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Say Goodbye To The 4% Rule

Monday, March 4, 2013 - 5:47 AM
From the Wall Street Journal
If the conventional wisdom no longer holds about spending in retirement, what are the alternatives? Here are three of them.

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Ken TuminKen Tumin5,468 posts since
Nov 29, 2009
Rep Points: 125,017
1. Monday, March 4, 2013 - 7:55 AM
There are a myriad of alternatives regarding "spending in retirement". Each one tailored to an individual's particular circumstances.
ShorebreakShorebreak2,602 posts since
Apr 6, 2010
Rep Points: 14,082
2. Tuesday, March 5, 2013 - 5:12 PM
The "4% rule" never really was a "rule". It's handy more in the accumulation phase than in the withdrawal phase.

Let's say, in today's dollars, you estimate you'll need to withdraw (pre-tax) $50,000/year over and above Social Security and any pension you might have in order to retire well. You should probably plan to have 25X of that amount, or $1,250,000, to accomplish that goal, adjusted for expected inflation. That's the amount to generate an inflation-adjusted $50,000 at a 4% initial withdrawal (year one).

That said, what you "actually" do, when you hit retirement, is use common sense. Given current fixed-income yields, and no light at the end of the tunnel, folks retiring with "age-in-bonds" should probably consider a withdrawal rate less than 4% for starters. Folks with little-or-no equity allocation in their retirement portfolio should probably go no higher than 3%, and forego any inflation adjustments until real returns come back (i.e., nominal returns greater than inflation).
BozoBozo137 posts since
Feb 14, 2011
Rep Points: 937
3. Wednesday, March 6, 2013 - 8:37 AM
4%, 2%, or whatever, just live the same life with prudent but enjoyable spending as one lives before the retirement. 

The withdrawal percentage guideline after retirement is simply non-sense to me, it only aimed at increasing article/paper waste and creating trivial debates.
51hh51hh1,476 posts since
Jan 16, 2010
Rep Points: 6,425
4. Wednesday, March 6, 2013 - 10:28 AM
Shorebreak is correct.  There is no one-size-fits-all answer to how to spend in retirement. 

Bozo is also correct - the 4% guideline is a guideline, nothing more.  It is certainly not set in concrete.  

51hh also gets it right.  Don't be afraid to spend money in retirement (but don't spend excessively).  Enjoy the fruits of your labor and maintain the spending habits that brought you to this moment.   

I have continued to live in retirement as prudently as before. I use the percentage guideline (although definitely not 4%) each year as a sanity-check of my anticipated net expenses, then decide if I need/want to reduce.   For the last couple of years (and likely for the next 3-5) I have consciously invaded principal (to a small degree) to take advantage of unique personal opportunities. I can live with the risk of that decision. 
pearlbrownpearlbrown1,430 posts since
Nov 2, 2010
Rep Points: 6,246