In talking about drawing income from a retirement portfolio, I’ve often referred to the 4% rule. This rule holds that, if you withdraw an inflation-adjusted 4% from a balanced stock/bond portfolio, there would be a high likelihood of your money lasting 30 years.
However, the 4% rule dates back to academic research that was published in the late 1990s (1998 to be exact, though it was based on data through 1995) and the investing landscape — bond rates in particular — has changed dramatically in the intervening years.
According to a very recent study, the likelihood of failure increase dramatically as returns decline. In fact, when bond rates are calibrated to the current yield on TIPS while maintaining historical equity performance, the failure rate soars from 6% to 57%.
And even if we assume that bond rates will return to their historical range in 5 or 10 years, the failure rates (for people retiring right now) remain quite high at 18% and 32%, respectively (for a 50:50 allocation).
Said another way, given current conditions, 4% can no longer be treated as a “safe withdrawal rate.”
Solutions include reducing your (fixed) withdrawal (the authors found that a 2.5% withdrawal rate has a 90% chance of success under current conditions), adopting a variable rate that fluctuates depending on market performance, annuitizing a portion of your portfolio, and/or supplementing your nest egg with additional income.
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