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Today's Market Volatility Reminds Us the 4 Percent Rule Isn't a Retirement Catch-All

four percent rule retirement doesnt always work

At some point or another, you may have heard of the "Four Percent Withdrawal Rule," but what exactly is it? And why does it matter for your retirement?

The four percent rule is the brainchild of south California financial planner Bill Bergen. Simply put, the rule states that a retiree can withdraw 4% of their initial retirement portfolio balance, and thereafter, adjust their amount for inflation each year. This approach would give the retiree a reliable "paycheck" that lasted for 30 years.

Back in 1994, Bergen had many clients worrying about safe withdrawal rates. They were anxious about how much they could spend in retirement without running out of money. Searching for answers in financial textbooks, Bergen found that no educational materials at the time gave a definitive answer.

With that, Bergen went to work on his computer. He ran analyses on data provided by no less than Roger Ibbotson, whose blockbuster research includes groundbreaking findings on indexed annuities as a retirement asset class.

The end result? Bergen's now-famous four percent withdrawal rule. Today, it's one of the most widely quoted and used rules of thumb in finance.

But those days had vastly different economic conditions than now. Given that, is the 4 percent rule still relevant for retirement investors today?

The Four Percent Rule: Created in a Different Time

It was a different world back then. According to a 2011 article in The Economist, the Fed had kept interest rates at the lower end of 3% for three years.

The three-percent target was in response to several major economic events, including the failures of many savings & loan institutions. Being in the 1990s, markets also hadn't yet seen the two historic dips that came in 2000 and 2008.

Needless to say, market volatility wasn't as rampant. And people had shorter expected lifespans than now.

In other words, retirement investors faced quite different economic conditions and challenges than now. Nowadays, low interest rates and volatile markets are back in the driver's seat.

New Study Takes a Fresh Look at the Four Percent Withdrawal Rule

In a recent article, Colin Devine of C. Devine & Associates and Ken Mungman of Milliman showed the danger of continuing to use the 4% withdrawal rule in times far different from 1994.

Their respective firms put together a white paper on a 4% withdrawal rate with new research and modeling. The findings?

"This longstanding rule of thumb puts retirees at significant risk of running out of income should they achieve even an average lifespan," said the researchers. It's "a national dilemma, given that a record 4.5 million Americans will reach the age of 65 in 2024."

For their research, Milliman and Devine & Associates looked at a few variables that affect people's income in retirement: how long someone is expected to live, their health status, the rate of inflation, and equity market volatility.

What Did They Find?

The white paper found that stock market corrections in early retirement were very damaging. Retirees who see a market decline of 20% within the retirement red zone (or first 10 years of retirement) were at serious risk of running out of income.

Even those with a conservative 60/40 equity-to-fixed-income investment portfolio had that risk.

According to Devine and Mungman, an early-retirement market drop is a "likely outcome given the crash coinciding with the financial crisis of 2008-2009, as well as the December 2018 and current COVID-19 selloffs." This danger of early-retirement losses is called sequence risk.

Assuming sequence risk took hold within people's first decade of retirement, the risk of running out of income was:

  • 11% during the first 19 years (average life expectancy for a male aged 65);
  • 20% over the first 22 years (average life expectancy for a female aged 65); and
  • 34.6% within the first 27 years (combined average life expectancy for one member of a male/female couple both age 65).


Devine and Mungman said the "trifecta of longevity, equity market volatility, and the uncertainty of older-age health costs and long-term care" could pose significant financial risk to many Americans as they enter retirement.

How Do We Solve This?

How, then, can retirement investors rise above these challenges? Many investment offerings, from target date funds to mutual funds, are used to create retirement income.

But annuities are the only financial product capable of generating protected lifetime income.

With an annuity, you have contractual guarantees that you will receive protected income for as long as you live. The insurance company gives you this security in a way that no individual retiree can replicate on their own.

Create a Guaranteed Lifetime Income

For example, say a 65-year old couple has $500,000 of retirement savings. They could put $300,000 of that into a variable or fixed index annuity. Or if they wanted a simpler contract, they could go with a fixed annuity.

No matter what, they would receive a guaranteed income stream from the annuity that they can count on every month.

Meanwhile, the couple would have some money in equities. Their portfolio might have other types of assets as well, such as REITs or high-yield bonds. But the protected income from the annuity would give them a predictable floor of cash-flow each month.

Is an Annuity Right for You?

An annuity needs to have a clear role in your financial strategy. What problems does it solve? The amount of money you put into an annuity will depend heavily on your risk tolerance, cash-flow needs, and long-term financial picture.

If you are counting on an annuity for your monthly living expenses, then choose a contract that will be able to do this. You shouldn't take any more risk here than you have to.

If an indexed annuity can provide you with enough income, then don't buy a variable annuity. If the payout from a fixed annuity will do the trick, then don't buy an indexed or variable annuity.

Don't Forget About Inflation and Healthcare

But you also need to consider the possibility that your expenses will rise during your retirement. That includes medical or long-term care expenses.

Fortunately, many annuities will double or triple their payouts if you should need long-term or nursing home care. This higher amount will be paid either until you pass away or you no longer need the care. Some contracts will give you this higher payout for a certain time, though, such as up to 60 months.

Thereafter, the payment will revert to its standard lower amount for the remainder of your life. If you opted for joint life payouts for you and your spouse, the payment would revert back for the remainder of both you and your spouse's life.

Planning for the New Economic Uncertainty

At this point, the 4% withdrawal rule may be a permanent thing of the past. Many financial planners are now telling clients to limit their annual withdrawals to 3% of their portfolios, at most. Some planners even go lower than that, depending on the situation.

If it makes sense for your goals, an annuity may let you maximize your income beyond this. Consult your financial advisor to find out more about how much you can withdraw from your portfolio during retirement without running out of money.

What if you are looking for a financial professional to guide you? No sweat. Help is just a click away at SafeMoney.com, where you can connect with a knowledgeable independent advisor or agent for answers.

Use our "Find a Financial Professional" section to connect with someone. You can request an initial appointment to discuss your situation, goals, and concerns. Should you want a personal referral, please call our team at 877.476.9723.

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