Tags: Retirement | Rule | Out Dated | four percent

Is the '4 Rule' Retirement Rule Out Dated?

Is the '4 Rule' Retirement Rule Out Dated?

 (Dollar Photo Club)

By    |   Thursday, 02 March 2017 11:02 PM

I have observed throughout my 20 years in the financial industry, that there is a general rule floating around stating that if you take 4% out of your investments in retirement to live on, your money will last the rest of your life.

This is called the 4% rule.

Many advisors today are still following this and many other old antiquated rules that are in my opinion, no longer valid.

Here is why the 4% rule is now being debunked:

Many advisors don’t realize that when this rule was first introduced, fixed interest rates were higher than they are today. In the early eighties it was not uncommon to get a well over 10% return in CDs. As we have seen over the years, interest rates have steadily declined along with bonds and treasuries.

The other factor is market volatility. Volatility has increased over the years dramatically. Let’s face it, there are a lot of factors that play into increased market volatility. For one, people can now use their mobile devices to make trades online. You also can set stops on your computer to buy and sell stocks at a certain price point automatically. There are so many contributing factors for the increased volatility that are too numerous to list here. News travels in an instant and people react accordingly.

As long as the volatility of the market stays within a certain trading range you can have a mathematical formula tell you what you can pull out each year and how long the money will last. It’s when the market starts moving out of those ranges that causes problems for those pulling money out based on old formulas. For example how many people in 2007 retired and relied on the 4% rule and after 2008 had to go back to work again? The 4% rule did not work so well for those folks.

The other big factor is longevity. People are living longer nowadays and this plays a big part into a person’s draw rate for retirement. Just because we are living longer does not mean we are necessarily living healthier. Some people are living with chronic health problems in their later years which can bring about additional expenses that some health insurances may not cover. Should this be your case, you will now have to pull out of your own pocket to cover these costs.

Allow me to summarize: When the 4% rule was established, fixed income rates were higher, market volatility was lower and people were not living as long. So when you combine these three elements together you will realize the 4% rule no longer works for us today.

There are currently plans that can be fashioned for a retiree that are specifically geared to provide income so one does not have to rely on the old 4% rule. Plans today have to take into account lower interest rate environment, increased volatility as well as longer life expectancies.

More than ever before, it is now critical when planning for your retirement that you deal with a seasoned investment advisor that understands these elements and can address income planning within your goals and objectives this way, you don’t ever have to worry about running out of money. 

Rick Rivera is a partner at Safeguard Investment Advisory Group (www.safeguardinvestment.com) and has more than two decades of experience in the financial industry providing guidance to those planning for retirement. He is an investment advisor representative holding a series 65 license, as well as Life-Only and Accident and Health licenses in California.

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Many advisors today are still following this and many other old antiquated rules that are in my opinion, no longer valid.
Retirement, Rule, Out Dated, four percent
Thursday, 02 March 2017 11:02 PM
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