4% Rule and Target Date Funds

[Dranoel]

The author here concludes that the safe withdrawal rate for a 30 year retirement using Target Date funds is well below the accepted 4% rule because they do not re-balance to maintain a 50/50 portfolio. Most stop around 40/60. His argument seems sensible. If he's correct, I might have to make some changes...

 

[jazz4cash]

I only read the first bit and decided not to invest any more time right now to read further. This part stopped me dead in my tracks......

I noticed that two investing/retirement rules of thumb were used in his presentation:

1. Use Target Date Retirement funds
2. The 4% withdrawal rule.

Being a geek, specifically regarding withdrawal rates in retirement, I immediately noticed an issue with these rules of thumb – they aren’t likely to be true if people follow both at the same time!

Target Date funds are for accumulation phase and 4% SWR applies to distribution phase, so why would anyone follow both at the same time?

A bigger issue to me is that the specific AA varies significantly between different mutual fund companies for a given Target Date. I generally ratchet up the equity side a bit to satisfy my own risk tolerance

 

[mathjak107]

Target funds cuttiing back on equity's over time will likely have trouble keeping pace. Cash and bonds are starting out at just to low as far as returns.

 

[nun]

The validity of the 4% rule depends on you assumptions about stock and bond returns. The returns are significantly lower that the historical averages then the 4% rule looks optimistic. Wade Pfau has written about this and done some modeling.

https://www.onefpa.org/journal/Pages/The 4 Percent Rule Is Not Safe in a Low-Yield World.aspx

 

[marko]

At one point I had 100% in a 2015 TDF. Over the past few years, I found myself wandering out into funds that deliver more return.

I still have about 30% in my 2015 but I find I'm now there for the general broad market it represents rather than a RE return.

 

[Animorph]

You can always use a fund that is dated a decade or two after you retire. You just can't verify your SWR unless you have a calculator that can handle the variable AA.