Retirement Planning: The 4% Withdrawal Rule Doesn't Work (2021)
- 3 years ago
Ask 100 people how much income your retirement nest egg can generate in retirement and you will get 100 different answers.
However, while there are different strategies and approaches, there is one rule of thumb that is usually the basis from which all others are built, the 4% safe withdrawal rate.
In 1994, William Bengen conducted a study to determine how much retirees could withdraw from their retirement nest egg without running out of money.
In his research, he discovered that if retirees withdrew 4% of their nest egg each year adjusting each year for inflation, there was a good chance that retirees could not outlive their retirement nest egg.
Today, however, researchers are beginning to rethink Bengen's 1994 research. Now, many researchers believe that a safe withdrawal rate isn't 4%, but rather 2.8% or 2%, or even as low as 1.49%.
Why?
Bonds.
Simply put, Bengen's research assumes that your retirement portfolio was invested in stocks and bonds and Bengen's assumptions did not consider today's long period of historically low bond yields.
The low yields drag down the potential performance of the bond portion of your portfolio lower than what Bengen assumed.
And before you think that simply reducing your bond holdings will be the answer, increasing your exposure to stocks will simply increase your exposure to volatility, which adds a whole new level of risk to your retirement.
To see how you can potentially address this issue, consider Bill and Jill.
Both Bill and Jill have $1 million saved and need $40,000 a year for retirement.
Bill was planning on withdrawing 4% of his portfolio to generate the $40,000. However, based on recent research published by Morning Star, Bill would only have a 50% chance of having his money last 30 years.
Alternately, in order to have a 90% chance of having his money last for 30 years, he would have to lower his retirement income to $27,000.
On the other hand, Jill elects to incorporate a fixed index annuity into her retirement strategy.
By using a portion of her $1 million to purchase a fixed index annuity, she is still able to reach her retirement income goal of $40,000.
Plus the income that is generated by the fixed index annuity can be guaranteed to generate lifetime income.
The key is that in order to address the many risks of retirement, you may need to consider retirement products that you may not have contemplated when you were saving for retirement.
Annuities are just one of these types of products that are specifically designed to help generate retirement income. The Annuity Expert can help you determine if a fixed index annuity is right for you.
Learn More: https://www.annuityexpertadvice.com/4-percent-rule/
However, while there are different strategies and approaches, there is one rule of thumb that is usually the basis from which all others are built, the 4% safe withdrawal rate.
In 1994, William Bengen conducted a study to determine how much retirees could withdraw from their retirement nest egg without running out of money.
In his research, he discovered that if retirees withdrew 4% of their nest egg each year adjusting each year for inflation, there was a good chance that retirees could not outlive their retirement nest egg.
Today, however, researchers are beginning to rethink Bengen's 1994 research. Now, many researchers believe that a safe withdrawal rate isn't 4%, but rather 2.8% or 2%, or even as low as 1.49%.
Why?
Bonds.
Simply put, Bengen's research assumes that your retirement portfolio was invested in stocks and bonds and Bengen's assumptions did not consider today's long period of historically low bond yields.
The low yields drag down the potential performance of the bond portion of your portfolio lower than what Bengen assumed.
And before you think that simply reducing your bond holdings will be the answer, increasing your exposure to stocks will simply increase your exposure to volatility, which adds a whole new level of risk to your retirement.
To see how you can potentially address this issue, consider Bill and Jill.
Both Bill and Jill have $1 million saved and need $40,000 a year for retirement.
Bill was planning on withdrawing 4% of his portfolio to generate the $40,000. However, based on recent research published by Morning Star, Bill would only have a 50% chance of having his money last 30 years.
Alternately, in order to have a 90% chance of having his money last for 30 years, he would have to lower his retirement income to $27,000.
On the other hand, Jill elects to incorporate a fixed index annuity into her retirement strategy.
By using a portion of her $1 million to purchase a fixed index annuity, she is still able to reach her retirement income goal of $40,000.
Plus the income that is generated by the fixed index annuity can be guaranteed to generate lifetime income.
The key is that in order to address the many risks of retirement, you may need to consider retirement products that you may not have contemplated when you were saving for retirement.
Annuities are just one of these types of products that are specifically designed to help generate retirement income. The Annuity Expert can help you determine if a fixed index annuity is right for you.
Learn More: https://www.annuityexpertadvice.com/4-percent-rule/