Experts Say The 4% Rule, A Popular Retirement Income Strategy, Is Outdated


Economic conditions are trying to pressure the 4 percent rule, a popular rule of thumb for retirees to determine how so much cash they can continue living on every year without fear of going out afterward.

Withdrawing the money from one’s nest egg is among the most complicated financial workouts for families. There are numerous unknowns, including the length of retirement, one’s spending needs (for example, health care costs), and investment returns.

The 4% rule is designed to provide seniors with a steady stream of annual income and give them confidence that their funds will last them through a 30-year retirement.

Simply put, the rule states that in the first year of retirement, retirees can withdraw 4% of the total value of their investment portfolio. The dollar amount rises with rising prices (cost of living) the following year, as well as the following year, and so on.

Market conditions, on the other hand, do not appear to be working in retirees’ favor, with lower projected returns for stocks and bonds.

According to a paper published Thursday by Morningstar researchers, the 4% rule “may no longer be feasible” for seniors, given market expectations. They claimed that the 4 percent rule should now be renamed the 3.3 percent rule.

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Though the reduction may appear insignificant, it can have a significant impact on retirees’ quality of life.

The 4 percent rule, for example, allows an investor to withdraw $40,000 from a $1 million investment in the first year of retirement. Using the 3% rule, however, that first-year withdrawal drops to $33,000.

When inflation is taken into account, the difference becomes even more pronounced later in retirement: $75,399 versus $62,205 in the 30th year, according to a CNBC analysis.

Because of the so-called sequence-of-returns risk, investment returns are especially important in the early years of retirement. Taking a large withdrawal from one’s nest egg in the first year or years — especially from a portfolio that is losing value at the same time — can heighten the risk of running out of cash afterward.

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