Saving for Retirement: The 4% Rule

Most people’s primary concern about saving for retirement is outliving their money and facing poverty at the end of life. For that reason, a lot has been written about the so-called 4% Rule. Essentially what the 4% Rule suggests is that, upon retirement, you should be able to withdraw 4% of your portfolio balance and do so annually for 30 years with the confidence that you will not run out of money during retirement—even if you had the bad luck of retiring into the worst equity markets in U.S. history. The research that supports the 4% Rule assumes an allocation of 60% stocks and 40% bonds.

However, most Americans have not saved enough to meet their retirement needs with a 4% withdrawal. For those who have not saved enough for retirement, their withdrawal rates will likely be too high to support 30 years of retirement. But even those who have saved well enough to live by the 4% Rule will be disappointed to learn that withdrawal rate rules are precarious at best. If we look abroad for a moment, we can test the fragility of such rules. Relative to other stock markets around the world, the U.S. stock market has a very good history. Many stock markets in other countries do not have a market history strong enough to support even the oppressive sounding 4% Rule.

If a citizen of Italy, Belgium, France, Germany or Japan, for example, unwittingly retired into a historically bad time for that county’s stock market, sticking to the 4% Rule would have run their portfolio into the ground. To safely fund 30 years of retirement in those countries in the worst market environments would require withdrawal rates of 2% or less.

This is not to bash foreign stock markets. It is more to point out that generic guidelines have hidden flaws. To our knowledge, the best way to safely fund 30 years of retirement is to create a financial plan and use it as an instrument to strategically vary withdrawals overtime. This tactic allows one to adapt to whatever kind of market one retires into as it unfolds. No one knows the future, but by being responsive to it, one creates the chance of withdrawing significantly more than 4% in many years without compromising the ability to fund 30 years of retirement.

“The Women’s Roundtable: Taking Charge of Your Financial Future” September 24.
6 – 7:30 pm at the Oakland office of Bell Investment Advisors, 1111 Broadway, Oakland, above the 12th Street BART station. For more information about The Women’s Roundtable and how to register for the wine and cheese gathering, click here.

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