Time to readjust the 4 percent rule? All signs point to yes
By David Shields
WealthMark Advisors, Inc
If your doctor were to inform you that an elective surgery had a 57 percent failure rate — and “failure” here can mean any number of outcomes, including death — you’d probably think twice about going under the knife. Analogously, we’re now being told that the old 4 percent rule for retirement is moribund at best, completely obsolete at worst. It’s been estimated, in fact, that recent retirees who follow the rule face a sobering 57 percent chance that their money will run out before they’re ready to check out.
And no wonder. The 4 percent rule was developed by financial academics in the 1990s, a very different and rosier time to retire. Many workers still had reliable pension plans, hadn’t sunk everything into a failed 401(k), statistically lived four years shorter and enjoyed a 3.5 percent to 4 percent savings account interest rate, higher than it currently is.
Today, even though the economy seems to be picking up, it might be too late for many to recoup what they lost in the one-two punch of 9/11 and 2008. Workers saw their 401(k)s lose on average a quarter of their worth when the housing bubble burst. As a result, annually withdrawing 4 percent of too little or not enough won’t last more than a few short years, if that.
So what can those nearing retirement do besides delay it, save more in preparation of it and spend less in the midst of it?
One of the surest solutions is to buy a fixed annuity. Unlike a bond, an annuity has no maturity date and promises an income for life, and unlike a stock, it has a guaranteed rate of return. Some retirees might have the impression that annuities’ rates aren’t aggressive enough — which, compared to certain stocks, is true — but what you’re giving up in high rates, you’re making up for with security, consistently and longevity.
That’s not to say that stocks have no role to play in a successful retirement plan. Paired with a portfolio of solid stocks, a fixed annuity can help a retired individual or couple annually withdraw as close to the magic 4 percent as they possibly can.