Does the ‘4 Percent Rule’ Still Hold?
The 4 percent rule that has guided retirees for the past two decades is “under scrutiny,” said Tara Siegel Bernard in The New York Times. The classic guideline for retirement spending says retirees with a portfolio evenly split between stocks and bonds should withdraw 4 percent from their retirement account annually, adjusting for inflation each year, in order to guarantee they have enough to sustain a 30-year retirement. The rule of thumb was designed to withstand even the worst bear markets, but with today’s painfully low interest rates, some wonder whether “a new worst case is beginning to play out.” Unless you’re wealthy or have saved considerably, “the old approach is no longer working well,” said Kelley Holland in CNBC .com. The 4 percent rule came about during the high interest rates of the 1990s, when retirees could generate more income from savings in bonds and annuities than their counterparts can today. PricewaterhouseCoopers has found that if historically low interest rates persist, the risk that retirees will run out of money rises to 57 percent if they rely on the 4 percent rule.
“Almost no one will be able to follow the 4 percent rule exactly,” said David Ning in DailyFinance.com. We like to think we’ll know how much we’ll spend during retirement, but life is unpredictable. You get rid of commuting, but might want to travel more. Health-care costs, which often rise faster than inflation, might spike unexpectedly. To best protect your savings, you should spend more during bull markets and less when your portfolio takes a hit. The key is being able “to adapt when the situation calls for it.” With a few adjustments, the 4 percent rule can still be “a good starting point,” said Kira Brecht in USNews.com. Financial advisers compare it to a pilot’s flight plan. You know the route, but there will probably be course corrections. Keeping up to two years’ worth of expenses in “safe investments” can also provide peace of mind.
“There are no guarantees in life—and that includes the 4 percent rule,” said John Mayfield in Fool.com. But “stringent scenarios” have shown the rule would have weathered even the Great Depression. It’s as good a “central guidepost” as there is for retirement spending. The fact is, most retirement-age Americans are so ill prepared for their golden years that they don’t have a spending plan at all, said Erin Arvedlund in Philly.com. A recent survey by the American College of Financial Services found that only one in five seniors was “able to pass a basic test” on making a nest egg last. As for the 4 percent rule, 70 percent of respondents hadn’t even heard of it.
see also finance and business knowledge
