You’ve likely heard of the 4% rule. William Bengen came up with it as he tried to answer the two most common questions his clients asked him.
Those questions were:
- How much should I save for retirement?
- How much can I spend in retirement without running out of money?
He could give no clear answers for either question, so he analyzed retirement for each year from 1926 to 1976. And his conclusion was 4% would mostly be a safe withdrawal rate. It isn’t guaranteed; it was a good ‘rule of thumb’ for retirees to use.
Problems with the 4% rule
The illusion of liquidity: If you need $50,000 from your investments per year, a 4% withdrawal means you need to save $1,250.000 to generate the income. But you don’t actually have $1,250,000 to spend. Those funds are required to drive the income each year.
The dollars are, in effect, hostage to the need to generate income.
History, not prophecy: Another weakness is the 4% rule is historical. Just because it worked before doesn’t guarantee it will continue to work. Dr. Wade Pfau tested the 4% rule in other countries and found it didn’t always work.
In the US, we had a good stock market and interest rates that allowed it to work. Interest rates are now at historic lows and the stock market at historic highs. If returns do not stay strong, retirees will have a difficult time.
The freedom to spend and enjoy:
Here is where it’s critical to use the right tool for the job. Stocks, mutual funds, 401k’s, etc., can be good accumulation tools. But they are not designed to be distribution tools.
Income annuities are designed to be good distribution tools. It often takes less money to achieve the desired income. They are not based on history; they are based on contractual guarantees. They provide a guaranteed income stream you cannot outlive, not one based on hope.
By covering your basic needs with guaranteed income, you actually create the freedom to spend and enjoy your other funds. Cover your essential income needs with guaranteed income, eliminate stress, and worry about running out of money. After you’ve done that, go plan that vacation you’ve always wanted and enjoy your retirement. You’ve earned it.