My latest MoneySense Retired Money column looks at that perpetually useful guideline known as the 4% Rule. Click on the highlighted headline to access the full article online: Is the 4% Rule Obsolete?
As originally postulated by CFP and author William Bengen, that’s the Rule of Thumb that retirees can safely withdraw 4% of the value of their portfolio each year without fear of running out of money in retirement, with adjustments for inflation.
But does the Rule still hold when interest rates are approaching zero? Personally I still find it useful, even though I mentally take it down to 3% to adjust for my personal pessimism about rates and optimism that I will live a long healthy life. The column polls several experts, some of whom still find it a useful starting point, while others believe several adjustments may be necessary.
Fee-only planner Robb Engen, the blogger behind Boomer & Echo, is “not a fan of the 4% rule.” For one, he says Canadians are forced to withdraw increasingly higher amounts once we convert our RRSPs into RRIFs so the 4% Rule is “not particularly useful either … We’re also living longer, and there’s a movement to want to retire earlier. So shouldn’t that mean a safe withdrawal rate of much less than 4%?”
It’s best to be flexible. It may be intuitively obvious but if your portfolio is way down, you should withdraw less than 4% a year. If and when it recovers, you can make up for it by taking out more than 4%. “This might still average 4% over the long term but you are going to give your portfolio a much higher likelihood of being sustainable.”
Still, some experts are still enthusiastic about the rule. On his site earlier this year, republished here on the Hub, Robb Engen cited U.S. financial planning expert Michael Kitces, who believes there’s a highly probable chance retirees using the 4% rule over 30 years will end up with even more money than they started with, and a very low chance they’ll spend their entire nest egg.
Retirees may need to consider more aggressive asset allocation
Other advisors think retirees need to get more comfortable with risk and tilt their portfolios a little more in favor of equities. Adrian Mastracci, fiduciary portfolio manager with Vancouver-based Lycos Asset Management Inc., views 4% as “likely the safe upper limit for many of today’s portfolios.” Like me, he sees 3% as offering more flexibility for an uncertain future.
Mastracci suggests retirees need have more aggressive asset allocation and move “the venerable balanced asset mix toward the 70% equity ballpark … Becoming more conservative during retirement is a mistake. Asset mix choices make the biggest impacts on investment outcomes. Low returns may linger near zero longer than investors realize.”
Wealth Advisor Matthew Ardrey, vice president with Toronto-based TriDelta Financial, sees three alternatives to accepting low fixed-income returns: High Yield Bonds, dividend-paying blue-chip stocks and Alternative Income Investments, which invest in private debt, real estate and infrastructure and are not highly correlated to stocks.