Grow Financial Federal Credit Union
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.

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.

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.

Schedule a Complimentary Consultation

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.


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