Following the post-COVID stimulus hangover in 2022, the bull market has continued to run. One of the key factors was the Federal Reserve’s decision to
Is the 4% Retirement Withdrawal “Rule” Dead or Alive?
Published Date : January 26, 2024
In late 2023, The Wall Street Journal (WSJ) published an article titled “The 4% Rule for Retirement is Back” and my immediate response was, “Where exactly did it go?” As a financial planner, I pay attention to articles on retirement withdrawal rules and can confirm I’ve seen and read many diverging opinions on the topic. Simply put, the “4% rule” refers to the rule-of-thumb “safe” rate of withdrawal one can rely on and not likely run out of money. When markets took a downturn in 2022, I recall a different article informing me the 4% rule is dead. I wondered then what resurrected the 4% rule this time and why is it so fickle that it can seemingly come and go depending on the current state of the economy and financial markets?
In simple terms, retirement plans are constructed with the express goal of allowing someone to live throughout retirement without running out of money. The ups and downs of the stock and bond markets should not dictate if one’s current retirement experience is suddenly in jeopardy. Whether it’s 4% or 5% or some other number, it is critical to know if you’re in the safe zone regardless of what’s happening in the markets.
The WSJ article referenced annual research conducted by Morningstar on the “safe withdrawal rate” during retirement. Per Morningstar, in 2021, the recommended retirement withdrawal rate was 3.3%, and it increased to 3.8% in 2022. To understand this in terms of dollars, a retired couple with $5 million in liquid assets earmarked for retirement could spend $165,000 in 2021 and $190,000 in 2022. Moving forward to 2023, by utilizing the resurrected 4% rule, this couple could spend $200,000! But if this were a real couple and the timeline were reversed, it would be very difficult for a household accustomed to spending $200,000 per year to be forced to scale back to $165,000 over that same 2-year period. That is the equivalent of a 17.5% reduction in spending.
How can any rational person build a retirement plan—let alone make the monumental decision to officially retire—when that decision is based on a withdrawal “rule” that seems to come and go with the whims of current events and markets? The answer is there is no simple rule anyone should follow, especially not one that could be calculated on the proverbial back-of-the-envelope.
As financial planners, we at Sand Hill would never suggest a client is in a good place to retire based on such a basic formula. The planning work we do is extremely robust, involving a multitude of carefully determined inputs and assumptions on timeline, inflation, income sources, market return and much more. We understand the importance of the advice we provide, because our clients are real people with very specific needs and goals to accomplish. Even when a retirement plan is finalized, we like to revisit this process in future years to determine if any adjustments to goals should be made or simply if spending is on track relative to plan. A great plan is one that is reviewed on a regular cadence, and especially any time circumstances materially change. Those regular check-ins allow our retiree clients to right the ship if spending veers off track or other external conditions affect the sustainability of the plan.
With any important life decision, having the guidance of an experienced Wealth Manager and financial planner will allow you to not only build a solid retirement plan, but to maintain and adjust that plan for the long term.
Sources:
www.wsj.com/personal-finance/retirement/the-4-rule-for-retirement-is-back-627ef287
www.morningstar.com/retirement/whats-safe-withdrawal-rate-today
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