20 Second Advisor: Flaws in the 4% rule
The golden rule of withdrawal rates is of course the 4% rule. You simply withdraw 4% of the portfolio in year 1 of retirement and adjust that amount with inflation in subsequent years. That should safely fund a 30 year retirement.
While the 4% withdrawal rate is a good rule of thumb, here are 3 reasons why the 4% rule is misguided.
- Longevity– A 4% rule overlooks the fact that investors can increase their withdrawal rate as they age, without taking on more risk.
- Spending trends– The rule also locks retirees into maintaining the same purchasing power through retirement. Retirees often spend the most early in retirement, followed by a long period of decreases and then an increase for medical reasons toward the end of life.
- Non-portfolio cash flows– The rule fails to acknowledge that non-portfolio cash flows are typically a major source of a retiree’s income. Social Security, pensions, rental properties, part-time jobs, house downsizing, inheritance, etc. make the actual cash flow picture for most families quite complex.
Income distribution is the most complex aspect of the retirement puzzle. The multiple variables that come with it require complex and dynamic planning, not rule-of-thumb thinking. Let us help navigate your distribution strategy in retirement.
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