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Retirement: Is the 4% rule still relevant?
Rodney Brooks, USA TODAY 12 p.m. EST December 30, 2014
132 CONNECT 72 TWEET 15 LINKEDIN 30 COMMENTEMAILMORE
For the last 20 years there has been a steadily consistent rule of thumb by America's financial planners when it comes to retirement — the 4% rule.
And what exactly is the 4% rule?
In short, it's a guideline that helps retirees determine how much money they should take from their nest egg each year. The goal is to help make sure the money lasts.
In other words, if you adhere to the rule and have a nest egg of $500,000, you should limit your withdrawals for living expenses to 4%, or $20,000 a year.
So, the big question is, after 20 years, is the rule still relevant? Most planners interviewed say yes — but only as a rule of thumb, and certainly not for everyone.
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The 4% retirement rule is broken
<p>Sophisticated investment management made simple</p> <p>Jon Stein, Betterment CEO, discuss the company&#039;s $32 million round of funding and plans to make high-end financial planning services more affordable for the masses.</p>
If there is one thing that can capture the imagination of the public when it comes to money, it's a simple rule of thumb.
That has been part of the appeal of the so-called "4 percent rule"—an investment-income strategy that says as long as you withdraw no more than 4 percent of your initial portfolio, adjusted for inflation, on an annual basis during your retirement years, you shouldn't run out of money.
However, new research shows that this rule doesn't work for retirees in today's low-rate environment. Here's why.
Quest for stability
When the formula was introduced in the early 1990s, it was designed to accomplish these goals of retirees:
But while, in the public's imagination, the 4 percent figure remained fixed, the rates it relied on were anything but. Twenty years ago, when the rule appeared, the yield on a three-month Treasury bill was 6 percent.
Seems there are a lot of retirees here. Do any of you use this rule in their own life?
Rodney Brooks, USA TODAY 12 p.m. EST December 30, 2014132 CONNECT 72 TWEET 15 LINKEDIN 30 COMMENTEMAILMORE
For the last 20 years there has been a steadily consistent rule of thumb by America's financial planners when it comes to retirement — the 4% rule.
And what exactly is the 4% rule?
In short, it's a guideline that helps retirees determine how much money they should take from their nest egg each year. The goal is to help make sure the money lasts.
In other words, if you adhere to the rule and have a nest egg of $500,000, you should limit your withdrawals for living expenses to 4%, or $20,000 a year.
So, the big question is, after 20 years, is the rule still relevant? Most planners interviewed say yes — but only as a rule of thumb, and certainly not for everyone.
=====
AND
=====
The 4% retirement rule is broken
<p>Sophisticated investment management made simple</p> <p>Jon Stein, Betterment CEO, discuss the company&#039;s $32 million round of funding and plans to make high-end financial planning services more affordable for the masses.</p>
If there is one thing that can capture the imagination of the public when it comes to money, it's a simple rule of thumb.
That has been part of the appeal of the so-called "4 percent rule"—an investment-income strategy that says as long as you withdraw no more than 4 percent of your initial portfolio, adjusted for inflation, on an annual basis during your retirement years, you shouldn't run out of money.
However, new research shows that this rule doesn't work for retirees in today's low-rate environment. Here's why.
Quest for stability
When the formula was introduced in the early 1990s, it was designed to accomplish these goals of retirees:
- Provide a fixed rate of withdrawal, like an annuity.
- Rely on an easy-to-use withdrawal formula (unlike, say, required minimum distributions).
- Minimize retirees' risk of running out of money.
But while, in the public's imagination, the 4 percent figure remained fixed, the rates it relied on were anything but. Twenty years ago, when the rule appeared, the yield on a three-month Treasury bill was 6 percent.
Seems there are a lot of retirees here. Do any of you use this rule in their own life?
