Say Goodbye to the 4% Rule - tips from the WSJ

[obgyn65]

Say Goodbye to the 4% Rule for Retirement - WSJ.com

"Conventional wisdom says you can take 4% from your savings the first year of retirement, and then that amount plus more to account for inflation each year, without running out of money for at least three decades.

This so-called 4% rule was devised in the 1990s by California financial planner William Bengen and later refined by other retirement-planning academics. Mr. Bengen analyzed historical returns of stocks and bonds and found that portfolios with 60% of their holdings in large-company stocks and 40% in intermediate-term U.S. bonds could sustain withdrawal rates starting at 4.15%, and adjusted each year for inflation, for every 30-year span going back to 1926-55.
Well, it was beautiful while it lasted.

(...)

So, if you can't safely withdraw at least 4% a year from a balanced portfolio of equity and bond funds, what do you do? Here are three alternative approaches that retirement specialists say may work better to ensure your money lasts as long as you do."

Some comments are interesting also.

 

[bondi688]

I do not know much about annuity. My understanding is that the annuity pays someone a fixed annual amount for life. In order to provide for that, the fixed amount can only be that large, given variation in people's life spans. The amount one receives may be ok initially, but with inflation, the annual amount without adjustment may not be all that large after 25 years.

Also, is the security of the annuity only as good as the company underwriting it? What would happen if you buy an annuity from an insurance company and it went bankrupt? Are annuity holdings separated in an escrow account that even in case of bankruptcy, the creditors cannot take the money as part of the bankruptcy settlement, leaving the retirees in a bind?

I need to read a little more because supposedly it is becoming popular. Am I wrong with my concerns?

 

[WestLake]

You could also give the million to your alma mater in a Charitable Remainder Trust as those must pay 5%. No inheritance for the kids though.

 

[obgyn65]

Clearly annuities have been discussed many times here. They have many pros and cons i.e. no money left for heirs, etc which I will not repeat. However, from a pure mathematical standpoint, some annuities do make sense in some cases. In my case, my Excel ER model is optimized with the purchase of some deferred annuities up to my mid 50s (say up to about 100k in all) and larger SPIAs much later in life (about 100k age 75 and another 100k around 85 if I am still alive). Choose your company carefully - mine is one of the top 3. The first deferred annuity I bought last year will generate 12% per year from 62 until I die. I'm aware that part of the % includes repayment of principal,also discussed in other threads.

I am aware many here dislike or even hate annuities and will beat up my comments above. That's fine. This is America, people can disagree.

Good luck.

I do not know much about annuity. My understanding is that the annuity pays someone a fixed annual amount for life. In order to provide for that, the fixed amount can only be that large, given variation in people's life spans. The amount one receives may be ok initially, but with inflation, the annual amount without adjustment may not be all that large after 25 years.

Also, is the security of the annuity only as good as the company underwriting it? What would happen if you buy an annuity from an insurance company and it went bankrupt? Are annuity holdings separated in an escrow account that even in case of bankruptcy, the creditors cannot take the money as part of the bankruptcy settlement, leaving the retirees in a bind?

I need to read a little more because supposedly it is becoming popular. Am I wrong with my concerns?

 

[MichaelB]

Didn't see anything new in the linked WSJ article. The analysis and proposal by W. Pfau has been discussed here before as well.

 

[obgyn65]

I found some of the WSJ' readers comments very interesting. Did you read them also ?

Didn't see anything new in the linked WSJ article. The analysis and proposal by W. Pfau has been discussed here before as well.

 

[MichaelB]

I found some of the WSJ' readers comments very interesting. Did you read them also ?

Reader comments on news sites make me wonder if other animal species have learned to write. I've no doubt there is the occasional gem, but I doubt any comment there will be as meaningful as the typical serious comment here.

 

[foxfirev5]

I've always had a hard time accepting any % rule. I can't imagine blindly taking the same % plus inflation regardless of what's happening. When I look back at the wild fluctuations in my income (not high income fluctuations just from low income to middle income) I see how we adapt to each new situation. Perhaps that lifelong experience will help me in future years.

 

[steelyman]

I am aware many here dislike or even hate annuities and will beat up my comments above. That's fine. This is America, people can disagree.

No one's "beating you up" or intends to.

 

[eytonxav]

You could also give the million to your alma mater in a Charitable Remainder Trust as those must pay 5%. No inheritance for the kids though.

I've not heard of this before and am not sure if I am interpreting your statement correctly; that if you donate $1M to your alma mater, you are assured of receiving $50K/yr for life in return Sounds like a good alternative to a fixed annuity, no?

 

[Animorph]

I like the standard 4% rule, or a smaller percentage using the same process, because that maintains an arguably constant standard of living throughout retirement. That is a nice goal to shoot for when planning. Most of the other methods might start a little lower and then let you increase spending if things went well. But do we really want to increase spending as we get older? I'd rather err a little on the side of overspending and optimism early in retirement, suitable for travelling for example, and then wind it down a bit if necessary. The 4% rule gives me an idea of the risks that might involve. Doesn't mean I won't make adjustments to my withdrawals later in retirement.

 

[steelyman]

I've not heard of this before and am not sure if I am interpreting your statement correctly; that if you donate $1M to your alma mater, you are assured of receiving $50K/yr for life in return Sounds like a good alternative to a fixed annuity, no?

I have heard of these. There is a very knowledgeable professor of finance here who until recently appeared on a PBS broadcast who mentioned them and their benefits, and I am interested because I want to make charitable donations. I can probably find the archives if you like.

Edit: it's a little silly to say "tell me if you want a link", rather than just posting it. Here's what I found - but keep in mind it dates from 2000.

PERSONAL FINANCE | Focus | Illinois Public Media

 

[REWahoo]

You can find information on charitable gift annuities here: American Council on Gift Annuities - About ACGA

 

[HFWR]

I have nothing against SPIAs, per se, but you are still taking market risk with one, just indirectly...

 

[pb4uski]

I have nothing against SPIAs, per se, but you are still taking market risk with one, just indirectly...

So indirectly it is effectively inconsequential. The insurers would buy bonds with an aggregate duration approximately equal to the duration of the SPIA obligations. While insurers hold stocks that support their surplus and perhaps some longer term products (like whole life for instance) it would be almost unheard of for stocks to be included in the pool of assets supporting SPIA liabilities.

While I'm not a fan of SPIAs at all, I don't think it is a fair statement to suggest they have market risk.

 

[pb4uski]

Didn't see anything new in the linked WSJ article. The analysis and proposal by W. Pfau has been discussed here before as well.

+1 article was a perceptive glimpse of the obvious and I'm typically a fan of the WSJ. IIRC even way back when the issue of sequence of returns was referred to.

 

[ERD50]

I am aware many here dislike or even hate annuities and will beat up my comments above. That's fine. This is America, people can disagree.

Good luck.

No one's "beating you up" or intends to.

Agreed. Obygyn65 seems very quick to claim he is being (or will be ) beaten up for his comments.

People on this forum have presented viewpoints and opinions different from his, and challenged some of his statements, same as most everyone here. To claim that those people are "beating up" on him is dismissive and condescending, IMO. Just maybe there is some merit to those opposing views?

It seems to me that calling these people out as bullies is actually an act of bullying itself, far more than those who are presenting their alternate viewpoints.

Many here "hate" annuities? Where does that come from? All I've seen is analysis (expenses, low rates, safety of the insurer, etc), which leads many to avoid (or delay) them. They don't "hate" them. There may have been some "hate" expressed towards the sales people who sell (or over-sell) them in inappropriate cases.

-ERD50

 

[ziggy29]

I have nothing against SPIAs, per se, but you are still taking market risk with one, just indirectly...

For the right people and the right circumstances, a low-cost SPIA can definitely make sense. But right now, it's hard for the circumstances to be "right" because interest rates are so pathetic that the cost of a guaranteed income stream is rather extreme at this point.

I suspect that when people usually speak pejoratively of "annuities" they are referring mostly to the high-cost, high-commission variable annuities, equity-indexed annuities and other products which carry high, recurring fees and punitive surrender charges -- the type that are *very* aggressively sold by commissioned salespeople.

 

[Stanley]

I am glad this news is getting out to the unwashed masses. Better late than never.

We, as members of this elite group of financially sophisticated people, have known about his for quite a while.

For the record, I plan on a 3% withdrawal rate. Obviously, I reserve the right to change it as conditions warrant.

 

[Spanky]

The 4% rule is still valid for planning purpose. The key is to be flexible or adaptable to market conditions. That is, adjust the withdrawal rate and re-balance the portfolio to the desired AA. Our plan is 2% SWR, however.

 

[Midpack]

I am aware many here dislike or even hate annuities and will beat up my comments above. That's fine. This is America, people can disagree.

People 'beat up your comments' because your posts rarely if ever do more than scratch the surface. You always tell us you're too busy to add any substance, fair enough. But when someone tries to give another POV, you take that as getting 'beat up' - instead of providing a thoughtful rebuttal.

You've admitted you're an outlier, you have a high income relative to your spending - more than most members (congrats). And IIRC you've never owned equities or equity funds - so you may know the cons of equities much better than the pros, and therefore can't present a balanced view on equities. Longtime members have learned what your financial/investment philosophy is, and you're as entitled to it as anyone else is to theirs. But you have to realize that your POV, could be puzzling or worse to newbies, that's where I personally get concerned with some of your overly brief/too general posts.

Most people can't/don't LBYM to the extent you do, so they can't be as conservative investing as you are. History suggests inflation will ruin their chances. Again, congrats that it's an option for you.

My intent is not to beat up on you. FWIW...

Didn't see anything new in the linked WSJ article. The analysis and proposal by W. Pfau has been discussed here before as well.

+1. A SPIA is one of my plan B options, presumably later in life depending on how our annuitization hurdle plays out. Hopefully that's not 'hating annuities.' And as another member noted, some annuities have inordinately high commissions and provide relatively poor value - arguably some annuity products are categorically bad.

 

[youbet]

I have nothing against SPIAs, per se, but you are still taking market risk with one, just indirectly...

My major concern with standard SPIA's is inflation risk. Using an SPIA, especially if the rates are attractive at the time, when you're deep into retirement might be fine. But to rely on an SPIA early in retirement hoping that the real value of the payments doesn't erode too severely over the decades would be a concern for me.

 

[MichaelB]

My major concern with standard SPIA's is inflation risk. Using an SPIA, especially if the rates are attractive at the time, when you're deep into retirement might be fine. But to rely on an SPIA early in retirement hoping that the real value of the payments doesn't erode too severely over the decades would be a concern for me.

+1

Even with inflation protection, one loses over long periods because taxes consume part of the inflation factor.

 

[Sarah in SC]

Annuities rank right up there with the "crunchy" cat food in my retirement plans, say around Plan F or so. Wade Pfau is too young to feel the way he does, IMHO.

 

[Tyro]

Annuities rank right up there with the "crunchy" cat food in my retirement plans, say around Plan F or so.

I'm sorry, you gotta splain me that one. We feed our dog one of the top three, but it's still crunchy, and he [-]likes[/-] loves it. Been a while since we've had a cat, but friends who do (including a couple vets) feed em crunchy cat food too.

Tyro