Is the 4% Rule Still Valid?

Have you heard of the 4% rule?  It simply states that an investor can withdraw 4% from his or her retirement nest egg every year in retirement and never run out of money despite the possibility of the next Great Depression, Great Recession, Tech Bubble, etc.

But does the 4% rule still apply?  People are living longer. Some will spend more years in retirement than they spent in their working career. This can increase the worry that retirement funds will be depleted.

Moreover, the trouble with these rules of thumb is that every retiree and ever retirement is different. And, before settling on a withdrawal rate, it’s also necessary to factor in the funds you’ll have available from Social Security and pensions.

Some factors that could potentially reduce a withdrawal rate are:

  • A low risk tolerance
  • A low equity exposure
  • Inadequate diversification
  • Concentrated positions in a few stocks
  • An inadequate asset allocation strategy
  • Behavioral risks such as selling during a market downturn
  • Significant liabilities in retirement such as college expenses for kids or elder care for parents
  • A need for uninterrupted income

Likewise, some factors that could potentially increase the withdrawal rate are:

  • Moderate risk tolerance
  • Balanced equity exposure
  • Disciplined investment approach
  • A long-term investment focus
  • No desire to leave a legacy to future generations
  • Flexibility as to when portfolio withdrawals can be taken or reduced

The 4% rule has a lot of followers and is supported by William Bengen’s work and the analysis of Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz in 1998.

So, while 4% is a good starting point, it’s important to factor in all the considerations from the list above. You also need to consider your retirement age, family longevity, and general health to arrive at your retirement withdrawal rate. Also, remember that a portfolio withdrawal rate is not set in stone. You can adjust the percentage you withdraw based on market conditions or changes in personal circumstances.

Leave a Reply

Your email address will not be published. Required fields are marked *