What’s Wrong With the 4% Rule?
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Bill Bengen’s 4% safe withdrawal rule is the standard by which retirement strategies are measured. But it fails as a practical guide to retirement planning. Here is how to fix it.
What is wrong with the old 4% withdrawal rule?
Bill Bengen’s famous 4% withdrawal rule has been a longstanding strategy since the 1990s. It works by withdrawing an amount equal to 4% of your retirement savings the first year of your retirement. Subsequently, the payments are adjusted each year for inflation.
This rule advocates constant spending in real dollars every year, no matter how the underlying portfolio performs. The investment strategy is disconnected from spending needs and the income-generation objective.
It is problematic and a significant shortcoming when the investment strategy and the payment mechanism are detached and do not work well together. The payout strategy should be integrated with an investment strategy specifically designed to support it.