The 4% Rule Did Not Become a Whole Lot Easier

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I’ve been retired for seven years, which explains my “timed itch” to respond to Allan Roth’s recent article, The 4% Rule Just Became a Whole Lot Easier. Roth often challenges industry dogma, but in this article, he’s promised too much, made inaccurate comparisons and blurred the notion of risk. His surrender to real return projections may work in theory but will fail in a world tainted by the most significant risk of all: human behavior.

Real returns in retirement projections pass muster only because projections allow for course corrections as life events unfold. These real-return shortcuts, however, are much more dangerous when used in an actual portfolio with frozen components working inside a dynamic world.

Before I go too far, let me mention what I like about Roth’s article. I like TIPS, which have enjoyed a 20% allocation in the bond portion of my portfolio for years. I like their extremely low risk of default. Since history reports that high inflationary periods can destroy portfolios, I like their contribution to inflation protection.

Unfortunately, my complaints outweigh what I like in the article. TIPS’ inflation protection has its limits.

Turning to my complaints

Let’s start with Roth’s unfair comparisons, beginning with “safe withdrawal studies,” which leads to a summary of success or failure rates for a balanced portfolio. In Roth’s case, he compared a balanced portfolio’s 90% chance of success over the 30-year projection period to the TIPS ladder’s 100% chance of success over the same period. What he failed to mention is that those balanced portfolios within the 90% success level continue, many for years and years, adding a level of longevity protection. Roth’s TIPS ladder self-destructs at 30 years and a day. Imagine the fear in the 29th year when the frail elderly retiree suddenly realizes their portfolio is about to run out of fuel.