Four or Less

Sanjib Saha

A RECENT ARTICLE from Morningstar suggested that the 4% rule for sustainable retirement withdrawals should be revised downward to 3.3%. This lower rate, the researchers argued, is safer given today’s rich stock market valuations and low bond yields.

The article also recommended being flexible with withdrawals, by taking larger amounts in good markets and smaller withdrawals during down periods. This strategy could provide more lifetime income than fixing a withdrawal amount in the first year and then automatically increasing that sum each year with inflation.

I like simple rules of thumb, but I only use them as ballpark estimates. The old 4% rule provides a quick, back-of-the-envelope sense of our retirement readiness. For instance, if we divide 100 by that 4%, we get 25. The upshot: If we have savings equal to 25 times our average annual spending, or something in that range, we may have enough to quit the workforce. For younger folks, I’d bump up the multiplier in recognition of longer life expectancies.

What if our retirement readiness passes this simple sniff-test? Now, it’s time for detailed calculations using individually tailored parameters. A ballpark estimate is not helpful at this stage.

My unease with the 4% rule—and I’m not alone—isn’t with the number’s accuracy. Rather, I’m uncomfortable with its widespread use as a one-size-fits-all withdrawal strategy. And, no, tweaking the recommended withdrawal rate up or down from a nice whole number to a decimal figure doesn’t necessarily make it more correct. Rather, it can simply create a stronger illusion of accuracy.

“Everything should be made as simple as possible, but not simpler,” as Albert Einstein may have said. Withdrawal strategies in retirement needn’t be too complicated. But a prescribed withdrawal rate—even with some adjustments here or there—strikes me as an over-simplified endeavor.

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