An April 2008 study by Jason Scott, William Sharpe and John Watson entitled The 4% Rule - At What Price? states that the "...4% rule wastes money..." The reason is that this withdrawal rate was based on the worst-case scenario over many 30-year periods studied where some times the portfolio generated substantial surpluses.
The rule-of-thumb is not a bad place to start but, depending on the sequence of returns you personally experience in retirement, there may be no need to be too stringent in following this rule. If your first withdrawal year is 4% of your nest egg, then in subsequent years (regardless of the returns you experience) you can increase that first year's dollar amount by inflation and not run out of money.
Good news if during your retirement you experience a 1966-1982 flat stock market and a late 1970's and early 1980's double-digit inflation after some bad returns. 1973-1974 saw a 50% decline in the markets, too. Lots of bad news for those retirees, but a 4% withdrawal rate worked.
What if you have a better retirement economically speaking? Then sticking to the 4% rule can waste money.
The authors of this paper argue that "...the major flaw of the 4% rule is its attempt to support non-volatile spending with volatile investing..." Even worse, is the situation where glide-paths are used and the retiree starts at about a 60% stock position and reduces that exposure during retirement. This strategy may tend to lock in early poor returns. So it is essential to understand retirement planning in its entirety if you want to reach your goals.
Use a NAPFA Fee-Only planner to help you.
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.