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How Retirees Can Withdraw More Than 4 Percent Per Year

FYI: Elizabeth Shaw and Charlie Holloway were digging around in a Scottish cave. They discovered a special map that, they hoped, held the key to the origin of life on Earth. It was one of the earliest scenes in the science fiction thriller, Prometheus. And their discovery was a bit like the 4 percent rule.

OK, I might be stretching things a bit. But who’s to say William Bengen didn’t discover the 4 percent rule in a man-cave of his own? Bengen, a financial planner from MIT, published his discovery in a 1994 publication of the Journal of Financial Planning. He tested several portfolio models back to 1926. His research showed that if retirees had diversified portfolios comprising at least 50 percent in stocks, they could have withdrawn an inflation-adjusted 4 percent per year and not run out of money over a 30-year retirement.
Regards,
Ted
https://assetbuilder.com/knowledge-center/articles/how-retirees-can-withdraw-more-than-4-percent-per-year

Comments

  • MJG
    edited November 2019
    Hi Guys,

    Portfolio potential survival is always a dominant and difficult issue when retired. When estimating that portfolio likelihood, drawdown rate is obviously a key factor. That’s under your control. But not under control are the returns that your portfolio delivers. For any given year, those returns are unpredictable. But from a statistical view, some fairly reliable estimates can be made.

    The referenced article uses precisely the past returns as recorded in the markets on an annual basis. The odds of that happening again closely approach zero. What to do?

    I likely am a broken record, but the tools that are easily available to make that longer term statistical projection are Monte Carlo simulators. The inputs required by this tool class allow a user to quickly explore many what-if scenarios.

    Here is a Link to a Monte Carlo code that I have frequently referenced in past submittals:

    https://www.portfoliovisualizer.com/monte-carlo-simulation#analysisResults

    This version of a Monte Carlo code is easy to input and allows a rapid examination of countless what-if market returns. Please give it a try.

    Of course, junk input will generate junk output. So be realistic in your assumptions. Good luck!

    Best Regards
  • edited November 2019
    I guess these are positive articles on the prospect of safely taking more than the 4% rule dictates, but even with all the charts and research in the articles I have a hard time buying it. Maybe that is just my fear of out living assets which is a fear many of us have. We are being fed from the likes of Benjamin Graham and others that both bond and equity returns will likely be less in the future. Doesn't it make more sense to say less than 4% might make more sense? That's what I'm planning on anyway.
  • edited November 2019
    Agree with @MikeM (assuming he means “Better safe than sorry” here).

    You don’t know until it’s you out of your life’s work with ongoing expenses and at the mercy of what we collectively term “the markets”. Guess wrong and you might find yourself out looking for a job on your 95th birthday.

    I’’m atypical in that I have a DB pension. Wish everybody did. So with that I went 6-7 years into retirement without having to touch the IRA. If you can do that, it’s a great way to build up that nest egg. But 4% yearly? I’ve been able to take a bit more than that over the past 10-12 years and not really “ding” the balance. In fact it’s grown. But I’ve been lucky. Most years I pull 5-7% out. But a couple years, for new car purchases, it’s been a bit higher than 7%.

    I doubt the linked OP article even addresses the traditional vs Roth issue. If you’re pulling $$ from a Roth IRA, it’s quite likely that $10 withdrawn from that Roth will buy you as much as $12-$15 pulled from a traditional IRA would (after taxes are accounted for). So, with a Roth, you need to pull out a significantly smaller percentage to maintain the same lifestyle.

    The markets are a real wild card. I’d be loath to try and draw too many conclusions from the past 10 or even 20 years. That’s too short of time. History has a much longer memory. Final comment - It seems as if the bond market is hooked on “downers” today while the equity markets are doing steroids. One wonders how long that dichotomy can persist.

  • edited November 2019
    @hank; "So, with a Roth, you need to pull out a significantly smaller percentage to maintain the same lifestyle." You've already paid the taxes , so a smaller amount to draw from. It probably boils down to when the Roth was started.
    Derf
  • edited November 2019
    @Derf - Correct Sir. Too many variables there to address which way is better. Certainly if you have a traditional IRA in which some assets temporarily get beaten up during retirement it may prove a wise tactical move to convert them while they’re under water.

    All that said, it does throw that 4% withdrawal figure into question.
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