Why the creator of the 4% retirement spending rule says it’s no longer working

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The creator of the 4% pension system says it needs to change.


the main points

  • Bill Bengen, the creator of the 4% retirement rule, says retirees will need to cut back on their spending because of high inflation and high stock valuations.
  • According to a study by Morningstar, 3.3% is the new 4%.
  • Retirees will need to reduce their spending to ensure that their retirement savings are not depleted.

Bill Bingen first devised the 4% retirement rule in 1994. Since then, retirees have relied on this rule to help determine how much they should spend in retirement. The rule is relatively simple. You add up all your investments, and withdraw 4% of that total during your first year of retirement. In subsequent years, you adjust the amount you withdraw to calculate inflation.

So if you have $1 million saved for retirement, you’ll spend $40,000 in the first year, and if inflation is 2% the next year, you’ll have $40,800 that year. The 4% rule assumes that when you retire, your portfolio is made up of 50% stocks and 50% bonds.

Based on Bingen’s original paper, this approach could have kept retirees from running out of money during every 30-year period since 1926, even when considering the Great Depression, the technology bubble, and the 2008 financial crisis. However, given the combination of high inflation and valuations Stock and bond market soaring, Bingen believes retirees will need to do some Adjustments to their spending.

Cut spending now

Bengin, who retired in 2013, points out that given today’s unprecedented economic situation, retirees will need to cut back on their spending and lower their withdrawal rate. A recent study by Morningstar showed that their 4% withdrawal rate was very aggressive. Her research recommends a starting withdrawal rate of 3.3%.

This assumes a 50/50 equity and bond portfolio and a 90% certainty of not running out of money over 30 years. The main thing I’ve found is that the more flexible the retiree is with their spending, the higher the chance they have of raising their withdrawal rate over time.

The effect of high inflation and high stock valuations

average Inflation rate in the United States Since 1913 it has been 3.1%. With inflation now at 8.3%, withdrawals under the 4% rule have increased dramatically. This means that the portfolio will need to earn higher returns or there is a higher chance of the portfolio being depleted.

Another issue that Benjen raised is that stock valuations have reached a historically high level. Stocks now trade at about 36 times corporate earnings over the past decade. ‚ÄúThat’s twice the historical average,” says Benjen. “While lower interest rates warrant somewhat higher stock valuations, I think the market is expensive.”

When stock valuations are high, a bear market usually follows it to bring prices back to their mean. So there is a good chance of a recession or a bear market in the near future, if we are not currently in a recession. During these periods, retirees will need to be extra careful about making withdrawals to ensure they don’t run out of money.

After reducing their spending, Bingen recommends retirees reduce their exposure to stocks and bonds. This would reduce its risk in the event of a recession or bear market. By acquiring more cash or other assets such as income-producing real estate, when the market is down, there may be an opportunity to buy stocks when they are cheaper. Pensioners should be careful. The important thing is not to try to time the market, as this can lead to bigger problems.

Depending on current economic conditions, retirees will need to rethink the popular 4% rule. Experts, including the creator of this popular retirement income strategy, believe it is outdated and retirees should evaluate their financial plans and spending to manage the risk of running out of money. The key is to be flexible with your money And maintain a long-term financial outlook.

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