Weekend Reading: Will the Real Retirement Income Number Please Stand Up?

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Weekend Reading

Some say four percent, others say 3.5 percent and the list continues on. The debate over a safe withdrawal rate in retirement is ongoing. You don't want to leave too much on the table, but you also don't want to run out of money. Learn more about pinpointing the right income number for you in this article from Morningstar below.


You’ve undoubtedly heard of the four percent rule, but as a retirement income strategy developed over two decades ago, many experts continue to question its validity.

Some believe the four percent withdrawal rate could be considered overly conservative, while others believe a number as high as 5.5 percent is needed to account for lower inflation. Ultimately, a confident, secure retirement should include a sustainable stream of income you won’t outlive, but determining how much you can safely spend is often the challenging part.

There is no ‘right’ answer: The best number for a sustainable withdrawal rate in retirement depends on your unique financial situation, however, that doesn’t mean you can’t stress test various withdrawal levels to see how they might play out. This article highlights withdrawal rates over a 30-year period utilizing volatility and correlation assumptions based on historical averages, as well as a Monte Carlo analysis to view potential return paths for each spending rate.

The outcome: In this analysis, a four percent starting withdrawal rate showed an 86 percent probability of success with a portfolio consisting of half stocks and half bonds, while lower numbers continued to increase odds. The analysts also note that with longevity being an uncertain factor, pinpointing how long you’ll need your income to last makes finding a safe rate increasingly difficult.

In conclusion: You cannot, and will not, ever use the four percent withdrawal rule for a variety of reasons. Of course, you could implement the strategy, but that doesn’t mean you will statistically experience what is found in the research. You most likely aren’t investing all your stock exposure in the S&P 500, you should and probably do invest in stocks outside of the S&P 500, and if you’re investing in the stock market, it isn’t free.

This is good information to begin thinking about the importance of a retirement income strategy, but let’s face it, this isn’t a real income strategy.