The 4% Rule No Longer Works for Retirees, Says the Man Who Invented It

In the early s financial planner William Bengen developed an idea that took hold in retirement planning His approach which became known as the rule evolved into a strategy for withdrawing income from a retirement portfolio without running out of money More than years later Bengen revisits this strategy in an upcoming book A Richer Retirement Supercharging the Rule to Spend More and Enjoy More The new book builds on his original research incorporating decades of sector material evolving asset classes and lessons from real-world applications according to Bengen The so-called rule which Bengen noted was dependably intended as a guideline suggested withdrawing of your portfolio in year one adjusted for inflation The rule isn t really a rule it s a process Bengen reported My new research looks at variables that affect retirement income and eight of them you have control over This book builds on everything I ve learned over the past years and shows how retirees can safely increase their withdrawal rate without taking on more danger Bengen now considers a new starting point for sustainable annual withdrawals Although late economist Harry Markowitz called diversification the only free lunch in investing Bengen revealed the biggest surprise in his research was finding four free lunches that retirees can use to safely boost withdrawal rates In addition to diversification the other three advantages include rebalancing asset class tilts and a rising equity glide path Diversification Diversification is a familiar concept to a great number of retirement savers and one that Bengen endorses Asset classes perform differently at different times and research has shown that it s impossible to predict which will outperform at any given time Investing in a broad portfolio of equity and fixed-income asset classes can not only smooth an investor s return but also improve the outcome over time Read If You Want to Retire in Here s What You Need to Prep Now Asset Class Tilting Bengen now advises retirement investors to consider tilting their portfolios slightly to two of the highest-returning asset classes small caps and microcaps Not drastically but the extra return generally will help your portfolio he declared Equity Glide Path Historically retirement investors have been communicated to steadily decrease their equity holdings as they age However Bengen recommends a different approach the rising glide path developed by retirement researchers Wade Pfau and Michael Kitces Using the glide path an investor s equity allocation gradually increases during retirement Bengen s new research suggests this can improve retirement outcomes compared to traditional fixed or declining equity allocations It s really a strange concept when you hear it for the first time he announced The small percentage increase each year should be in the range of about to he added Read How to Build a Balanced Retirement Portfolio Rebalancing Your Portfolio In simple terms this is the process of selling assets that have outperformed and using the proceeds to purchase several that have lagged This returns a portfolio to its predetermined allocation as set by your financial plan Bengen recommends doing this every six to months Extend Your Time Horizon One of the variables that Bengen analyzed was retirement portfolio longevity versus the retiree s longevity Never plan based upon what you think your life expectancy is going to be he noted Plan for to years beyond that So if you think you ll live until plan to about That margin of error is key he says although it usually leads to a lower withdrawal rate But you don t want to start messing with going back to work in your mid- s he quipped Should Retirees Still Plan for How Your Financial Advisor Views the Rule Aaron Brask principal at Aaron Brask Capital in Lake Worth Florida explained in an email that he prefers a dynamic approach to estimating sustainable withdrawal rates Instead of relying on a fixed percentage this approach adjusts withdrawal rates based on current economic conditions life expectancy records and anticipated income from the portfolio Rather than using a static figure such as or I like to calibrate withdrawal rates to current industry rates actuarial tables and the clients ages Brask explained This estimate is not perfect he added as factors such as dividend sustainability can change However it is a quick and easy estimate that might be more precise Anthony Saccaro president at Providence Financial Insurance Services in Woodland Hills California noted that Bengen s rule offered a logical retirement withdrawal strategy when it was introduced in the s thanks to strong equity markets and higher interest rates If someone had retired in with a million portfolio allocated to stocks and to bonds they would have still ended the year with well over million even after taking annual withdrawals Saccaro announced in an email Lower Sector Returns After From to it was a different story Saccaro reported The domain experienced two major crashes the dot-com bust and the Great Recession and even though there were recoveries in between equity returns over that entire -year period were essentially flat Saccaro commented Using a withdrawal rate a retiree who started with million in would have had just over left by That kind of drawdown creates real concern for longevity menace he disclosed noting that he prefers to focus on income-generating investments that pay interest and dividends That way retirees can live off the income without having to sell assets regardless of realm conditions Saccaro stated More from U S News What Is the Average Retirement Age in the U S Social Assurance Mistakes to Avoid Trump Proposed Eliminating Social Safety Taxes Here s the Bill That Could Make It Happen The Rule No Longer Works for Retirees Says the Man Who Invented It originally appeared on usnews com Source