• Investing
  • Stock
Round Table Thoughts
  • Economy
  • Editor’s Pick
Home Editor's Pick Is it time to rethink the 4% retirement withdrawal rule? Experts weigh in
Editor's Pick

Is it time to rethink the 4% retirement withdrawal rule? Experts weigh in

by May 15, 2024
by May 15, 2024 0 comment
Share
0
FacebookTwitterPinterestWhatsapp

When it comes to spending money in retirement, there’s one rule of thumb — the 4% rule — that has persisted for decades.

The 4% withdrawal rule calls for retirees to withdraw that portion from their investment portfolio in the first year of retirement. In each subsequent year, the amount of those withdrawals is adjusted for inflation.

Financial planner William Bengen first identified the 4% rate as a sweet spot for safe withdrawals in 1994.

Since then, the world — and retirement — has changed.

Yet 61% of financial advisors are still using the 4% withdrawal rule, according to research from David Blanchett, managing director and head of retirement research at PGIM DC Solutions.

Now, researchers are looking at the most effective ways to integrate the 4% rule with today’s portfolios.

Many baby boomers face a challenge of how to maintain their lifestyle once they retire.

Social Security benefits typically replace about 40% of a worker’s pre-retirement income.

Annuities may help provide another source of guaranteed income. However, many people do not seek those products when they retire, due to their complexity and difficulty selecting among the various products.

TIAA has launched a new metric to show why the 4% rule combined with an annuity can provide a higher amount of income than just using the 4% rule alone. (TIAA’s analysis is based on the use of one of its own fixed annuities that provides a guaranteed rate of return.)

For example, if a retiree has $1 million in total savings, the 4% rule would provide them with $40,000 in their first year of retirement.

However, if the same retiree instead converts $333,000 of their $1 million balance to an annuity, that may boost that income to $52,667, according to TIAA. That is based on the combined income of the annuity and a 4% withdrawal on the remaining $666,667 portfolio.

The first-year withdrawal of the annuity strategy — $52,667 versus $40,000 — is 32% higher and $1,056 more per month than just using the 4% rule.

“Retirees never know how much they’re allowed to spend,” said Benjamin Goodman, vice president at TIAA Institute.

“And with an annuity, you know exactly what you can spend, the check, because you’re going to get another one next month,” he said.

One reason more investors do not buy annuities may have to do with their financial advisors.

“It’s rare that we recommend them, but they are applicable in some circumstances,” said Colin Gerrety, a certified financial planner and client advisor at Glassman Wealth Services in Tysons Corner, Virginia.

To be sure, annuities are not a fit for all investors, particularly those who have poor health habits or conditions that may prevent them from living long lives, Goodman said.

But because of the income certainty annuities can provide, they may catch on, Blanchett predicts.

“I think that we’re going to see more and more advisors realize that you cannot create the same kind of outcomes and certainty by managing a portfolio as you can having a retiree allocate their savings to a product that provides lifetime income,” Blanchett said.

Retirees may also get guaranteed income from Treasury Inflation Protection Securities, or TIPS, according to Morningstar. Specifically, a TIPS ladder of bonds with varying maturity dates can provide steady income and inflation protection.

The 4% rule has its blind spots when applied to today’s retirees, according to recent research from Blanchett.

In addition to ignoring other income streams like Social Security, the 4% model also falls short in that it does not provide a lot of spending flexibility.

Retirees who are depending on their savings to fund essential expenses would want to have a conservative approach.

However, those who have can withstand more market fluctuations may have more flexibility with withdrawal rates.

For those retirees, the 4% rule likely will provide an outdated recommendation.

“It’s going to be too low for most people who are retiring at a reasonable age,” Blanchett said.

While the 4% rule may be useful to gauge how much savings an investor needs when they first enter retirement, it’s not meant to be an ongoing distribution framework, he said. 

The 4% rule is difficult to apply to every single person across the board, particularly as they are subject to different tax rates and have different risk profiles and cash flow needs, Gerrety said.

“Very rarely have I ever seen a client who just withdraws 4% of their portfolio every year, and calls it a day,” Gerrety said. “Things tend to be a lot lumpier and a lot messier than that.”

This post appeared first on NBC NEWS
You Might Also Like
  • Americans are unusually down on a solid economy. So far, they aren’t spending — or voting — like it.
  • The impact of IoT on healthcare costs and resource utilization
  • Investors pitch new international basketball league that would offer players equity
  • Klarna, nearing IPO, plucks lucrative Walmart fintech partnership from rival Affirm
Share
0
FacebookTwitterPinterestWhatsapp

previous post
Amazon Web Services CEO Adam Selipsky to step down
next post
Master The Most Underutilized Options Income Strategy: Cash-Secured Puts

You may also like

Home Depot says the worst of inflation is over —...

November 15, 2023

A Burt’s Bees, Hidden Valley Ranch lip balm collaboration has...

January 20, 2024

T-Mobile sued after employee stole nude images from customer phone...

November 19, 2023

YouTube is dominating the living room, forcing media companies to...

June 28, 2024

More people are seeking work, but jobs are becoming harder...

August 5, 2023

Inflation ticked up to 3.4% in December thanks in part...

January 12, 2024

YouTuber Mr Beast sued by Mr Beast Burger food delivery...

August 9, 2023

Lawmakers ask Mark Zuckerberg to show how Facebook, Instagram are...

August 16, 2024

Valentine’s Day spending on significant others is expected to hit...

January 30, 2024

TSA airport screenings hit an all-time high

June 28, 2024

    Stay updated with the latest news, exclusive offers, and special promotions. Sign up now and be the first to know! As a member, you'll receive curated content, insider tips, and invitations to exclusive events. Don't miss out on being part of something special.


    By opting in you agree to receive emails from us and our affiliates. Your information is secure and your privacy is protected.

    Recent Posts

    • Breakouts, Momentum & Moving Averages: 10 Must-See Stock Charts Right Now

      May 31, 2025
    • Leadership Rotation Could Confirm Corrective Phase

      May 30, 2025
    • Run Your Stock Portfolio Like a Pro Sports Team

      May 30, 2025
    • U.S. foreign tax bill sends jitters across Wall Street

      May 30, 2025
    • Amazon taps Xbox co-founder to lead new team developing ‘breakthrough’ consumer products

      May 30, 2025

    Popular Posts

    • 1

      Trump-era China sanctions ended by Biden may be...

      June 27, 2024 2,765 views
    • 2

      Walz’s honeymoon with China gets fresh scrutiny as...

      August 9, 2024 2,472 views
    • 3

      Biden appointee played key role in recruiting Chinese...

      June 25, 2024 2,451 views
    • 4

      Shein’s global ambitions leaves some cybersecurity experts fearful...

      July 10, 2024 2,432 views
    • 5

      Harris VP pick spent years promoting research facility...

      August 29, 2024 2,308 views

    Categories

    • Economy (7,009)
    • Editor's Pick (2,106)
    • Investing (538)
    • Stock (2,581)

    Popular Posts

    • 1

      Trump-era China sanctions ended by Biden may be revived under new House GOP bill

      June 27, 2024
    • 2

      Walz’s honeymoon with China gets fresh scrutiny as Harris camp blasts ‘lying’ critics

      August 9, 2024
    • 3

      Biden appointee played key role in recruiting Chinese businesses to Delaware: ‘Longtime friends’

      June 25, 2024
    • 4

      Shein’s global ambitions leaves some cybersecurity experts fearful of Chinese spy threats

      July 10, 2024
    • 5

      Harris VP pick spent years promoting research facility that collaborated with ‘Chinese military company’

      August 29, 2024

    Latest News

    • Breakouts, Momentum & Moving Averages: 10 Must-See Stock Charts Right...

      May 31, 2025
    • Leadership Rotation Could Confirm Corrective Phase

      May 30, 2025
    • Run Your Stock Portfolio Like a Pro Sports Team

      May 30, 2025

    Categories

    • Economy (7,009)
    • Editor's Pick (2,106)
    • Investing (538)
    • Stock (2,581)

    Disclaimer: RoundTableThoughts.com, its managers, its employees, and assigns (collectively “The Company”) do not make any guarantee or warranty about what is advertised above. Information provided by this website is for research purposes only and should not be considered as personalized financial advice. The Company is not affiliated with, nor does it receive compensation from, any specific security. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. Any investments recommended here should be taken into consideration only after consulting with your investment advisor and after reviewing the prospectus or financial statements of the company.

    Copyright © 2024 RoundTableThoughts.com. All Rights Reserved.

    Round Table Thoughts
    • Investing
    • Stock
    Round Table Thoughts
    • Economy
    • Editor’s Pick

    Read alsox

    Google CEO Pichai struggled to navigate...

    December 30, 2024

    Social Security Administration will no longer...

    March 29, 2024

    Clorox warns cyberattack and product shortages...

    October 11, 2023
    Sign In

    Keep me signed in until I sign out

    Forgot your password?

    Password Recovery

    A new password will be emailed to you.

    Have received a new password? Login here