal rates and higher lifetime withdrawals by being willing to adjust for some of these variables – such as acceptance lower success rates or abandon inflation adjustment altogether.”

Take for example adjusting expectations for successfully surviving their retirement savings – retirees willing to accept an 85% success rate can increase their withdrawal rate to 3.7%, and those with 80% probability can use the 3.9% withdrawal rate. Of course, whether a lower withdrawal rate is possible also depends on how much money has been saved, if it is properly invested, and the retiree’s budget and income needs – immediately after retirement. retirement, as well as at their older age.

This is not the first time the 4% rule has been contested. Even the creator of the guide, Bill Bengen, said it was used a simple way. A new retiree will have money in the end if they maintain a 4% withdrawal rate, he said when creating this rule of thumb in 1994.

Bengen’s updated proposal goes in the opposite direction of the Morningstar researchers. He said the withdrawal rate for retirees should be no more than 5%. One reason: persistently low inflation rates. Inflation was the most dangerous thing for retirees in the 1970s, he notes.

Other analysts agree that the safe withdrawal rate will be around 3% – or less. “I think it’s too aggressive these days and other advisors agree,” Allan Roth, founder of Wealth Logic, wrote on Barron’s. After modeling these rates, Roth says a 3% withdrawal rate should be good in 25 years, so a retired 65-year-old couple should aim for 2-2.5% if their budget is hardly arbitrary. The rate also depends on retirement age – a younger person will need to spend less while an older person may have a higher rate.

Do you have questions about your retirement concerns? Check out MarketWatch’s column “Help Me Retire”

The three keys to maximizing this margin of safety, according to Roth, are: staying flexible, especially during market downturns; delay Social Security, which will increase the guaranteed source of income; and “responsible” investing, including minimizing investment fees and taxes, maintaining a diversified portfolio, and acting disciplined in market volatility.

The safe withdrawal rate 40 years ago may not be safe today, and the right withdrawal rate today may not work in the future. As a result, retirees need to look at the bigger picture when choosing their withdrawal rate. Today’s economic environment includes low bond yields, high stock valuations and low inflation, meaning historic rates no longer apply to new retirees.

“Safe withdrawal percentages starting in the low 3% range can be demoralizing for new retires, but one antagonist is numbers,” the researchers said in their note. The balance of most retirement savers is significantly higher than it was a decade ago. An extensive bull market over the past 10 years has certainly helped those investors. | The 4% rule is being debated – again – but here’s what you should do


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