The 4% Rule Gets an Update: Introducing the 4.7% Rule for Retirement Spending
After three decades, financial planner William Bengen, the creator of the widely-used 4% rule for retirement spending, has revised his recommendation. Citing more sophisticated research, Bengen now suggests a withdrawal rate of 4.7% to better reflect modern market conditions and ensure retirees can safely stretch their savings.
What is the 4% Rule?
The 4% rule, originally published in the Journal of Financial Planning in 1994, offers a simple approach to retirement planning. It advises retirees to withdraw 4% of their savings in the first year of retirement, then adjust that amount for inflation in subsequent years. This strategy aimed to ensure savings lasted for at least 30 years. The rule has become a common benchmark, though its validity has been consistently debated.
Why Revise the 4% Rule?
Bengen updated the rule due to increased sophistication in his research. The original rule provided a straightforward solution to a significant concern: running out of money in retirement. An Allianz survey highlighted this fear, revealing that many Americans worry more about outliving their savings than about death itself, particularly among Gen X. However, market conditions and investment strategies have evolved since the 1990s.
Changes in Market Conditions and Investment Strategies
The initial 4% rule was based on a portfolio comprised of 50% large-cap stocks and 50% U.S. bonds, with an allowance for up to 75% in stocks. It relied on historical market returns. Today, asset allocations are more commonly structured as 60/40 (stocks/bonds) or even 70/30. Furthermore, retirees often diversify their portfolios across a wider range of assets, including cash, commodities, and real estate.
Impact on Retirement Plans
The shift to a 4.7% rule could significantly influence retirement planning strategies. Individuals may be able to withdraw slightly more each year without drastically increasing the risk of depleting their savings. However, it is essential to consult with a financial advisor to tailor retirement plans to individual circumstances and risk tolerance. This revision suggests a need to continually reassess retirement strategies in light of changing economic factors.
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