{"id":25499,"date":"2023-10-09T16:15:59","date_gmt":"2023-10-09T16:15:59","guid":{"rendered":"https:\/\/isafespend.com\/personal-finance\/retirement\/7-things-you-probably-dont-know-about-the-4-retirement-withdrawal-rule\/"},"modified":"2023-10-09T16:15:59","modified_gmt":"2023-10-09T16:15:59","slug":"7-things-you-probably-dont-know-about-the-4-retirement-withdrawal-rule","status":"publish","type":"post","link":"https:\/\/isafespend.com\/?p=25499","title":{"rendered":"7 Things You Probably Don\u2019t Know About The 4% Retirement Withdrawal Rule"},"content":{"rendered":"
\n

The 4% rule seems so simple. Multiply your savings by 4%, and that\u2019s how much you can spend the first year in retirement. After that, adjust your spending by the rate of inflation. It\u2019s simple, right? Not so fast.<\/p>\n

While many people nearing retirement have heard of the 4% rule, few have read the 1994 paper that gave us this rule. Read it carefully, and you\u2019ll learn some surprising facts about this ubiquitous retirement rule of thumb.<\/p>\n

1. It Only Applies To A 30-Year Retirement<\/span><\/h2>\n

William Bengen, the author of the 1994 paper, evaluated 30-year retirements. He looked at 51 one of them, starting from 1926. For shorter retirements, the safe withdrawal rate goes up. For longer retirements, it goes down. It\u2019s up to each of us to determine how long our retirement plan should be.<\/p>\n

As an example, Charles Schwab calculates that for a 20-year retirement, one could start with a 5.4% or higher initial safe withdrawal rate. For early retirees with a 50-year planning horizon, Vanguard puts the SWR at 3.3%, depending on a number of variables.<\/p>\n

<\/fbs-ad><\/p>\n

The key is to recognize that the 4% rule is sensitive to longevity.<\/p>\n

2. It Assumes You Pay No Investment Fees<\/h2>\n

Bengen didn\u2019t account for investment fees. For those who manage their own portfolio of index funds, fees are near zero. But for those with an expensive investment advisor who charges 1% of assets under management, it\u2019s a different story.<\/p>\n

A 1% fee reduces a retiree\u2019s spending by 25% the first year. For example, on a $1 million portfolio, a retiree can spend $40,000 the first year using the 4% rule. Because of the fee, however, $10,000 of this amount must go to the investment advisor. If they\u2019ve put the retiree\u2019s money in expensive mutual funds, as is so often the case, the results are even worse.<\/p>\n

It\u2019s worth noting that the effects of a 1% fee change over time for a retiree. Why? Because while the spending amount turns on inflation irrespective of portfolio values, the 1% fee ignores inflation and is based exclusively on portfolio values. Either way, investment fees lower, sometimes significantly, the 4% SWR.<\/p>\n

3. It Requires A 50% To 75% Allocation To Stocks<\/h2>\n

Bengen examined stock\/bond allocations ranging from 100% bonds to 100% stocks, in 25% increments. What he found is that the best results (i.e., 4%) require a stock allocation of between 50% and 75%. If less than 50%, the portfolio struggles to handle long bouts of inflation. If more than 75%, a 1929-style stock market crash derails the portfolio.<\/p>\n

In a second paper published in 1996, Bengen suggested the ideal stock allocation was 63%. Keep in mind, however, that there were other assumptions he had to make in that paper to arrive at this number.<\/p>\n

4. Different Asset Allocations Change The 4%<\/h2>\n

Bengen used the S&P 500 to represent stocks and intermediate U.S. Treasury bonds to represent bonds. In later work, he considered other asset classes, including international stocks, small cap stocks and cash. Using these and other asset classes, he more recently concluded that the SWR is 4.7%.<\/p>\n

The point is that the SWR depends, in part, on the specific asset allocation chosen by the retiree. Here it\u2019s worth keeping in mind that all of these conclusions are based on historical data. The future is uncertain.<\/p>\n

5. It Represents The Worst-Case Scenario<\/h2>\n

The 4% rule is not based on averaging the results. Bengen looked at 30-year retirements with starting years from 1926 to 1976. The 4% rule comes from the worst outcome from these 51 retirement periods\u20141966 to 1995. For those who retired in any other year, the SWR is higher. In some cases, it approached 10%.<\/p>\n

6. It Assumes Your Spending Never Changes<\/h2>\n

The 4% rule results in a retiree having the same after-inflation spending each year in retirement. Most retirees, however, don\u2019t spend the same after-inflation amount in their 90s that they spent in their 60s. Studies have found that we spend less money as we age through retirement, even accounting for higher medical expenses.<\/p>\n

There\u2019s even a term for this observation\u2014the Retirement Spending Smile.<\/p>\n

7. You May Die Broke (Or Wealthy)<\/h2>\n

Bengen defined success based on whether any amount of money remained after 30 years. Thus, if $1 remained in the portfolio after 30 years, he counted the results as a success. The same is true if the hypothetical retiree in his study had $6 million left after 30 years. And that\u2019s pretty close to the actual range of results.<\/p>\n

A person retiring in 1966 finished 30 years with virtually no money left. Another person retiring in the early 1980s had six times the starting portfolio value after three decades.<\/p>\n

Conclusion<\/h2>\n

As simple as the 4% rule seems, there is a lot of complexity. It\u2019s for this reason that a robust retirement planning tool is so important for those in or near retirement.<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

The 4% rule seems so simple. Multiply your savings by 4%, and that\u2019s how much you can spend the first year in retirement. After that, adjust your spending by the rate of inflation. It\u2019s simple, right? Not so fast. While many people nearing retirement have heard of the 4% rule, few have read the 1994<\/p>\n","protected":false},"author":1,"featured_media":25314,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[55],"tags":[],"class_list":{"0":"post-25499","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-retirement"},"yoast_head":"\n7 Things You Probably Don\u2019t Know About The 4% Retirement Withdrawal Rule | iSafeSpend<\/title>\n<meta name=\"description\" content=\"The 4% rule seems so simple. Multiply your savings by 4%, and that\u2019s how much you can spend the first year in retirement. 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