For years, financial commentators have cited a rule of thumb for retirees: you can withdraw 4 percent of your financial assets each year.
The idea is that the income thrown off by your portfolio will at least partly provide for your 4 percent annual withdrawals.
"However, new research shows that this rule doesn't work for retirees in today's low-rate environment," Jon Stein, CEO of Betterment, an online investment advisory service, writes in a commentary for CNBC
The problem: low interest rates. "Twenty years ago, when the rule appeared, the yield on a three-month Treasury bill was 6 percent," Stein says. That bill yielded 0.02 percent Tuesday morning.
In addition, "the 4 percent rule is based on the portfolio's initial balance," he writes. "Subsequent market performance isn't dynamically factored into the withdrawal rate, even though it can dramatically affect the portfolio's balance."
Translation: market declines can rapidly shrink the value of your portfolio, possibly making 4 percent withdrawals dangerous.
"So what's the modern-day retiree to do?" Stein asks.
"Fortunately, technology has come a long way since the 1990s. There is an emerging class of services from tech-savvy investment managers that provide dynamic withdrawal rates using algorithms that look at market performance, balance and term of portfolio, all of which work together to ensure you won't run out of money," he explains.
"Dealing with a variable retirement income from year to year is a relatively new idea. However, the smartest algorithms are optimized to balance the dual objectives of maximizing lifetime withdrawals and keeping the withdrawal amount within a consistent range year after year."
U.S. News & World Report writer David Ning
offers a mixed assessment of the 4 percent rule.
"[It] worked through two world wars, the Great Depression, the hyperinflation years and practically everything in between. It's really as good of a starting point as any," he writes.
"But do your portfolio and spending patterns resemble those used in the study that came up with the 4 percent rule? It's worth your time to investigate."
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