The 4% Rule, Revisited
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.
Source: SSRN via Retirement Researcher Blog
Disclaimer: Discover is a paid advertiser of this site.
Reasonable efforts are made to maintain accurate information. See the Discover online credit card application for full terms and conditions on offers and rewards.
Modified on February 4th, 2013 - 4 Comments
Filed under: Retirement, Saving & Investing
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
Related articles...
» Gas Prices, Revisited» Carnivals – Week of 04/24/06
» IRS to Modify FSA Use-It-or-Lose-It Rule?
» Carnivals – Week of 08/27/07
» Link Roundup: Spambot Edition
» The Best of FCN – Selections from 04/06
» Another Retirement Rule of Thumb
» How to Make Money in the Stock Market
Was this article useful? Please sign up to receive our content via e-mail:
4 Responses to “The 4% Rule, Revisited”
Leave a Reply
Top Cards by Category
Earn 100 Reward Dollars after you make $1,000 in purchases in the first three months of Cardmembership.
Earn 25K Membership Rewards(R) points after you spend $2,000 during your first three months of Card membership.
Consumer friendly credit card with a great low rate of 7.25% and save on interest charges. No balance transfer fees and no annual fee.
The new Discover it card is out to change the way people think about credit cards. No annual fee. No overlimit fee. No foreign transaction fee & no pay-by-phone fee. No late fee on your first late payment. And Discover won't increase your APR for paying late.*
The new Discover it card is out to change the way people think about credit cards. No annual fee. No overlimit fee. No foreign transaction fee & no pay-by-phone fee. No late fee on your first late payment. And Discover won't increase your APR for paying late.*
Consumer friendly credit card with a great low rate of 7.25% and save on interest charges. No balance transfer fees and no annual fee.
Limited Time Offer: Get 25,000 Membership Rewards(R) points after you spend $5,000 in the first three months of Card membership. Enroll and select a qualifying airline to receive up to $200 annually in statement credits for incidental fees, such as checked bags and in-flight refreshments, charged by the airline.
The new Discover it card is out to change the way people think about credit cards. No annual fee. No overlimit fee. No foreign transaction fee & no pay-by-phone fee. No late fee on your first late payment. And Discover won't increase your APR for paying late.*
- How to Become a Millionaire
- How to Get Out of Debt
- The Best Dollars I've Ever Spent
- How Our Estate Plan is Structured
- How We Paid Our Mortgage In Less than 10 Years
- Money Making Ideas
- How to Manage Your Asset Allocation with Multiple Accounts
- Consumption Smoothing - Save While the Saving's Good
- How to Save on Groceries
- How Much Life Insurance Do You Need?
- Eleven Great Books About Money
- Dave Ramsey is Bad at Math
- Dish Network Customer Service SUCKS
- $8,000 Homebuyer Tax Credit
- Pay Off Mortgage Early or Invest?
- How to Claim the First-Time Homebuyer Tax Credit
- Termite Control: Sentricon vs. Termidor
- How Much Should You Pay a Babysitter?
- Ethanol Blended Gas = Lower Mileage?
- Reduced Credit Limits? Share Your Experience
- $15,000 Homebuyer Tax Credit
- Will Mac OS X Lion Kill Quicken 2007?
- Federal Income Tax Rates Went Down but Your Federal Tax Withholding Increased. Here's Why...
How to save money on insurance
- More money, more happiness: Do you think money can buy happiness?
- Overdraft fees soared to $32 billion in 2012
- How do you combat prom inflation?
- How should you choose a bank? Look in the mirror.
- The cost of clean water
- College debt 101
- Is it possible to live debt free?
- How to prepare for a home appraisal
- Home prices are up: good news or bad?
- A bit of foolishness
January 24th, 2013 at 10:23 am
I would think a 2.5% withdrawal rate would easily be low enough to have your money last 30 years, unless inflation skyrockets. It is not difficult now to find companies paying 2.5 to 3.0 percent and that have raised dividends every year for more than 30 years. Plus, the rate of their dividend increases have been higher than inflation. Add some utility stocks that pay over 4%, and add some bond funds but keep the duration low, and then just be prudent going forward, and except for a catastrophic event, I would think with a 2.5% withdrawal rate, you may not even lose much principal going forward.
January 29th, 2013 at 7:43 pm
I would expect anyone who retires, whatever their definition of that is, to be re-evaluating things every year or two at a minimum. Rules of thumb are general and your individual position is specific.
That said, seems to me that if their assumptions are correct, they’re predicting a double whammy, with rates so low, you’ll have a smaller nest egg combined with a smaller withdrawal rate, though they don’t say that explicitly.
February 5th, 2013 at 2:39 pm
Actually the percentage that will work is the one you are stuck with in any case it’s on a individuals basis. 4% is one that someone is stuck with because they have no choice to live on less. I am in a position where 1% will easily get me by and may not have to take that much until I am 70 and will probably have to even be forced by age requirement. I was fortunate enough to have the wisdom and will power to save. Was not a high income earner just one frugal enough to do what I needed to do to retire with enough of a nestegg and retire at age 58. I still do not need to tap my nestegg. My wife is working for another year or so that will both give us the ability to collect SS at 62 and her pension gives us more than $75k to live on without tapping the nestegg. So any rule is out the window. It’s got to be based on the individuals circumstances. It’s a rule to use as a baseline, thats all.
February 12th, 2013 at 3:11 pm
If hyperinflation strikes, there will be no rule of thumb to use. Hype-inflation will wipe out most nest eggs in a short period of time. Some will be forced to take out 20% or more in the first yer or two of such catastrophic economy anomalies. This is very likely to occur based on our government spending.