Tags: Retirement | retirement | 4 percent rule

The 4 Percent Rule ('Systematic Withdrawals') and Retirement Planning

By    |   Tuesday, 16 June 2015 12:52 PM

The 4 percent rule stating how much a person should withdraw each year from their retirement portfolio was the brainchild of a financial planner and MIT graduate who came up with the formula in the 1990s. But for retirement planning purposes, how relevant is it to wealth management in the 21st Century?

The rule, calculated in part on prevailing interest rates at the time, held that a retiree withdrawing 4 percent of the accumulated total each year will have a solvent portfolio for at least 30 years, according to CNBC.

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But as time passed, and interest rates fell sharply after the 2008 financial crisis, the 4 percent rule for systematic withdrawals came into question even from its creator, Bill Bengen, who joined the ranks of the retired.

"I always warned people that the 4 percent rule is not a law of nature … It is entirely possible that at some time in the future there could be a worse case," Bengen told The New York Times in 2015.

Other observers have agreed that retirement annuities pegged to interest rates paid out more in the 1990s than they do in the 2010s.

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The 4 percent rule, long considered the safe approach to keeping a portfolio sound, "is no longer working well—unless you are among the wealthy, or at least have more than enough socked away for later life," CNBC correspondent Kelley Holland wrote in 2015.

It hasn't been abandoned entirely: Wealth managers surveyed by US News & World Report in 2015 defended the 4 percent rule as a "good starting point." And there's been no great rush in financial circles to nominate a new— and presumably higher — figure in lieu of 4 percent.

So it's there as a guideline for retirement planning, not an absolute.

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The 4 percent rule stating how much a person should withdraw each year from their retirement portfolio was the brainchild of a financial planner in the 1990s. But for retirement planning purposes, how relevant is it to wealth management in the 21st Century?
retirement, 4 percent rule
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2015-52-16
Tuesday, 16 June 2015 12:52 PM
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