There is No “Safe Withdrawal Rate”

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For almost 30 years, a large segment of the financial advisor community has recommended to investors an approach to generating retirement income commonly known as the “4% rule.” The premise behind this methodology is that if you have an investment portfolio comprised of stocks and bonds, you will be able to draw down annual income beginning at 4% of the portfolio’s value; in subsequent years, you will be able to make withdrawals that keep pace with the rate of inflation (CPI).

I’m not a fan of the 4% rule.

If I had the power to ban its use by “constrained” investors,” I would do so. When confronting the challenge of creating retirement income, clients must understand if they are a “constrained” investor. (Read about why this is important.)

What are the problems with the 4% rule?

It was developed using “backtesting,” a process that projects financial results based upon historical investment performance. The justification for the 4% rule was based upon historical investment performance during the period between 1925 to 1995. But what is the value of relying on historical investment results when today’s economy looks so different than in the past? For example, in 1994, the five-year Treasury yield was 6.69%. Today’s five-year Treasury yield is only 1.33%.