The 4.5 Percent Retirement Withdrawal Rule May Not Be Viable Anymore

December 18, 2013
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Retirement planning has always been more personal than financial planning. However, there has always been a certain consensus among financial planners regarding the acceptable rate of withdrawal from retirement portfolios.

Two decades ago, William Bengen, a certified financial planner published a series of papers on the topic of the sustainability of a retirement portfolio based on safe withdrawal rates. He reconstructed retiree portfolios based on historical patterns since 1926. After taking various asset class returns and inflation rates under consideration for respective retirement portfolios and their time horizon, William Bengen recommended that retirees should withdraw 4 percent of their portfolio per year. According to him, a 4 percent withdrawal rate would allow retirees to withdraw from their portfolio in a sustainable manner. Later, based on further analysis of the asset classes, he increased his recommendation of sustainable withdrawal rate to 4.5 percent.

However, as the stock market returns have been chaotic since the Dotcom bubble popped in 2000, it may not be wise to presume that the rule of 4.5 percent withdrawal rate set is still viable under current circumstances.

Blog 3 Image (Retirement Withdrawl Rate)-tdrvxBack in 1993, Mr. Bengen studied a total of 38 different 30-year retirement periods, when he recommended his 4.5 percent sustainable retirement withdrawal rate. However, as of this year there are more than 57 time periods to be studied, and he still believes the 4.5 percent rule still holds true. As his study period included the Great Depression, the World War II, and several market crashes as well as both high and low inflation periods, Mr. Bengen believes current economic climate may seem dire for potential retirees, but it is nothing compared to people who retired in 1969 as they faced abnormally high inflation in the 1970’s. For example, the 11.03 percent (in 1974) compared to the current rate of 1.24 percent is extremely low.

Based on such historical comparison, Bengen believes that people who retired in 2000 have a better chance of sustaining their retirement portfolio for a minimum of 30 years. Although he is not yet ready to give up on the time tested 4.5 percent rule, he believes that people should entertain alternative strategies, in case this rate of withdrawal fails to sustain their portfolios for their life expectancy amid the current uncertain economic climate.

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