ó Conventional wisdom for the past two decades or so
in the financial services industry has been that
retirees stood a good chance of making their savings
last a lifetime as long as they were disciplined enough
to only withdraw about 4 percent of their nest egg each
year for living expenses.
the time the so-called "4 percent rule" was
formulated in the 1990s, the Federal Funds interest rate
floated between 8.1 percent and 6.24 percent. Todayís
interest rates have been stalled near zero percent for
so long that many financial advisers have come to
believe the 4 percent rule is out of touch with the
reality retirees now face.
you go back to when rates were higher on money market
accounts and fixed bonds, you could invest
conservatively and earn close to that 4 percent
distribution. However today, if you invested
conservatively in money markets and bonds, you would
earn about 1 percent," said Nick Besh, investment
director at PNC Wealth Management in Pittsburgh.
to meet your retirement needs you would have to invest
more aggressively, most likely in stocks," Besh
said. "The other side of that is stocks have a lot
more risk as we are seeing now. Stocks have had the
worst start to a year in history."
factors come into play when deciding a safe rate of
withdrawals, Besh said.
size of your retirement portfolio, your life expectancy,
market return expectations, timing of the distributions
and risk tolerance must all be considered. Other sources
of income also become part of the equation.
Investment Management in Chicago found in a 2013 study
that if bond rates remained at these low levels,
retirees stood a 50 percent chance of running out of
money in 20 years if they stuck to the 4 percent
withdrawal rule. Thatís assuming they had a portfolio
of 60 percent bonds and 40 percent stocks.
found if retirees started with an initial withdrawal
rate of around 2.5 percent, it would raise the odds of
making the money last.
Carter, an investment strategist at Hapanowicz &
Associates in Pittsburgh, said the current low interest
rates are a good example of why itís best when
constructing rules of thumb to focus on long-term market
most important thing for us is to look at each client
individually," Carter said. "The benchmark for
expected rate of return on the portfolio, for risk
tolerance and an appropriate withdrawal rate from the
portfolio is the client himself. Itís really a
client-by-client, case-by-case customized
4 percent withdrawal rule was created in 1994 by
financial planner Bill Bengen in response to several
anxious clients asking him the same question: How much
could they spend in retirement without running out of
who graduated from the Massachusetts Institute of
Technology with a bachelorís in aeronautics and
astronautics, turned to his computer. He found that
retirees who withdrew no more than 4 percent of their
initial portfolio, adjusted for inflation, on an annual
basis during retirement years could create a paycheck
that lasts for 30 years.
of the rule say it was based on economic conditions in
the U.S. during a specific time in history.
this premise was formulated not only were rates higher,
but we were also embarking on a bull market for bonds.
We might be on the threshold of a bear market for
bonds," said Adam Yofan, president of Alpern Wealth
Management in Pittsburgh.
some extent, the 4 percent rule is fallacy because
everyone has different spending requirement and pots of
money," he said. "There is no
one-size-fits-all withdrawal rate.
care costs for seniors also are spiraling out of
control. Itís crazy what people pay for drugs and
prescriptions. People are spending thousands of