The 4 percent rule no longer rules
December 2, 2013
by Brian Wolf

The debate continues: Is 4 percent really a reasonable withdrawal amount to take from retirement assets?

In recent years, the so-called “4 percent rule,” an idea that retirees can take 4 percent from their savings the first year of retirement, and then that amount plus more each year to account for inflation, without running out of money for at least three decades, has come under scrutiny by many financial professionals. Many worry that taking that much income on an annual basis will deplete retirement income too soon. Additionally, with health care cost increasing each year, many worry that clients may not have enough money to cover the possible expenses or to leave a legacy for their heirs.

Now, with the all too familiar face of market fluctuations, the risk of a prolonged market decline during the first few years of your retirement could be devastating. In other words, timing is everything. If the value of your retirement assets were to decline 25 percent just as you started accessing them, the 4 percent rule may no longer hold, and the danger of running out of money would increase.

According to www.advisorone.com many financial professionals would argue that today’s low rates will eventually climb higher. Yet, even if rates go back up in five years, retirees using the 4 percent rule would face an 18 percent failure rate, which is three times the rate William Benger, the planner who originated the rule, thought acceptable. If rates go back up after 10 years, the failure rate rises to 32 percent; further illustrating the reason many believe sticking with this rule in a low-yield environment is a risky strategy.

With this new school of thought, many advisors are moving away from a “probability-based” approach of establishing a 4 percent withdrawal rate and instead moving toward a “safety-first” approach. This approach would take defensive measures to ensure basic retirement needs are met. In fact, using the safety-first approach, which I refer to as “the insurance company way,” instead of the 4 percent rule, which I call “the Wall Street way,” you can help provide guaranteed lifetime income for people, plus they could create a legacy to be passed on to their beneficiaries (guarantees provided by annuities are subject to the financial strength of the issuing insurance company).

Another way to think of this would be that the way your father or grandfather invested might not work so well in today’s global economy. A new way or, in my opinion, a safer way is available to clients who work with a specialist advisor in this area of safe money investing.

As a side note; we have recently opened up another office in Buffalo, and we look forward to seeing our clients who live west of the Twin Cities at this new location.

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