By John Drachman
Through our pandemic haunted world the journey to retirement continues. As tens of thousands of baby boomers turn 65 every day, they move the dial on their retirement plan assets from “Accumulation” to “Receiving Income I (Hopefully) Won’t Outlive.”
Many will opt for the famed “4% retirement rule.” Based on academic research from the 90s, this guideline refers to the amount of money you might withdraw each year from the starting value of a retirement portfolio of stock and bonds designed to last some 30 years.
Financial advisor Brian Cohen tells his clients “Four percent withdrawals from a balanced investment mix (a roughly 50/50 mix of stocks and bonds/fixed income) from age 65 should last for 30 years with inflation increases.” However, he is quick to add that it’s important to have an emergency fund tucked away “to cover three to six months of unexpected expenses.” Still, he concluded, “We are far above where we were at the depths of the financial crisis that bottomed out in 2009.”
In contrast, Dana Anspach CFP™ seems more circumspect. Citing the academic paper, The 4 Percent Rule is Not Safe in a Low Yield World, she noted, “The success of the 4% rule in the U.S. may be a historical anomaly, and clients may wish to consider their retirement income strategies more broadly than relying solely on systematic withdrawals from a volatile portfolio.”
WealthVest’s Wade Pfau and Wade Dokken have gone further. “There is nothing sacred about 4%, or more recently, 4.5%,” they recently wrote. Mr. Pfau added that a retirement plan that lasts 30 years is no longer enough. “The good news is that we are living longer, and the bad news is that we are living longer. Keep in mind that for a married couple both retiring at age 65, there is a good chance for at least one of the spouses to live longer than 30 years.”
The Financial Industry Regulatory Authority (FINRA) weighed in too on how best to retire through the pandemic: “Don’t let fear drive your decisions. If it seems like your portfolio is taking a harder hit than you’re comfortable absorbing given your long-term goals and investment strategy, consider whether, how and when to make adjustments to help create a balance more in line with your risk tolerance and more resilient to market fluctuations. Talking to a licensed investment professional can help.”
Rather than clinging to any hard and fast 4% rule of thumb, retirement-minded investors may be better off personalizing their retirement withdrawals according to their unique circumstances.
Portfolio monitoring, periodic reviews and second opinions from a professional advisor can all contribute to better outcomes. In fact, according to the Insurance Retirement Institute, retirement investors with access to professional advice did substantially better than do-it-yourselfers. There’s a psychological pay-off too. Those who worked with a financial professional were twice as likely to feel better about their long-term retirement outlook.
John Drachman is a contributing writer to MyPerfectFinancialAdvisor the premier matchmaker between investors and advisors .John is an IABC award-winning writer, who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.