Retirees are commonly advised to withdraw retirement savings at a rate of 4 percent per year. But many financial professionals are skeptical, including the man who wrote the rule.
According to the rule, a person can withdraw 4 percent of a retirement portfolio, raising the annual withdrawal amount by 3 percent to account for inflation. And the individual should be confident the money will last for 30 years, says Time
This idea was put forth by Bill Bengen, financial planner and president of Bengen Financial Services. The recommendation sparked a trend, which continues to be the “gold standard” for many financial advisors, says CNBC
But Bengen told CNBC that in the current economic environment, the rate may be unsustainable, putting retirees at risk of depleting their funds much earlier than expected.
The advice was based on a “worst case” scenario of an investor with a portfolio containing 60 percent stocks and 40 percent bonds, who retired in 1969.
“The question now is: Are we going to have a worse environment than the 1969 retiree or not?" Bengen questions.
“I honestly don't know. I won't know, for sure, for some years, until we see what type of investment environment we go through,” he said.
Some critics believe the 4 percent rule is flawed and to keep citing it places people at risk.
“I think that it's nonsense,” Seth Stewart, president of PlanMyBenefit and managing partner at Brookstone Financial, told CNBC.
“I don't think you can count on it. It's an easy way to plan, but if there is another market correction, someone who retires this year and doesn't have enough cash in their accounts will be forced to sell low to generate that income,” he added
In fact, the rule “could be devastating” for retirees if the market delivers a sequence of negative returns
, Stewart warned.
Saul Simon, author and certified financial planner at Simon Financial Group, notes that some people are over-reliant on the data, believing that the 4 percent distribution rate will prevent them from running out of money.
“But that's not necessarily true or guaranteed,” he told CNBC.
With interest rates being so low, Simon points out that economists now recommend a 3 percent drawdown rate. And still, people shouldn't focus so much on any magic number but instead withdraw what they can afford.
In the Journal of Financial Planning, Ball State University associate professor Manoj Athavale and assistant professor Joseph M. Goebe argue that many variables are overlooked in the 4 percent distribution rule and it carries a higher probability of failure than people realize.
The researchers claim 2.52 percent is the “truly safe” annual withdrawal rate, because “it can sustain a 35-year retirement through almost any returns scenario.”
© 2015 Newsmax Finance. All rights reserved.