Has the 4% Rule Had Its Day? The Case for Dynamic Retirement Spending
Most people use a version of the 4% SWR in retirement. I think it's the wrong approach for most, although it offers a tempting idea: an extremely high probability of not running out of money and genuine income stability. These reasons are its biggest Achilles heel—it causes the median retiree to pass with a large amount of unspent wealth. Many studies suggest two-thirds to four-fifths of retirees end with a portfolio equal to or larger than their starting balance.
This reality stems from the rule's design. The creator identified the worst possible 30-year period and calculated the largest withdrawal rate so the portfolio lasted 30 years.
Safeguarding against ruin is the flaw in the system. If you happen to experience your retirement in any timeframe that doesn't emulate the worst-case scenario—which means nearly every retirement—you end up with a large portfolio balance at the end of life. Statistically, most could have had a more comfortable retirement with higher spending levels.
The rigidity of the rule makes things worse. It demands that a retiree take an inflation-adjusted withdrawal every year, regardless of market performance. In a good year, this fixed withdrawal is too low, leaving significant growth unspent. In a bad year, a temporary reduction in spending could substantially protect the portfolio, but the rule prescribes moving ahead with the inflation adjustment anyway.
In my mind, for the typical retiree, the 4% rule presents a bit of a conflict. Is your goal really just seeking a 100% guaranteed promise of your portfolio lasting, and be damned about a large ending balance, or is it maximizing lifetime spending and enjoying the retirement you worked so hard for?
I'm drawn towards the idea of dynamic withdrawal strategies—they're gaining traction with financial planners. Cynics might suggest it's because a dynamic strategy is a bit more complex, and some might prefer using a professional to run the plan, earning fees for the planner.
/https://www.whitecoatinvestor.com/guyton-klinger-guardrails-approach-for-retirement/
However, the benefits are clear: These flexible strategies use fairly simple rules that increase your spending above inflation during good years and require no increase or small decreases during bad years. This lets you catch more of the market's "upside" and significantly lowers the possibility of large unintended inheritances while still providing a high level of portfolio security.
I think the 4% rule is a good big-picture planning guide. Unfortunately, its very foundational ethos is more likely than not acting as a brake on what most of us could spend during retirement. Taking a closer look at these guardrail systems could let the majority spend more freely without much compromise…other than in the size of your final balance.
When a respected organization like Vanguard is citing dynamic withdrawal as a better pathway for lifetime income, I think it's time we all have a closer look at the 4% SWR system. Could it possibly have had its day?
The post Has the 4% Rule Had Its Day? The Case for Dynamic Retirement Spending appeared first on HumbleDollar.
