Weekend Reading: Retirement Planning in the Post-4% World

This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
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Weekend Reading

The four percent rule has been around for over two decades, which begs the question: Does it still hold any truth for today’s retirement planning strategies?


A potential overshot: When it comes to the decumulation phase, utilizing the four percent rule as a starting point can be helpful in pinpointing your optimal withdrawal rate. Ultimately, however, it’s going to depend on your financial preferences and unique situation. Past Retire With Purpose podcast guest, David Blanchett, analyzes the circumstances on which the four percent rule was originally developed (some data going as far back as 1926), which in today’s world, might mean this benchmark is slightly optimistic.

In that light, it’s important to understand the assumptions used in retirement spending models as you navigate the development of your retirement plan. Many software models automatically assume a specific retirement period (often 30 years), a static spending pattern throughout those years, and portfolio withdrawals that remain in tandem with inflation. All of these factors can easily fluctuate depending on the retiree, and in fact, studies show that spending can actually decrease throughout retirement, even declining one to two percent annually in relation to inflation.

The reality: So, what does a safe initial withdrawal rate look like? Blanchett conducts an analysis utilizing four percent, as well as historical average U.S. returns, a 30-year time horizon and a 50/50 balance of stocks and bonds. Here, the probability of success stands at 95 percent, then declines to 50 percent when returns are reduced to mirror today’s investing environment.

In order to reach that 95 percent probability of success today, Blanchett finds a 2 percent initial withdrawal rate is more realistic. However, this can also vary greatly on the retiree, what other supplemental income they might have available (i.e., a pension) and the manner in which their withdrawals might evolve over time.

Make note: This information is only relevant if you won’t be structuring a true retirement income strategy, and simply taking withdrawals from an investment portfolio. A true strategy will always allow for a higher safe withdrawal rate.