Why the 4% retirement rule is just a starting point

Some experts argue for withdrawal strategies tied to changing conditions.

  • By Glenn Ruffenach,
  • The Wall Street Journal
  • Saving and Spending
  • Saving for Retirement
  • Withdrawals
  • Saving and Spending
  • Saving for Retirement
  • Withdrawals
  • Saving and Spending
  • Saving for Retirement
  • Withdrawals
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Q: Is 4% still the going number for the amount considered “safe” to withdraw from savings in retirement? And is there a “magic” number that should make me feel comfortable about retiring? I’m 64½.

A: This question gives me a chance to highlight several resources about tapping a nest egg, one of the most important and difficult tasks that retirees face.

Based on pioneering research in the early 1990s by William Bengen, then a financial planner in California, the so-called 4% rule states that retirees can pull about 4% annually from their nest egg (a figure Mr. Bengen eventually set at 4.5%), with a high probability that their savings will last 30 years.

But Mr. Bengen, now retired, never has claimed that his findings are right for every retiree. He started with a specific set of assumptions: a retirement lasting (again) 30 years, with savings in a tax-deferred account, and nothing left for heirs. Change just one of those parameters, and your “safe” withdrawal rate may differ.

So, to answer your first question, the 4% rule (“guideline” would be a much better word) is still a good starting point when thinking about tapping your savings.

But that’s all it should be — a starting point. There are many techniques to help you pull funds from a nest egg, most of them tied to the idea that withdrawal rates should be “dynamic,” or change each year in response to changes in the markets. (More on this in a moment.)

As for a “magic” number, it varies by person. Depending on your circumstances (the size of your savings, investment fees, other sources of income, your life expectancy, spending patterns, etc.), you might be comfortable with a withdrawal rate of, say, 4.5% — or something closer to 3%. Of course, the lower your withdrawal rate, the safer. William Bernstein, the author of several books about investing, puts it this way: “Two percent is bulletproof, 3% is probably safe, 4% is pushing it, and at 5%, you’re eating Alpo in your old age.”

Now, some resources:

Options and mechanics

If you plan to tap your savings on your own, two resources, in particular, can be a big help. Karsten Jeske, a chartered financial analyst and author of the Early Retirement Now blog (earlyretirementnow.com) has written a 27-part (and counting) series about safe withdrawal rates. In short, Mr. Jeske is no fan of the 4% rule; rather, his articles look closely at, and make a compelling argument for, withdrawal strategies that are tied to “changing economic and financial conditions.”

Similarly, check out “Living Off Your Money” by Michael H. McClung. This valuable book, although somewhat technical, focuses on “systemic withdrawals” — how to generate sustainable income in retirement. To that end, Mr. McClung patiently examines a number of strategies for investing your savings, pinpointing a withdrawal rate, and pulling funds from your nest egg. His website (livingoffyourmoney.com) includes a companion spreadsheet.

Guaranteed income

If you have a high level of guaranteed income in retirement — Social Security, a pension, an annuity — you probably can pull more from your savings each year than people with smaller amounts of such income. That’s the point made by David Blanchett at researcher Morningstar Inc. and Mike Piper, who writes the Oblivious Investor blog.

Numbers vs. lifestyle

For the moment, let’s put aside numbers and consider how your lifestyle might affect your withdrawal rate.

Darrow Kirkpatrick, who writes the Can I Retire Yet? blog (caniretireyet.com), has come up with a Retirement Flexibility Scale that uses non-numeric factors to help would-be retirees determine whether their particular withdrawal rate should be closer to 3% or 5%. Some examples: Could you return to work in your original career in the first four years of retirement, if necessary? Do you have the skills to start a business? Could you downsize to reduce housing expenses? There are 12 questions in all.

Quirky? A bit. But as with most of Mr. Kirkpatrick’s articles, well worth your time. (At his website, search for: Retirement Flexibility Scale.)

Back to Bengen

Finally, William Bengen, the aforementioned father of the 4% rule, spoke earlier this year with the American Association of Individual Investors. In a lengthy interview, he explained how his withdrawal method works and why he still has a great deal of faith in his research. The biggest threat to his recommendations? A sustained period of high inflation, he says. (And not a lengthy period of low returns, as some critics of Mr. Bengen’s work have suggested.) Go to aaii.com/journal and search for: Bengen.

Of course, all of the above raises the question: Should you choose a withdrawal rate, and how to pull the necessary funds from savings, on your own? Again, this is one of the most important financial steps you will take in retirement — and if you err early in the process, the consequences could be ruinous. This is a moment when a good financial adviser can be invaluable.

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