How to Retire Successfully
Try searching Google for “Flaws with the four percent rule” to read up on how dangerous this accumulation planning principle is.
What is the four percent rule? According to Smart Investor Magazine, the four percent rule states that “in retirement you can safely take out no more than 4 percent of the combined value of all of your financial assets each year with an expectation that your money will last 30 years or more, which is longer than the average length of time Americans spend in retirement.”
This simplistic notion is dangerous and not true.
We see several problems:
“You can not plan the future by the past” — Edward Burke
There is a reoccurring trend every 18 years in the stock market. For 18 years the market whizzes through a bull market, followed by 18 years of flat, choppy market returns.
If you retire in a bull market, your plan will work like a charm. Until the bull market winds down, that is. If you retire in a flat market your retirement could be over, your strategy fails you by potentially running out of money.
Never, never, never take money from a fluctuating account
With the ten-year treasury rates below two percent (see chart) how can there be ANY logic in extrapolating four-and-a-half percent bond returns with the current bond yields at HALF that rate? Again, it doesn’t make sense. However, most of you have dear friends that are being told they can draw 4 percent of their principal, and they will be fine.
Interest Rate Risk
The four percent strategy tells you that your bond funds are your “safe” money. Yet, according to the 100 year history of the 10 year treasury yield, bond funds have never been more at risk in the past 100 years! Interest rate risk is the risk to principal if interest rates start to rise. For example, in 1994 and 1999 rates went up and people who owned bond funds were hurt to the tune of double digit bond fund principal losses in the calendar years of 1994 and 1999. When rates go up, your “safe” money will lose principal.
How many fingers am I holding up? Unless you’re a psychic the four percent rule is not for you
How does the 4 percent rule protect you against rising food and energy prices? It doesn’t. It can’t; you can’t guess the economic future. In a low-interest rate environment and a flat stock market, you can’t draw higher amounts to offset rising food and energy prices. Those following the 4 percent rule will be slaughtered by inflation by losing their purchasing power.
If you don’t pay taxes you can skip this part.
Retirees often add up liquid assets and apply the four percent rule while forgetting taxes. How many believe tax rates are going DOWN in the near future? Tax rates will take a larger bite out of the retirement dollar to pay for these budget deficits.
Fate worse than death: Outliving your money
The four percent rule is based on the idea that you will only live 30 years into retirement. That may not be the case. Medical science is promising breakthroughs that raise life expectancies, thus straining your retirement nest egg even more.
The logical solution to the problems of asset allocation and the 4 percent rule is Distribution planning. That is what we do. If you are a client, please warn a friend and have them come in and solidify their retirement plan with Absolute Return Solutions. We will eliminate or minimize the risks mentioned above so that your friends can have the income they need and want for the rest of their lives.