Does the 4% rule hold up?
I’m often asked what I think about the “4% rule” for spending in retirement. According to this rule of thumb, an individual who is planning on a 30-year investment horizon and is holding a broadly diversified and balanced investment portfolio of stocks and bonds, can—with a reasonably low probability of running out of money over 30 years—spend an amount equal to roughly 4% of their total retirement portfolio in the first year, and then adjust that withdrawal every year thereafter for inflation.
One of the easiest ways to see where this “rule” comes from is the chart below.
Note: Using historical performance data, the chart shows what dollar amount could have been withdrawn from a portfolio (rebalanced monthly to a fixed asset allocation) to exactly exhaust that portfolio over 30 years.
Inflation is represented by changes in the non-seasonally adjusted CPI-U (source: U.S. Bureau of Labor Statistics). U.S. stocks are represented by the following benchmarks: S&P 500 (1926-1970); DJ Wilshire 5000 (1971-April 2005); MSCI BMI (since May 2005). For Bonds: S&P High Grade Corporate Index (1926-1968); Citigroup High Grade Index (1969-1972); Lehman Brothers U.S. Long Credit AA Index (1973-1975); Barclays U.S. Aggregate Bond Index (since 1976).
Assuming you had started spending in any month from January 1926 to July 1979, the chart shows how much you could have spent historically following an inflation-adjusted spending rule, so that you would have exactly exhausted your portfolio after 30 years. The data show that if you wanted to steer clear of historical scenarios where you spent more than the portfolio could produce over 30 years, you’d have had to start with an amount equal to 4% or less of the starting balance. Spending 4% didn’t lead to success 100% of the time (all three lines dip below 4% in the late 1960s and early 1970s), but was close to the lower limit in the data. Also note that since this is based on costless index returns, spending here has to include whatever fees you paid to make these investments. So there you go: “4% adjusted for inflation” is a plausible spending guideline based on the history and this assumed spending pattern.
Now, when economists hear about this “4% rule” for spending in retirement, they tend to cringe. (At least one well-known one has written an article explaining some reasons why.) One of the biggest issues they point out is, as the chart shows, that the “4% rule” in most cases tends to leave a lot of money unspent (at least over the 30-year horizon), and is hence potentially inefficient. Perhaps even more critically, the rule doesn’t allow, or really even envision, that people would revisit their spending rate going forward from the starting point. For example, if you start spending an amount equal to 4% of your portfolio, and then the market ends up going up much more than inflation, how come you can’t increase your spending by more than inflation? Presumably your horizon isn’t longer this year than it was last year, and now, 4% of the portfolio would be a higher number than last year’s 4% plus inflation. Beyond this, there is of course the “what-happens-if-I-live-to-year-31-risk” that the rule ignores entirely.
All valid criticisms. And there are alternative spending rules (based on academic work that has existed for decades) that could potentially be better—or at least more complete—solutions in a variety of ways. However, I would argue that most of these alternative, model-based approaches are only obviously superior if a retiree fully understands and accepts the models and framework used to derive the optimality results. The models and embedded behavioral assumptions are complex, and, while intuitive to economists, may not “feel right” to people in the real world.
As an example, consider an individual with no desire to leave an estate, whose required absolute minimum needed spending will be completely funded by Social Security, and who is not facing any uninsured risks. (Just go with it for a minute). We can use a “standard economics” framework to think about optimally spending whatever assets they have accumulated. But first we need to make still more assumptions about important issues—specifically: constant relative risk aversion utility with intertemporal elasticity of consumption equal to one-third, a pure discount rate of 1% per year, a real (and, to keep things simple) riskless rate of return of 2.5%, and mortality expectations in line with a 50/50 average male/female (unisex) version of the RP2000 mortality tables. Assuming one even understands what they mean in the first place, these are each debatable assumptions.
Anyway, in that theoretical world, for an individual attempting to optimize spending, you’d get the pattern in the chart below. Spending starts out about 15% higher than the 4% rule would prescribe, but after age 85 (assuming one lives that long), spending is lower than the rule would have prescribed. The pattern reflects that in the economic framework, people are looking forward as they are optimizing, and trading off the higher likelihood of not being around against the lower satisfaction they will get from spending less if they are around. The 4% rule is, in contrast, designed to target a fixed, minimum level of spending over a specific period of time.
I’ve shown this kind of result to a few people and gotten different reactions. A big one is that, on its face, the assumption that a retiree faces no uninsured risks is just silly. Many are also uncomfortable with the notion that if they make it to 90, they are going to be spending 30% less than at age 70. What do you think?
Bottom line, the 4% “rule of thumb” is just that—a rule of thumb. It’s based on an understandable, if not particularly complex set of assumptions about behavior and historical data on the markets. And as a baseline guide for setting individuals’ spending expectations at retirement, it’s in the ballpark, generating an initial spending recommendation that is arguably close to what comes out of a more complicated analysis.
While it’s not perfect, and it’s easy to be a critic, it’s tough to ask for a lot more than that in as simple a package.
Notes:
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I wonder if you can do a study of the 4% rule from 1980 to 2009?
this is not valid if we have zero % growth for another 10 years in our funds
I subscribed to the 4% rule because it then gives me an alternative as I age to (1) covered health cost changes, (2) handle emergencies, and (3) allow me to make it to an age where it will not matter to me if there is money or not.
This is a very interesting point of view. Your blog is refreshing, but I wish one could find more content, though. I am looking forward to reading more from you. Keep up the good work. thanks.
Thank you . I really enjoyed that 1st graph.
John — Presumably, each portfolio would earn a rate of return. What if you were to immunize the risk with long-term bonds paying at least 4% a year. In this way, the principal remains in tack and the earnings provide the income. Perhaps having some stock investments will protect you from inflation risk, but at the cost of investment risk should the value of the portfolio decline, like in the past few weeks.
I’m in my early 40′s and semi-retired. I plan to far outlive the 30 year horizon. I plan to spend no more than 3.5% to hopefully give me the edge of having money in my portfolio to see me to the end. But I also plan to keep a minimum balance in my portfolio during those dips which means some years I’ll perhaps take less than 3.5% from the portfolio. I guess you can say, I’ll have to roll with the punches depending upon what Mr. Market has to say.
Do Vanguard balanced funds rebalance monthly?
While the “surplus problem ” maybe real for some, the real problem with any rule is:
“Past performance is no guarantee of future returns, and account balance results may have differed under other market conditions.”
I would think anybody who has read anything from Vanguard recognizes this warning.The last 10 years should have made the quote very real.
What does this mean in terms of the 4% rule. It ‘s OK, but if you can afford it, the 3.5% rule is better. Of course, not as good as the 3% rule, which is not as good as…..you get the idea.
The 4% rule is nothing more then a back tested rule. When people say this will work out 90 to 95% of the time, they are talking nonsense. The proper sentence is it has worked 90 to 95% of the time in the PAST.
So what do you really KNOW. The less you spend and the more you make the more you will have in the bank. After that it is just a question of how low can you afford to go on the % rule and live modestly well.
No one in this family, going back four generations, has ever planned on spending everything during their lifetime. They all planned to leave untouched the principle amount of their estate, live on interest and dividends, etc, and pass the principle in equal shares to their children. Spending it all would be considered treason to the ancestors. No one feared spoiling a child thusly, as a child’s whole upbringing was devoted to teaching competence, including money management, and self-sufficiency. Jackie Kennedy said it best: if one fails at raising one’s own children nothing else they do is of much importance.
If I were to spend a moderate amount of time to do so, I believe that I could understand all the complicated language and assumptions. I should be able to develop some insights about how to go about spending and investing what I have.
What would be a more helpful article, though, is to approach it from the standpoint of someone who is retiring with some given amount of invested assets and who may or may not wish to have any of those assets eventually pass to his or her heirs. How should that person approach the issue of spending down those assets, given a reasonable collection of the uncertainties? In other words, speak in more of a “practical” voice to those who want to put the thinking into action.
The spending model, while rather naive, is nevertheless a good starting point for research into “other” alternatives for spending over time.
If the market keeps going down like it has the 10 past years!!!! How can you afford to take anything out?
Very interesting article and the 1st graph is a useful presentation I have not seen before. But its not clear to me whether the analysis considers stock dividends, as the indices referenced do not appear to include them. Can the author or anyone else comment on whether stock dividends are included in the analysis summarized in Figure 1? Thanks
To the person who asked:
“I wonder if you can do a study of the 4% rule from 1980 to 2009?”
As I interpret Figure 1, the x-axis shows the year withdrawals began. Therefore, for the period 1979-2009, a 50/50 stock/bond mix would have sustained an withdrawal rate of about 8% with the withdrawal amounts adjusted for inflation for years after 1979 (if I’m wrong, someone please correct this understanding).
The 30 year result beginning in 1980 would be very similar as the analysis is more sensitive to returns in the early part of the cycle than the later part of the cycle.
Another approach that I would like to see evaluated this same way is the sustainable withdrawal percantage (X) if I were to adjust my withdrawal each year based simply on the total portfolio value at the beginning of the year, rather than basing it on the initial withdrawal amount adjusted for CPI.
For example, if X is 4% and I start with $1M in year 1, I would withdraw $40k for that year. If the portfolio does well and at the beginning of year 2 I have $1.1M, then I adjust my withdrawal up to 44k (4% of $1.1M ) but if the value of portfolio drops to $0.9k, I would only withdraw $36k.
The question is, what value of X would be sustainable using this approach which seems to have some advantages. I’m guessing that the range of values would be narrower than those in Figure 1.
This reader just hit it on the head – gives us some practical spending senarios based on age and accumulated wealth.
We spend whatever we agree upon and desire as our financial retirement planning began upon my completion of a high school summer economics class, designed by the University of Nebraska, during the summer of 1959. We are not multimillionaires but have adequate former employer retirement income that in most years permits us to still plow funds into savings/investments. Also, we were able to retire in 1998, at ages 54 and 56, due to our financial status from planning and beginning a program prior to my age eighteen and I did not meet my wife until 1967. She spent more than she earned regularly but accepted the program when she saw earnings on investments at the end of our first year of marriage. Education is the answer along with choosing your life’s partner very carefully.
The standard 4% rule has the disadvantage of inverse cost averaging. To get your 4% each year, you must sell more shares when the price is low. Wouldn’t it be better to sell 4% of your shares each year, assuming dividends are reinvested, and accept the risk of lower income for those years when the price is depressed? Adjust your lifestyle downward during those times and reduce the risk of depleting your capital. If you’re willing, during the good years, withdraw less than 4% and reduce the depletion risk even further. You may make it through to the end and have something decent left for your heirs. The benefits of dollar cost averaging are frequently explained for the accumulation phase of one’s life, but rarely if ever for the distribution phase. An investor who wants a good long term result must be willing to endure hardship during the bad years. The contribution dated August 23, 2010 at 3:33 pm presents a similar viewpoint: “I’ll have to roll with the punches depending upon what Mr. Market has to say.”
To me, the “Optimal Spend” curve looks absurd. When retired, I want my income to be sufficient to provide for my basic living expenses, plus a reasonable amount for emergencies and for discretionary spending. If I need to withdraw 4.0% when I am around 86, how could I possibly expect to get by on 0.5% when I am 109?
I think that the 4.0% rule is a pretty good rule of thumb, but as another commenter pointed out, 3.5% is better, and 3.0% is even better, and so forth, in order to be more on the safe side. It is better to end up with too much rather than not enough, especially at a time when you are, as a practical matter, perhaps too old to be willing and able to work.
When budgeting, it is easier to start with a small budget and then annually increase it, rather than start with a large budget and perhaps have to make drastic cutbacks somewhere down the road.
I may try to start with 3.0% (around age 67), then gradually bump it up to 4.0% over a period of four to ten years, then stay at 4.0% and try to roughly adjust for inflation, or at least some portion of inflation, each year. But once I get to 4.0%, if the investments ever have a very bad year, it might be necessary to do some belt tightening, and eliminate or cut back on the inflation adjustments for several years. As somebody else indicated, you might have to roll with the punches.
Why not just spend 4% of your portfolio yearly balance? That way you will never run out of money.
First of all, it’s only mildly interesting to a portfolio holder of today to look at 1926-1979 data. It may or may not be very relevant to an individual or family. My suggestion is to use a program that simulates what could happen per user inputs and assumptions. “Forecaster 3″ is one good, free program that allows multiple inputs, assumptions including tax rates, inflation, age of death estimates [I use 90 for myself and 95 for my wife to be conservative], etc. Then it runs many hundreds [can be thousands if you choose] ‘Monte Carlo’ simulations to give one a range of possible outcomes. Even a great portfolio can go broke with a 2% drawdown rate per many negative outcomes. Conversely, a portfolio can grow like a weed if many things go right. Monte Carlo simulations yield a probable outcome plus the percentages for better or worse outcomes. Some financial house programs just give you an expected [average] outcome based on your inputs. With a good financial simulator, you can play what-if games and add or subtract risks per inputs and drawdown rates. As for a “magic drawdown percentage”, there is none. Age, expectations and risks taken and averted make a big difference. My guess is that for retirees, something around 0.3% per month will be safe {3.6%/year}, But, as the car dealer says, “Your mileage may vary”.
The 4% is not a “rule”, but rather a loose guideline.
As a rule it is logically flawed because how do you decide which your starting point is ?
Drawing the obvious conclusion that every year is your starting year, therefore withdrawing 4% of your present capital may work, but only at the price of not having a steady income, which is the original objective.
This seems to fit with another study that showed spending by elderly people diminishing (except health care) as they aged. As I recall, the amount of spending by age 85 was about half that of age 65. So the assumption that spending increases over time generally isn’t valid.
Why do so many people want to be told how to manage their retirement funds? If they managed their pre-retirement income without help, they should not need any help after retirement. On the other hand, if they could not manage their pre-retirement income, then I suspect the are beyond help.
As for leaving the principle to heirs, that is fine for sizable fortunes but not at all practical for working class or even most professional class people. We raise our kids to make their own way, not to expect mommy and daddy or the government to take care of them all their lives.
My parents are cool . They are 86 and 82 and they said their goal was to leave us with nothing.
So, the model works
I read your 2001 article “Making Retirement Income Last a Lifetime” in which you examined a 4.5% withdrawal rate based on historical data and Monte Carlo simulations, then mixed in annuitization of 25% and 50% of the portofolio. For a 65-year-old individual, the annual annuity payments amounted to about 9% of the amount annuitized, and always seemed to improve the chances that the portofolio would not be exhausted, expecially with longer retirement periods. It would be interesting to see how current annuity payouts based on todays lower interest rates would affect this observation.
The simple model I have used for about twenty years uses the 4% rule (it was the Harvard Endowment stricture for colleges, assuming they want their money to last ‘forever’), with a terminal date based upon my wife’s life expectancy. In general, the final balance has been significantly positive, with just a few months around zero balance at ‘death’.
With the S&P showing a negative return currently (YTD) and over the last decade, and the recent total return on bonds way inflated by the crash in rates, it takes a brave man to project much more than break-even, in real terms, going forward.
For now I am using a base spending limit, including taxes, of, implicitly, 3%. If this seems pessimistic, it is probably because expense inflation, in my model, is set at the higher of 4.5% or 10YT – 10YTips + 3%.
Guessing our way into the Chinese century.
John Ameriks wrote a good and thought-provoking article.
Many comments are also very good and thought provoking.
However, a few commenters are forgetting what John wrote. He clearly defined the 4% rule, and he explicitly referred to it as a rule of thumb. If you are wondering how it is defined, or if you are wondering if it is really supposed to be a hard and fast rule or a rule of thumb, please go back and read what he wrote, and see for yourself!
guideline not a rule. individual priorities, habits, vices, inheritance (or not) to be left, all influence spending down principal.
I can provide one answer to the question asked on 8/27 by the reader wondering how annuitization of part of one’s portfolio would hold up today. My husband is 66 and has purchased a fixed annuity paying out 6.88% of funds annuitized (payout beginning the first day of 2011). This is considerably lower than the 9% used in the 2001 example given by the reader, but also includes a joint survivor benefit of 100% for me, now age 62. The sum he annuitized was 33% of our portfolio.
Thus, by using the 4% rule on 2/3 of our funds plus 6.88% on 1/3 of our funds, we have almost 5% per year. Of course, on my death there will be no return of the annuitized funds, where there may or may not be anything left of our 40/60 stock/bond portfolio.
You mention that “there are alternative spending rules” to the 4% rule, yet you only cite one, and an odd one at that. Your discussion and the economic jargon seem intended to discourage your readers from considering any alternative to the 4% rule. I particularly like the reference to the “intertemporal elasticity of consumption”.
However, there is another rule that is older, simpler and safer. Namely, spend less than your income (including pension, interest and dividends). If you follow this rule, you will never run out of money because you never invade your principal. Further, if you follow this rule, your income will likely rise over time as long as long as you invest prudently. Any strategy that calls for spending more than your income (including the 4% rule) involves significant risk. This is true both before and after retirement. If you wish to push the limits and if you don’t want to leave an estate, you might purchase some annuities (preferably inflation indexed) though these have risks as well, particularly the risk of insurance company failure.
Very good stuff!! Please keep more articles like this coming!
I am spending my MMD each year from my traditional IRA. This works out to about 3.8%/yr. With proper allocation and diversification, I hope to have more money than life.
I think everyone who left a comment and the author himself make one ridiculous (if human) assumption that is both wrong and dangerous to include in your spending plans. You make no allowance for increased health care costs as you age. Most baby boomers and younger generations will not retire with company-paid health insurance. Medicare may be there, but it doesn’t cover all expenses and health spending tends to go up as we get older because we’re wearing out.
Everyone thinks it won’t happen to them, but how many strong, healthy 80+ year olds do you know who are spending less on health care costs, less on doctors, less on medications and less on hired assistance of many kinds than they did in the past? How many 80 yr olds can mow their own lawn, paint the house, even stand on a ladder to change a lightbulb? Yeah, maybe YOU will be the exception who is hale and hearty until dropping dead without warning one day at age 98. But really, REALLY– you won’t be that lucky. Getting old gets more expensive every year. You’ll spend more money as you age–it just won’t be on things you want to spend it on!
why not just estimate number of years left to live, budget for extra expected and unexpected expensed to come and divide into what’s left over (using some inflation rate assumptions of what money will be worth in the future). the point is that needs and portfolio can change in unexpected ways. what is needed is a more dynamic method of spending than just a simple % rule
All these theories do not reflect the reality of life – that life is unpredictable.
I have several relatives who have lived into their 90′s and several still living who are in their 80′s and 90′s. A few left fortunes, a couple ran out of money due to nursing care. All lived modest, comfortable lives and their expenses decreased as they aged.
But, most ended up spending thousands of dollars in the last few years of life due to health and aging issues. The cost of medical care was affordable due to Medicare coverage. But, the cost of private duty home health care and nursing home care at the rate of $7000 to $15,000 a month will consume a fortune in a few years.
On the other hand, I also know people who worked till they died, leaving much money unspent.
The moral is its important to manage one’s finances and plan for a long life but in the end, when you most need the care, it’s the people who love you who will spend your money to make sure you are well taken care of. Because to them you are more important than the money you leave behind.
Of course any safe withdrawal rate will leave money on the table. At age 65, your retirement could very easily last anywhere from 15 to 30 years, a factor of two. There’s just no way a fixed lump sum of money can take care of a factor of two difference in needs. That’s what annuitization is for. On the evidence presented, the 4% rule is OK for what it is. The most important sentence in the famous 1998 Cooley & al. study, “Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable,” is the one that is often forgotten: “The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning.”
I emailed Cooley himself recently and said “What the ’4% SWR’ means is not that you can treat a portfolio as if it were a guaranteed annuity. I think all the [Trinity] authors meant is that if it is late 2008 and your stocks halve in value, you don’t need to halve your spending instantly. It’s OK to cross your fingers and continue spending according to the 4%-then-COLAed plan, even though it means dipping into capital, and it’s OK to go on doing that for a while.” Cooley replied, “You have hit the nail on the head.”
How can anyone predict their future? I guess one just does the best they can. If you run out of $$ I guess you let the State you live in take care of you. We’ve all paid our fair share in taxes.
John Ameriks states that using this rule with a 30 year horizon you can “spend an amount equal to roughly 4% of their total retirement portfolio in the first year, and then adjust that withdrawal every year thereafter for inflation.” The key is adjusting the amount withdrawn every year. Therefore it seems to me that I would withdraw 4% the first year I’m retired (4% of total portfolio). At the beginning of the next year I take a look at the past year’s inflation and let’s say it was 7%. Let’s call the amount I took out in year one X. I then increase the amount I withdraw to 7% more than I took out the year before, or (1.07)X. Each year that inflation is positive I would be taking out more than the year before and in a deflationary year I would be taking out less than the year before. This is how I see it and I would be interested in finding out if I’m interpreting John’s statement correctly.
First, I would suggest that Vanguard number comments so that it is easier to refer to earlier comments.
Without that, it is too cumbersome for this note to refer to specific, prior notes. But, a couple prior notes suggested using an “annual 4% of current portfolio value” approach. This does have the disadvantage of being shocked by a sudden year-to-year decline in spendable income. How about modifying that such that you spend 4% of the three year moving average of portfolio value? Of course, the trade off is that you do not get to splurge if there is a year-to-year UPTICK in portfolio value. But, this “smoothing” effect appeals to me.
What do others think?
I recently wrote an article which examines the 4% rule in an international context with data from 17 countries. It can be found here:
http://ideas.repec.org/p/ngi/dpaper/10-12.html
Numerous studies about sustainable withdrawal rates from retirement savings have been published, but they are overwhelmingly based on the same underlying data for US asset returns since 1926. From an international perspective, the United States enjoyed a particularly favorable climate for asset returns in the twentieth century, and to the extent that the US may experience mean reversion in the current century, sustainable withdrawal rates may be overstated in many studies. This paper explores the issue of sustainable withdrawal rates using 109 years of financial market data for 17 developed market countries in an attempt to provide a broader perspective about sustainable withdrawal rates, as financial planners and their clients must consider whether they will be comfortable basing decisions using the impressive and perhaps anomalous numbers found in the past US data. From an international perspective, a 4 percent real withdrawal rate is surprisingly risky. Even with some overly optimistic assumptions, it would have only provided “safety” in 4 of the 17 countries. A fixed asset allocation split evenly between stocks and bonds would have failed in all 17 countries.
I don’t think there are any easy answers. One needs to be flexible and diversified. The best path is to have plenty of assets prior to retirement
It’s something to think about when or about to retire!
I think the 4% rule is a good start but if you or your wife has medical expences and not to mention nursing home care then I think even the 1% rule would not be good enough.
I think based on last 10 years, and current economy, you can not bet on 4%, and besides does it really feel like 4% after you pay taxes on it?
As individuals, we can only control what we spend and insure against those unpredictable risks such as long term care. Recent economic events have eliminated many “safe” sources of predictable income by the Federal Government keeping short term interest rates at or near 0% forcing many people in retirement to venture out into other, less familiar investment in their search for predictable income. I watch many of my parents’ friends reduce spending in fear of running out of assets too soon. There can be no “rule” without proper risk management which is an area that the current financial planning community is unprepared to provide in any objective fashion.
The Census data clearly supports that for each quintile of wealth in the US, absolute spending declines during each decade of retirement and net wealth increases. Amazingly, 90 year olds do not spend as much as 60 year olds…not very surprising. The canard of stratospheric health care costs that are uncompensated by either insurance or government programs is just not experienced in the real world by the vast majority of our millions of retirees. For the segment of retirees that retire with more than $2 million in investable assets, no debt and a house, some of these 4% guidelines are silly, this is especially true if that same retiree had a cash reserve for fixed expenses that covered 1-2 years. Cash would be used during severe market declines. Catastrophic last two years of life health care costs can be funded out of paid up assets like a mortgage-less home. Generalized inflation assumptions overstate impact on a healthy 70-90 year olds real basket of typical purchases.
My suggestion is you delay taking your Social Security benefits as late in life as possible. If you postpone filing, you will receive 8% per year in additional S.S benefits. For example: If your benefits are $1,000 per month when you’re 62, they would be 1,750 if you had waited until 70 to begin (Look at your S.S. statement and divide amount at 70 by amount at age 62.
What does this do? This alows you to withdraw 5% of your portfolio until age 70. At that time, refigure how much money you have and how much you need to live on. To continue this example, if at 70 you have $800,000 in investments and live on $48,000 a year, subtract $21,000(social security) and you would need $27,000 from your portfolio. 27K / $800K = 3.38%.
Advantages delaying S.S. allows you to spend more when you’re younger and delaying paying any income tax incurred on the benefit.
The graph only shows starting dates 1926-1979. What about starting dates from 1980 to 2010 which covers most current retirees? Not to mention starting in 2011 to 2031 when most of the current workers will retire. I suppose those results aren’t in yet. But 1926-1979 is a rather small sample of starting dates to draw a conclusion that minimum of the sample, 4%, is the minimum for all possible starting years.
So why should we think that the minimum, which was about 4% around 1966, will never be breached? That seems like a faulty conclusion.
While delaying Social Security is often viewed as a good strategy I don’t think many people actually consider the full impact. First, only those who don’t need SSA payments to live on can consider this alternative. Second, if you took the $1000 per month ($12k per year) and invested it at 4% compounded annually for 9 years (62-70) you would have almost $127,000. Third, at 70 you’d still be getting your original $1000/mth so you only need another $750/mth or $9000 per year to equal the higher SSA benefit. The $127k, still earning 4% could provide that $9000 for another 20 years. So your breakeven would be somewhere around age 90 and you wouldn’t even be ahead of the game until after that age. Why take the risk of dying early and not having those assets?
Can you explain with the current economy how a 50/50 stock and bond portfolio will support someone using 4 % annually.. If a couple has $500,000 invested in 50/50 ratio.
The first graph in this article is absolutely brilliant — very insightful. It puts risk and reward in perspective. From 1931 to 1961, risk (a higher stock percentage), in the subsequent 30 years of retirement, was well rewarded. After that time frame a 30 to 35% stock component looks like the more reasonable risk reward balance for conservative investors like me.
I understand why you had to stop the analysis at 1979 because 1979 plus 30 years of retirment equals 2009. However, I would like to see the first chart updated annually. It is simply, can I say it again, brilliant.
Finally, the addtion of a 100% bond line in the first chart, would give, in this reader’s opinion, a clearer picture of the risk/reward balance for various stock/bond allocations and give due consideration to the fact that, in their retirement years, fear outweighs greed for many investors and they tend to lower their stock allocations.