Does the '4% Rule' for Retirement Need Updating?
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Here's your money briefing for Monday, November 22nd.
What is the 4% rule and why has it guided retirement spending since the 1990s?
I'm Trina Neri for The Wall Street Journal, filling in for J.R. Whalen. There's a longstanding so-called rule about retirement, the 4% rule. Spend no more than 4% of your savings in the first year. Then adjust that amount to keep pace with inflation. But the 4% rule and the math behind it may be changing.
A lot of people who predict market returns are thinking that we're going to be in for a period of lower returns than we've had in the past.
So what are the new rules for spending in retirement? Coming up, our retirement reporter Ann Tergesen will be here to walk us through what experts are saying. That's after the break.
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For decades, millions of retired Americans have relied on the 4% rule. It's the conventional wisdom that retirees should spend no more than 4% of their savings in the first year of retirement. But new research suggests that rule may need an adjustment so that retirees can make sure their money lasts. Here to help us understand the new research on retirement spending is WSJ retirement reporter Anne Tergesen. Hi, Anne. Thanks for being here. Thanks for having me. First, Anne, bring us up to speed. Why has the 4% rule been common financial advice for retirees over the years?
So it dates back to the early 90s when a financial planner named Bill Bengen discovered by using computer simulations of past returns that, you know, dating back to 1926, which is the year where we start having kind of credible returns for the financial markets, he discovered that a portfolio, half stocks and half bonds, U.S., would have allowed a 4% withdrawal rate. over all the possible 30-year retirement periods between 1926 and the 1990s. And that has actually proven out even up to the present. So it's just become sort of a rule of thumb that financial advisors use and recommend for their clients.
But now some advisors are suggesting a change. What are they proposing instead of 4% and what's the reasoning?
So this comes from some sort of analysts at Morningstar, which is a big financial research company.
How are researchers rethinking the 4% rule using future return projections?
And what they're doing is instead of looking at past returns, they're looking at projections for future returns. And with bond yields so low and with stock valuations so high, I think a lot of people who predict market returns are thinking that we're going to be in for a period of lower returns than we've had in the past. So when you plug in lower future returns into the models, it looks like the safe withdrawal rate, the one that would enable you to make your money last for 30 years, is more like 3.3% rather than 4%. So, you know, again, that's premised on the idea of people having like a 30 year retirement. If you retire at 75 and you're pretty sure that your time horizon is going to be more like 20 years, then, you know, you can you can take a higher withdrawal rate.
OK, so these experts are suggesting a number closer to 3.3 percent. But what if I think that rate is too low?
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Chapters
5 chapters
1
What is the main topic discussed in this episode?
0:00–0:40
2
What is the 4% rule and why has it guided retirement spending since the 1990s?
0:40–3:28
3
How are researchers rethinking the 4% rule using future return projections?
3:28–4:33
4
Why do Morningstar analysts suggest a 3.3% safe withdrawal rate instead of 4%?
4:33–7:31
5
How does your retirement horizon (e.g., 20 vs 30 years) change the safe withdrawal rate?
7:31–8:16
Speakers
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