Research: the topics of the 4% rule and retirement planning. Post: respond to ea

Question

Research: the topics of the 4% rule and retirement planning.
Post: respond to each of the following questions
A. What are the consequences to a retiree that relies on the “4% rule” but whose investment returns in retirement fell short? B. Why do you think retirement advisors suck rules-of-thumb? C. How would a decrease in such a rule-of-thumb, from 4% to 3% for example, have on the size of the nest-egg that a retiree must accumulate prior to retirement? Research: the topics of the 4% rule and retirement planning.
Post: respond to each of the following questions
A. What are the consequences to a retiree that relies on the “4% rule” but whose investment returns in retirement fell short? B. Why do you think retirement advisors suck rules-of-thumb? C. How would a decrease in such a rule-of-thumb, from 4% to 3% for example, have on the size of the nest-egg that a retiree must accumulate prior to retirement?
Post: respond to each of the following questions
A. What are the consequences to a retiree that relies on the “4% rule” but whose investment returns in retirement fell short? B. Why do you think retirement advisors suck rules-of-thumb? C. How would a decrease in such a rule-of-thumb, from 4% to 3% for example, have on the size of the nest-egg that a retiree must accumulate prior to retirement?

Explanation / Answer

The 4 percent rule is a rule of thumb used to determine how much a retiree should withdraw from a retirement account each year. This rule seeks to provide a steady income stream to the retiree while also maintaining an account balance that keeps income flowing through retirement.

A:-Another problem with the 4% rule is that it assumes a rather even market performance over time. But what happens if a downturn hits just before you're set to retire? If your investments take a dive, you'll risk depleting your savings sooner than expected if you stick to a 4% withdrawal rate.

Then there's the opposite scenario: What if the market exceeds expectations during your withdrawal period? You could end up short changed if you limit yourself to a 4% withdrawal rate, and while that's far better than running out of savings, it also means losing out on a chance to enjoy your money while you're still alive.

The reality is that the biggest reason the 4% rule won't work for you could be you -- by which I mean, the average American's spending, debt, and saving habits. According to the Employee Benefit Research Institute, the average 401(k) balance in its database of people in their 60s was $171,641 in 2014, the most current data published.

A lack of acceptable bond yields is that many retirees may choose to invest a bigger portion of their retirement savings in stocks. And while retirees should have some exposure to stocks to generate long-term growth for later in life, this move can have damaging consequences because of the short-term volatility of stocks.

This is often pointed to as the biggest hole in the 4% rule in the current environment. When financial advisor William Bengen first developed the 4% rule in the early 1990s, interest rates were much higher than current levels:

B:-Clearly, the 4% rule isn't perfect, but it does have a strong history of success. In fact, the 4% rule can serve as a solid starting point for establishing a savings target and seeing whether you're on track to get there.

Just because the rule held up in the past doesn't guarantee it will in the future. And in fact, a 2013 paper titled "The 4% Rule Is Not Safe In A Low-Yield World," an initial withdrawal rate closer to 3% may be more appropriate if you want your nest egg to support you at least 30 years.

But there's another wrinkle to the 4% rule -- if the market performs decently, the value of your nest egg could swell dramatically if you strictly adhere to the 4% rule, perhaps leaving you with more money late in life than you started with when you retired.

C:-It would be nice to be able to identify in advance a level of withdrawals that will meet your retirement income needs, assure that your money will last a lifetime and not leave you with a huge stash of assets in your dotage (along with regrets that you hadn't spent more early in retirement). But there are too many variables and unknowns -- how the market will perform, how long you'll live, whether your spending will keep pace with, exceed or lag inflation, what sort of unanticipated expenses you'll run into, how well your health holds up, etc. -- to allow for such precision.

So I recommend starting out with a reasonable withdrawal rate -- as well as an appropriate mix of stocks and bonds, given your risk tolerance -- and then adjust as you go along.

What's reasonable? That's a judgment call, but I'd say 3% to 4% is a decent place to start if you want your savings to be able to support you 30 or more years.

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