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By Edward Kierklo
Special to the Financial Independence Hub
Nothing has worked more effectively for the financial industry to justify asset accumulation or AUM (Assets Under Management) than the theoretical underpinnings of the 4% “rule” or “guideline.”
There are innumerable articles on how individuals will require one million dollars or more for retirement based on this dubious principle.
Certainly it is crucial to save but to focus on any particular threshold misses the point that what counts in retirement is a regular, dependable stream of income for a lifetime.
Motley Fool does not debunk the 4% rule explicitly but offers lots of caveats in this piece.
Take this recent article on Marketwatch saying that one million is not enough.
Balancing lifestyle and longevity
There are two factors in retirement to balance: lifestyle and longevity. Any 4% or otherwise rule is irrelevant if longevity is uncertain. Most people want to maintain a certain quality of life in retirement as well as living healthy.
Here is a hypothetical question: would you take Social Security if it were offered as a lump sum or continue to collect it monthly for the rest of your life (with the bonus of inflation adjusted payouts)?
To plan on taking some set amount from a combined pool of assets will always be waylaid by reality. It is important to annuitize the assets. One way is to purchase an annuity (see previous post) or follow a strategy of “buckets.”
One example is this book by Hildy and Stan Richardson. They advocate investing specifically in individual bonds (not funds or ETFs where values can fluctuate) to secure a certain stream of income.
Mike Tyson famously has a quote where everyone has a plan till they get hit in the face.
Edward Kierklo is a retired Information Technologies professional living in San Franciso. He still enjoys coding and keeping abreast of emergent trends in finance and technology. He has a BA in English from the University of Connecticut and an MBA from the University of Rhode Island. This blog was originally published on his “Deaccumulate” site on December 5, 2018 and is republished here on the Hub with his permission.
