Will My Retirement Savings Last For The Duration Of My Lifespan?
If you save diligently throughout your life, have a nicely diversified portfolio giving back some decent returns, the general rule of thumb has been; if you don’t pull out more than 4%, your portfolio will last you through your retirement. However, as things have changed with stock values and interest rates, such as the way things are today with bond yields being well below average, Advisors are now suggesting that retirees could get into trouble if they stick with the 4% rule of thumb.
Why Withdrawing 4% Might Exhaust Your Retirement Savings
The 4% rule of thumb originally came from a paper published in 1994 by William Bengen, when he suggested that removing only 4% from your retirement account each year protects you from running out of money during retirement. However, the new information out there, presented in a paper titled “Asset Valuations and Safe Portfolio Withdrawal Rates”, indicates that you can’t just stick to a rule of thumb and assume it’s accurate for your retirement portfolio. Rather, retirees need to consider the current bond yields, and stock values, as well as a ratio known as (CAPE) which is the cyclically adjusted price-to earnings- ratio; before an accurate annual withdrawal limit can be set.
How Does Cape Impact My Retirement Savings?
Back when the authors of the paper conducted their studies, bond yields were at 2% and the stock market cape was 22. The standard portfolio mix for retirees of 40% stocks, 60% bonds, and a 4% withdrawal limit only stood a 50% chance of lasting for the average 30 year retirement. In other words, retirees have to save more, and withdraw less in order to have a shot at making their retirement accounts last for the long haul.
If I Were To Retire Today, What Would Be A Safe Annual Withdrawal Limit?
Based on the data, the researchers indicated that since retirees are living longer, bond yields are low, and CAPE is now over 25, which is indicative of future lower stock returns, retirees would be much safer starting with a 3% withdrawal limit today, rather than blindly accepting the 4% rule. If retirees start out taking only 3% they can always adjust it as needed as interest rates rise and Cape improves.
What’s The Solution For Financial Security For Today’s Retirees?
One suggestion is for retirees to save more, work longer, and withdraw Social Security at the higher level to help guarantee a steady retirement income that will last for the duration of a lifetime. The biggest mistake a retiree can make is underestimating the amount of money he or she will need to retire on and to come up short in the long run.
For more information on how the current investment environment could impact your retirement fund and lifestyle, speak to a Redhawk Wealth Advisor near you today.