Ridiculously Bad Advice on the 4 Percent Retirement Rule

More 401k 'noise' to mitigate

401k, retirement, incomeA prime example of the need for advisors.

Boo on Business Insider for an irresponsible and downright awful article involving the 4 percent withdrawal rule.

It’s not like we reserve high hopes for a financial website founded by a former analyst permanently banned from the securities industry for actions relating to massive conflicts of interest while at Merrill Lynch, but it’s widely read, which makes it that much worse.

Topped with an eye-catching, “There’s a simple calculation to determine how much you need to have saved before you can retire,” the authors do exactly that—attempt to reduce something complex (in this case the amount of retirement savings needed to generate a safe withdrawal rate) to something simple.

It fits with today’s app-loving, Internet-driven attention spans and the results are, as we said, awful.

“Retirement can be an endless summer,” they flippantly begin. “If Saturday beach trips and golf games have you dreaming about walking away from your 9-to-5 for good, there’s a simple way to calculate how much you need to save to make it happen.”

The magic formula?

“Your desired retirement income divided by 4 percent equals how much money you need to retire,” an obvious reference to the rule developed by Bill Bengen in the early 1990s.

What they avoid is the rule’s recent controversy, and specifically, questions over whether it still holds given higher sequence-of-return risk as hordes of baby boomers head for a low-interest-rate retirement.

Heavy hitters like Wade Pfau and Michael Finke of the American College, as well as Morningstar’s David Blanchett, routinely tackle the issue, and Bengen himself addressed widespread misconceptions.

“I always warned people that the 4 percent rule is not a law of nature like Newton’s laws of motion,” he told The New York Times in 2015.

“Because interest rates are so low now, while stock markets are also very highly valued, we are in unchartered waters in terms of the conditions at the start of retirement and knowing whether the rule can work in those cases,” Pfau said in the same piece, referring to sequence of returns.

Now compare it with Business Insider’s advice from last week:

For example, if your perfect retirement salary is $80,000, divide it by 4 percent and you get $2,000,000. That’s your magic retirement number, and you can call it quits as soon as your account balances hit it—even if you’re only 28.

It adds that a 5 percent annual return is needed to safely take the 4 percent, but no mention of that 5 percent as an average over a 30-year accumulation period, or the dangers of retiring into a down-market, or the multitude of other risks (longevity among them) that are snapping at seniors.

Unfortunately, it’s just more noise you’ll have to mitigate come Monday morning.

3 Comments on "Ridiculously Bad Advice on the 4 Percent Retirement Rule"

  1. What I love about “journalism” like this—is that it appears credible, but it’s more like cancer.

  2. Your article is right on point. Business Insider is another advertisement-driven piece of entertainment garbage passing for news, that a lot of people are duped into reading

  3. The whole industry is a shame. It’s all speculation. Gambling with other peoples money and rigging the system so the money managers and ‘journalists’ get theirs but the actual fund holders get nickel and dimed. And since 401k comes out pre-tax there aren’t too many other feasible options.

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