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The Classic 4% Rule Can Ruin Your Retirement


There’s a simple old rule to help make sure you don’t run out of money in your retirement years—withdraw 4% of your investment portfolio in the first year of retirement, then increase the dollar amount each year by the previous year’s rate of inflation. Based on market history, that gives you a 96% likelihood that the money will last 30 years. The problem is that the 4% rule is no longer dependable. That’s because, after having experienced long bull markets, bond and stock returns are likely to be lower than historical averages over the next several years.

In late 1994, when the 4% rule was popularized, the yield on a 10-year Treasury bill—a key benchmark for interest rates—was nearly 8%, compared with less than 2% recently. If yields remain near their current low levels for the next 30 years, the likely failure rate of a portfolio following the 4% rule would be 57%, not 4%.

And even if five years from now yields are back up to historical averages, the likely failure rate still would be a worrisome 18%. A relatively weak stock market also will hurt returns.

Two alternative strategies…

Based on a 50% stocks/50% bonds portfolio, you withdraw 4% the first year, but in subsequent years, don’t increase the withdrawal amount if the portfolio has lost money in the previous year. This may require that you cut back on your discretionary spending after any losing years.

Or, instead, to determine how much to withdraw from all your assets every year in retirement, use the same formula that the IRS uses to determine the required minimum distributions (RMDs) that you must make from your IRAs starting at age 70½. Each year, you calculate the maximum amount you can withdraw to make your money last the rest of your life based on your current life expectancy at that age and your portfolio’s current value. You can find the formula, including life-expectancy tables, at

Source:  Michael Finke, PhD, CFP, professor and director of retirement planning and living at Texas Tech University, Lubbock, Texas. Date: June 1, 2016 Publication: Bottom Line Personal