Good article.

The longstanding 4% rule was developed in the mid-1990s to answer the question, “How much can I safely withdraw from my retirement savings each year and have my nest egg last for the duration of my retirement?”

While this simple rule of thumb still stands strong despite numerous studies designed to prove it inadequate, it is important to understand the original assumptions that went into creating the rule and then take a modern view to get a more comprehensive answer to that important question.

In 1994, financial adviser William Bengen introduced the concept of the 4% rule, which found that retirees who withdrew 4% of their retirement portfolio balance, and then adjusted that dollar amount for inflation each year thereafter, would create a paycheck that lasted for 30 years.

Now 20 years out from the publication of Bengen’s study, experts recognize that this simple rule of thumb needs some modernization.


The $80 billion fitness industry sees huge growth in this demographic

Big unknowns
The most significant issue with the 4% safe withdrawal rate is that there are just too many unknowns for the retiree: How long will you live? How will the financial markets perform? Where are interest rates and inflation rates going? What will your retirement expenses actually be and how will they change over time? What about your health care needs? How will your taxes be impacted by your retirement income? What about the Medicare surcharge?

These are all important pieces of the retirement puzzle to consider, as just a few wild cards can impair your income plan. That’s why modern times require a more dynamic approach to the 4% rule.

Questioning assumptions
It’s instructive to look at some of the Bengen study’s underlying assumptions to understand the problem with applying the 4% rate to retirement today.

First, let’s examine the assumptions it makes about market returns. Bengen tested a range of withdrawal rates on differing portfolios of stocks and bonds using inflation data and investment returns from the mid-1990s back to 1926. The rule uses a portfolio assumption of 60% stocks and 40% bonds. Historical bond returns for this period were close to 5%, well below what can be expected today. With increased volatility in both the stock and bond markets, taking a forward view of testing a variety of market conditions can help you better understand the longevity of your portfolio.

Another issue with the study is that it favors portfolio longevity as its primary objective, as opposed to income needs. But this approach doesn’t hold up if the sequence of your spending is heavier in the early years of your retirement or, inversely, if the market experiences a downturn early in your retirement. As such, numerous strategies have surfaced that are designed to explore ways to manage sequence risk, ranging from the bucket strategy (segmenting retirement funds into “buckets” based on time periods), to using a floor-and-ceiling approach (not withdrawing more than a well-defined ceiling or less than a well-defined floor, regardless of fluctuations in your portfolio’s value), to using lines of credit to help protect portfolio longevity.

Testing differing retirement income needs assuming the so-called “go-go, slow-go, no-go” pattern of retirement spending — that is, being quite active at the beginning of retirement and slowing down as the years go on — will help you better understand your portfolio’s longevity. The reality is, most people will need to adjust their withdrawals up or down as they move through retirement.

Lastly, the study assumes a simple approach to taxes that may have been appropriate at the time but does not stand up to the complexity of modern-day retirement. For many baby boomers, who make up a sizable contingent of today’s retirees, the composition of their retirement assets will have varying tax obligations, from fully taxable to tax-free. The tax code has also become more complex in how it taxes various sources of retirement income. For higher-income retirees, there is further complexity in managing the timing of income from qualified distributions, required minimum distributions (RMDs) once they reach age 70½, and Social Security benefits, and in managing the incremental impact on taxes at varying tax brackets, along with worrying about potential Medicare surcharge thresholds.

Taking a tax-wise lens to your withdrawal strategy becomes increasingly important as your wealth grows beyond the need to use Social Security benefits or qualified distributions. A recent study published by the Journal of Financial Planning examines the effects of Social Security benefits and RMDs on tax-efficient withdrawal strategies, concluding that you can improve portfolio longevity by using a dynamic approach to converting qualified assets to tax-exempt assets in some years and managing your qualified withdrawals to fully cover the standard deduction and max out the lower tax brackets in years where income is not needed.

Thinking beyond the 4% rule
Though the 4% rule has its flaws, it is still a reasonable starting point for retirement planning. So rather than regard it as unassailable truth, use it as a general means of assessing your savings level. For example, if you determine that you’ll need $60,000 a year to live comfortably in retirement, of which $16,000 will come from Social Security, you’ll be left with a $44,000 gap to fill annually. Using the 4% rule, you can multiply $44,000 by 25 to arrive at a $1.1 million nest egg, which is what you might aim for during your working years.

In this vein, households that have accumulated considerable wealth may use the 4% rule as a conservative yardstick. For most households, however, the rule is simply an opening bid. In reality, once you’re in retirement, you’ll likely need to make a year-by-year assessment on how to successfully manage your sources of income with both your spending needs and taxes in mind.

As the 4% rate faces the test of time, it’s clear that retirement readiness is too complex to be codified by a simple rule of thumb.

Angie O’Leary is the head of wealth planning at RBC Wealth Management, U.S.


LINK https://www.marketwatch.com/st...odernized-2018-07-20

quote:

The $80 billion fitness industry sees huge growth in this demographic

What?

Who codified this “rule?” Who enforces it? The Thumb Patrol?

It's probably a better guideline than: "I have no idea how much I need", but not much.

quote:

Though the 4% rule has its flaws, it is still a reasonable starting point for retirement planning...

In this vein, households that have accumulated considerable wealth may use the 4% rule as a conservative yardstick. For most households, however, the rule is simply an opening bid. In reality, once you’re in retirement, you’ll likely need to make a year-by-year assessment on how to successfully manage your sources of income with both your spending needs and taxes in mind.

It is a reasonable starting point.
One strategy is to put the 4% in short term instruments and pay it out monthly. Keep the remainder invested for the longer term.

If your investments do better than 4% your principal will continue to grow... and you can slowly up the income you take out.

But you would be amazed by the number of people who think they can take a 10%+ withdrawal and expect the account to last for a 30+ year retirement.

The bigger concern is that we have an entire generation of people that have not saved enough to retire...

quote:

Originally posted by tha1000:
The bigger concern is that we have an entire generation of people that have not saved enough to retire...

Yes, this is very bad. A lot of people dying at their desk.


THIS picture is huge so I linked it

https://southfloridareporter.c.../03/main_overall.jpg

When I graduated from school and had my first job I did 3 things:
Maxed my 401k
Maxed my IRA contribution
Put 10% of my take-home into an Orange account.

Once I learned to live on the rest, it was smooth sailing.

I'm eyeball deep in to this topic for the last couple of years and a couple of things popped out to me.
First, depending on when you hope to retire your retirement could last for more than 30 years ...
Second, keeping #1 in mind a portfolio mix of 60/40 is ( at least for me) entirely too conservative. This is particularly true given the abysmal return that bonds have been achieving.
Thirdly, depending on the size of your tax deferred accounts ( 401K, SEP's, IRA's etc) your MRD's could indeed be size-able and even more than you're projected needs. You can easily just put that money back into a taxable account and continue to let it work for you ( but you will have to pay capital gains when you sell.)

quote:

For example, if you determine that you’ll need $60,000 a year to live comfortably in retirement, of it which $16,000 will come from Social Security, you’ll be left with a $44,000 gap to fill annually.

I always told my clients not to factor in SS. I sure as hell am not counting on it.

The 4% rule is good for back of the napkin math. In reality any financial planner using 'rules' for determining retirement savings/withdrawals wasn't worth the fee paid. not everyone has the same risk tolerance, needs, goals, wishes, etc. a plan is quite detailed and tailor made for each client and needs to be changed throughout savings and retirement.

quote:

THIS picture is huge so I linked it

https://southfloridareporter.c.../03/main_overall.jpg

quote:

Thirdly, depending on the size of your tax deferred accounts ( 401K, SEP's, IRA's etc) your MRD's could indeed be size-able and even more than you're projected needs.

RMD's?
Having a large 'Required Minimum Distribution' is a good problem to have. -

quote:

Originally posted by tha1000:
The bigger concern is that we have an entire generation of people that have not saved enough to retire...

The average retirement savings for those in their 50s is approx. $150,000. However the median for the same age group is approx. $12,000.

quote:

Originally posted by chellim1:

quote:

THIS picture is huge so I linked it

https://southfloridareporter.c.../03/main_overall.jpg

This graph would hold more meaning if it were broken out by age group. 200K for example would be more impressive it you were 30 yo.

^^^^ That is sad $7.00 a day, or the cost of a fast food combo meal will net you $400,000 after 40 years at 6%.

Thanks for the resize Chellim.

You can find the data preten2b and its bad. I used to wholesale in the financial world and do a bit of case planning. The number of cases that came through with people who are 65 with only 200k was staggering. We havent really begin to touch the surface of inflation over the next 30 years or inflation of medical expenses. It could easily be 750k to stay in a long term care facility by the time I'm in my 70s.

So after all of that, the article states that retirement savings is dependent on many factors but 4% is still a good rule of thumb

I just read something not long ago that 40% of Americans cant cover a $400 dollar emergency.
I also read that 70% cant afford a $1000 emergency.
With statics like this it is going to be interesting when people start to hit retirement age 40 to 45 years from now.
I see what is going on with some younger people spending money they don't have on thing they cant afford. It leaves little for retirement savings.
Years ago many people worked for companies that had pension plans and required very little input from the employ to have a nice retirement.
Now most companies have 401K and require the employ to contribute to get the company benefit.
I can see a lot of people working till they die in the future because they cant afford to retire.
The other problem with people working well past retirement age it leaves less jobs for the younger people needing jobs.

quote:

Originally posted by 71 TRUCK:
I just read something not long ago that 40% of Americans cant cover a $400 dollar emergency.
I also read that 70% cant afford a $1000 emergency.
With statics like this it is going to be interesting when people start to hit retirement age 40 to 45 years from now.
I see what is going on with some younger people spending money they don't have on thing they cant afford. It leaves little for retirement savings.
Years ago many people worked for companies that had pension plans and required very little input from the employ to have a nice retirement.
Now most companies have 401K and require the employ to contribute to get the company benefit.
I can see a lot of people working till they die in the future because they cant afford to retire.
The other problem with people working well past retirement age it leaves less jobs for the younger people needing jobs.

This isn't a problem that is going to manifest in 40-45 years... it's those nearing retirement age today. Millennials, for all their faults, do seem to save money... at least from the stat's I have seen. They also skew to risk averse, which will create it's own problems... but likely wont be from lack of savings. It'll be lack of growth of savings.

quote:

Originally posted by JALLEN:

quote:

The $80 billion fitness industry sees huge growth in this demographic

What?

Who codified this “rule?” Who enforces it? The Thumb Patrol?

The OP didn't copy selectively. That quote is a video advertisement in the article.

quote:

Originally posted by chellim1:

quote:

Thirdly, depending on the size of your tax deferred accounts ( 401K, SEP's, IRA's etc) your MRD's could indeed be size-able and even more than you're projected needs.

RMD's?
Having a large 'Required Minimum Distribution' is a good problem to have. -

Also, no rule against re-investing it. Doesn't all have to go to wine/trips/mall....