A new white paper puts a new spin on the decades old debate concerning the well-publicized 4 percent rule, arguing that not only is it obsolete, but because of its intended purpose, it might have been fatally flawed from the beginning.
At the very least, “Rethinking Retirement: Sustainable Withdrawal Rates for New Retirees in 2015” finds that a safe withdrawal rate for today’s retirees may be considerably lower than 4 percent. Released today, it notes the 4 percent rule was created for research purposes and formulated using overly simplified assumptions that do not reflect today’s reality.
“A retiree starting retirement as of Jan 1, 2015, would have over a 50 percent probability that they would outlive their savings if they pursued a traditional 4 percent withdrawal rate strategy from their savings,” said Wade Dokken, co-president and founder of WealthVest. “Our research indicates that a safe withdrawal rate for a current retiree, using a standard 60/40 stock bond portfolio, is well under 2 percent per year, allowing for growth for inflation. This is less than half of the traditional 4 percent rule.”
Author Wade Pfau, Ph.D, explained that sequence of return risk—or the chance of earning negative returns early in retirement—along with increasing longevity, investment fees, and current market circumstances (including low bond yields and relatively high stock market valuations) make a 4 percent withdrawal rate more risky than many financial professionals realize.
“It is a fallacy to conclude that just because the 4% rule worked in the U.S. historical data, it can be expected to continue to work just as well for today’s retirees,” said Pfau. “Retirees are vulnerable to sequence of returns risk once they begin taking income from investment portfolios. If early investment returns are poor, a sustainable withdrawal rate may be significantly lower than the rate implied by average portfolio returns over an entire retirement period.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
