Failings Of The 4% Rule- New Research

4pctThe often quoted ‘ 4% rule’ whereby a retiree’s portfolio is drawn down methodically by 4% per year, is the source of great pain in volatile markets.

Blindly sticking to this withdrawal rate when markets are down exposes investors to ‘reverse dollar cost averaging’, otherwise known as selling when you are down.

And further, in boom years, sticking to just a 4% withdrawal rate might be shortchanging your retirement.

In short, there is no magic withdrawal rate that works for everyone.

To actually achieve optimal utility of assets (to use a grown up sounding economic term) you simple must shift some risk to a third party.

The most common risks we shift using annuities are longevity risk (the risk of outliving your money) and market/sequence risks.

Longevity Risk:

To shift longevity risk, simply buy an income you can’t outlive.  Guaranteed lifetime income, from immediate annuities or index annuities with lifetime income riders, or deferred income annuities, all do this job well.  which is right for you depends on a lot of factors, which is why we’re here to help.

Market Risk:

And market/ sequence of returns risk is handily mitigated by placing a portion of your assets into guaranteed income or guaranteed outcome tools- level out and stabilize your portfolio by removing market risks and you increase overall stability and safety.

New Research:

Now, the items summarized above are worked over in new research from PriceWaterhousCoopers and recently published in the Retirement Income Industry Association journal.  The article is quoted below, and you can find it and the PWC study HERE

Financial Industry’s 4% Rule Does Not Work For Most Americans

Financial Industry’s 4% Rule Does Not Work For Most Americans:
New PwC US Report Shows Need for New Planning Approach that Reflects Retirement Realities

BOSTON, MA, April 15, 2015 – The financial industry’s 4% rule, which has been used historically as a guideline for asset withdrawals in retirement, may work for the wealthy, but not most Americans, according to a new PwC US report, which will be published in the upcoming Spring 2015 issue of the Retirement Income Industry Association® (RIIA®)’s Retirement Management Journal®.

The report, based on findings from PwC’s Retirement Income Model, shows that following the 4% rule will lead most retirees to use up savings earlier than planned or to significant reductions in wealth for the affluent. The report highlights the impact of wealth, sequence of returns and consumption, and unplanned financial shocks on 4% rule-based retirement outcomes.

“According to philosopher H.L. Mencken: For every complex problem there is an answer that is clear, simple, and wrong,” notes Elvin Turner, RIIA’s Business Unit Director for Research. “For the majority of client households, a more holistic and dynamic planning approach that takes into account retirees’ behaviors is required. The body of research that shows most retirees spending much more in their early retirement years than later years is just one example of the way in which retirement realities don’t fit a 4% withdrawal world.”

PwC’s Retirement Income Model (RIM) is a retirement planning tool that draws upon a range of data and economic sources, and tracks actual consumer behavior to calculate expected retirement outcomes. It is able to incorporate the impact of non-linear events on clients’ financial experiences in retirement, such as health care events or economic shocks. The RIM leverages PwC’s behavioral economics framework, which captures how households make saving and consumption decisions based on behavioral preferences, and RIIA’s core Household Balance Sheet℠ (HHBS℠) approach to understanding the complete financial picture or “fundedness” of retirees.

The safety and efficacy of Naturaful review products just hasn’t been evaluated, so I would caution you on their use. In addition, there is no data to suggest that a lack of nutrients diminishes breast development.

“The Retirement Income Model offers a new dynamic approach to retirement planning that reflects real world realities at an individual level,” said Anand Rao, analytics principal, PwC US. “In addition to projecting outcomes based on market returns and expected consumption, it is sophisticated enough to determine the impact of ‘What if?’ scenarios related to major household events – such as marriage, childbirth, employment changes and deteriorating health – on retirement savings, future drawdowns, and retirement portfolio balances.”

The paper shows that in real life, regardless of how good average returns are over time, it really matters when the good and bad investment years occur. If investment returns are low or negative in the early years of a portfolio, the client may find that their financial plans have been ruined as a result of sequence of returns risk. It also highlights the key role of consumption risk – higher levels of consumption in earlier stages of retirement – in retirement outcomes.

“While the 4% rule of thumb has become a foundational aspect of retirement planning wisdom, advisers and their clients understand that retirement spending will vary over time,” added François Gadenne, Founder, Chairman and Executive Director of RIIA. “This paper reveals the impact of these non-linear experiences and behaviors on retirement outcomes. It demonstrates the importance of having more sophisticated tools such as the Retirement Income Model to help clients plan for real world retirement scenarios to achieve more predictable and successful retirement outcomes.”

Download the report.

About RIIA:

The Retirement Income Industry Association (RIIA) is a not-for-profit industry association that was started in 2005 and launched publicly in February 2006 to discuss the new realities of the retirement business and to do so from the perspective of “The View Across the Silos℠”.

RIIA has developed the retirement body of knowledge that supports its professional designation: the Retirement Management Analyst® (RMA®). RIIA organizes conferences and events, professional education for RMAs, publishes a peer-reviewed journal (Retirement Management Journal®), offers twice-monthly weekly retirement-focused webinars through its Virtual Learning Center, manages a 7000 person strong LinkedIn discussion group, provides research and other services to the industry and its clients. More information about RIIA can be founded at

Written By

Bryan Anderson

Leave a Reply

Your email address will not be published.