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Is The “Four Percent Rule” For Retirement Still Viable?

By WealthTrust Arizona

This October marks 18 years since a noted certified financial planner, William Bengen, published an article advocating what has become known as “The Four Percent Drawdown Rule.” After conducting a series of empirical simulations of historical market behavior, Bengen concluded a person could “draw down” up to four percent from his or her portfolio annually without fear of outliving their money.

While “The Four Percent Drawdown Rule” has gained wide acceptance in the financial management field, it is not universally seen as a viable figure. Recent recommendations display a very wide range, with opinions varying from 1.8 to 7 percent.

When deciding how much to safely withdraw from your financial portfolio, there are many elements to consider. There are “external” factors, such as the current state of the market, interest rates, inflation, and “internal” factors, which include your spending habits, tax status and your lifestyle.

Since each person’s needs and objectives differ, a “one size fits all” investment and saving strategy is not advised, and that includes the notion of a fixed withdrawal percentage.

As a rule, the formula utilized to determine that amount is based on the assumption that certain variables (such as a person’s health status, length of retirement and return on the person’s investment) will remain the same over time, or vary only slightly. While it would be nice if these factors would remain stagnant, life (and the markets) can be messy, which means a retiree’s financial picture can change, sometimes dramatically.

Another strategic consideration when considering retirement withdrawals is drawing down those funds in the most tax-efficient manner possible. That means you should concentrate on the highest ending balance, not the minimization of taxes.

You should work closely with your financial advisor to develop a realistic cash flow projection for your retirement, factoring in things such as tax rates, market fluctuations, risk tolerance, asset allocation, projected life span, health care costs and all sources of income, such as pensions. This type of cash flow analysis can help increase the likelihood you will outlive your assets. Of course, living longer than expected is a good thing, but it is not so great if it means you run out of money sooner than you had predicted. Taking out too much money too early in your retirement years could wreck your nest egg, which is another reason why the idea of a fixed withdrawal percentage is not always a good one.

If you are already retired, you should make it a priority to keep a close eye on your spending habits and work with your financial advisor to regularly review and reassess your situation, in order to make realistic tweaks to your overall plan. If you are still working, it is vital you realize the spending and savings choices you make today can have a tangible impact on the lifestyle you will be leading in your retirement years.

It goes without saying that the earlier you begin saving and planning for retirement, the more likely it is your retirement will be everything you hope it will be. That is why it is never too early to devise and implement a workable cash flow projection and savings withdrawal plan. Bringing us back to the “The Four Percent Drawdown Rule,” realize that any annual withdrawal amount is going to be different for each person, depending on individual goals and objectives, as well as market conditions.


DISCLOSURE: WealthTrust Arizona is a fee based investment advisory firm that specializes in integrating portfolio management with estate planning for high net worth individuals and families. Services include portfolio management, estate planning, asset and lifestyle preservation, taxation concerns, access to trust and estate documentation preparation, business succession planning and more. The professionals at WealthTrust -Arizona are frequently sought out by the national media such as The Wall Street Journal, Forbes, New York Times, CNBC, BloombergRadio, and others to share their thoughts on matters that impact our clients.

Given the recent events impacting investors and their financial security, we would welcome the opportunity to provide a second opinion for anyone who would like to have a check-up on their investments, financial plan or estate plan. If you know of anyone who may have a concern with their current advisor or current investment portfolio, we encourage you to share our contact information with those that could benefit from a complimentary review.

Advisory services offered through WealthTrust Arizona, a registered investment advisor. WealthTrust Arizona does not engage in the trust business in the state of Arizona or in any other jurisdiction. Not FDIC insured. Not bank guaranteed. May lose value, including loss of principal. Not insured by any state or federal agency.


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