Experts say the 4% rule, a popular retirement income strategy, is outdated
This article explains the commonly-held notion that retirees who withdraw the equivalent of 4% of the portfolio in the first year of retirement and then adjust this dollar amount for inflation each year would enjoy a 30 year retirement without running out of funds. However, the most interesting part of the article is the emphasis on the “sequence of returns” – the idea that adverse market forces or large capital withdrawals early in retirement can permanently reduce the amount that retirees can live on. We address this issue regularly in our work now that clients are trending towards larger gifts to their children during their lifetimes instead of upon their deaths.
The article also presents the idea that your lifestyle expenses may need to mirror market returns – with higher standards of living enjoyed during market strength followed by more moderate spending aftermarket pull-backs. Needless to say, the true response to whether the 4% can be relied upon to stabilize your retirement income is: “It Depends”.
