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May 19, 2021
Planning Income During Retirement: Revisiting the 4% Rule
Saving for retirement is not easy, but using your retirement savings wisely can be just as challenging. How much of your savings can you withdraw each year? Withdraw too much and you run the risk of running out of money. Withdraw too little and you may miss out on a more comfortable retirement lifestyle. That’s why planning income during retirement is so important.
For more than 25 years, the most common guideline has been the 4% rule, which suggests that a withdrawal equal to 4% of the initial portfolio value, with annual increases for inflation, is sustainable over a 30-year retirement. For example, a $1 million portfolio could provide $40,000 of income in the first year with inflation-adjusted withdrawals in succeeding years.
The 4% rule has stimulated a great deal of discussion over the years, with some experts saying 4% is too low and others saying it’s too high. The most recent analysis comes from the man who invented it, financial professional William Bengen. His newest research suggests that retirees may be able to make larger initial withdrawals, particularly in a high-valuation, low-inflation environment.
Where did the 4% rule come from?
Bengen first published his findings in 1994, after analyzing data for retirements that began from 1926 to 1976. He considered a hypothetical, conservative portfolio comprising 50% large-cap stocks and 50% intermediate-term Treasury bonds held in a tax-advantaged account and rebalanced annually. He concluded that a 4% inflation-adjusted withdrawal was the highest sustainable rate in the worst-case scenario, which at the time was retirement in October 1968, the beginning of a bear market and a long period of high inflation.1 Bengen later adjusted it to 4.5%, based on a more diverse portfolio comprising 30% large-cap stocks, 20% small-cap stocks and 50% intermediate-term Treasuries.2
Does the newest research support higher withdrawals?
In October 2020, Bengen published new research that attempts to project a sustainable withdrawal rate based on two key factors at the time of retirement: stock market valuation and inflation. In theory, when the market is expensive, it has less potential to grow, and sustaining increased withdrawals over time may be more difficult. On the other hand, lower inflation means lower inflation-adjusted withdrawals, allowing a higher initial rate.
Using historical data for retirement dates from 1926 to 1990, Bengen found a clear correlation between market valuation and inflation at the time of retirement and the maximum sustainable withdrawal rate. In a high-valuation, low-inflation scenario at the time of retirement, Bengen found that a 5% initial withdrawal rate was sustainable over 30 years.3 While not a big difference from the 4% rule, it suggests that retirees could make larger initial withdrawals in a high-valuation, low-inflation environment.
It’s important to keep in mind that these projections are based on historical scenarios and a hypothetical portfolio, and there is no guarantee that your portfolio will perform in a similar manner. Although there is no guarantee that working with a financial professional will improve investment results, a professional can evaluate your objectives and help you consider appropriate long-term financial strategies, including your withdrawal strategy. Let’s talk about planning income during retirement today.
Questions? Contact a CFS Financial Advisor.
Grow has contracted with CUSO Financial Services, L.P. (CFS) to provide investment services, and your CFS Financial Advisor will help you build a plan that meets your needs. The advisor will look at your current spending, saving and investing, learn about your goals and priorities, make objective recommendations and support your efforts moving forward through the implementation and management of your plan.
1-2 Forbes Advisor, October 12, 2020
3 Financial Advisor, October 2020
Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members. For specific tax advice, please consult a qualified tax professional.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2021.
How to Find Your Routing & Account Numbers
When you make a payment online, by phone or on a mobile device, you may be asked for our routing number and your checking account number. Credit unions and banks use these numbers to identify accounts and make sure money gets where it’s supposed to be. You’ll also need to provide your routing and checking account numbers for:
- Direct deposits
- Electronic checks
- Military allotments
- Wire transfers
Where to Find Your Routing & Checking Account Numbers
Your personal checks include both our routing number and your account number, as shown on the Grow check example below.
Don’t have a Grow check? No worries.
Visit any Grow store and ask for a Direct Deposit Form. It lists both your routing number and checking account number.
Making a Loan Payment
When it comes to making payments, we try to make it as painless as possible to pay your loan every month. We have several different ways to pay, including convenient online options.
You have two ways to pay online by transferring funds from another bank or credit union.
- Grow Online Banking (Preferred payment method for any loan)
This is the simplest way to pay your loan. You can make one-time payments or set up automatic recurring payments in Grow Online Banking. Once you log in, select “Transfer/Payments” from the menu. If you’re not enrolled in Grow Online Banking yet, you can set up your account in just a few minutes.
- Debit Card or ACH (Available for auto, personal loans and HELOCs)
Note: ACH and debit card payments are not available for credit cards or most mortgages, except HELOCs.
We accept ACH payments with no additional fees or Mastercard® and Visa® debit cards with a convenience fee of $4.95. To get started with an online ACH or debit card payment, select Pay Now below.
Pay by Mail
You can also pay any Grow loan by check through the mail. Please remember to include your account number and Grow loan number on the check. (For credit card payments, please do not write your 16-digit credit card number on the check, which can cause a delay in processing the payment.)
Address for auto, credit card, personal loan and HELOC payments:
Grow Financial Federal Credit Union
P.O. Box 75466
Chicago, IL 60675-5466
Address for personal first or second mortgages and home equity payments:
Grow Financial Federal Credit Union
P.O. Box 11733
Newark, NJ 07101-4733