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Reconsidering the '4% Rule' for Retirement Withdrawals


The "4% Rule" allowed financial professionals to make financial planning easier for individuals to understand and have a plan to follow during their retirement. However, in the financial scheme of things, 1994 was a very different time and place compared to the current financial realities of 2014.

Retirement Savings

Recently, news organizations revisited an article William Bengen published 20 years ago. “Determining Withdrawal Rates Using Historical Data,” presented in October 1994, was used to introduce the concept of a 4% yearly withdrawal from financial portfolios that would allow an individual to safely maintain their portfolio assets through retirement. In conjunction with appropriate diversification, and factoring in an expected rate of inflation and rate of portfolio return, most financial advisors used this as a model when consulting with and advising clients.

The concept allowed financial professionals to make financial planning easier for individuals to understand and have a plan to follow during their retirement. However, in the financial scheme of things, 1994 was a very different time and place compared to the current financial realities of 2014.

As research continued on the topic of retirement withdrawal, other considerations were proposed. One concept which developed indicated expenses and not income were the primary factors to explore in determining retirement savings and spending needs. A few years prior to retirement, expense tracking is necessary to obtain a realistic overview of dollar outflows and what this means in postretirement.

Pundits and advisors continue to report and give opinions regarding the plight of retirees and their lack of adequate savings prior to retirement. However, according to the United States Personal Savings Rate 1959-2014, “Personal Savings in the United States increased to 5.60 percent in September of 2014 from 5.40 percent in August of 2014. Personal Savings in the United States averaged 6.81 Percent from 1959 until 2014, reaching an all-time high of 14.60 Percent in May of 1975 and a record low of 0.80 Percent in April of 2005.” Interestingly, Americans are only on track to replace 61% of pre-retirement income in retirement (including Social Security benefits). A replacement rate of at least 70-80% is typically recommended for a comfortable retirement (PlanSponsor.com April 23, 2014). Additionally, according to Consumer Federation of America, in 2014, approximately one-third of the US populace are living within their means and are confident they are prepared for their anticipated financial needs in and for the long term.

A thought-provoking contrarian opinion was proposed by Sylvester J. Schieber, PhD. Schieber stated that economists and actuaries use models formulating scenarios and anticipated outcomes in designing retirement plans based on income earned and associated savings, allowing for an anticipated preretirement standard of living. Schieber has postulated over the years and throughout his numerous articles that these methods are inadequate in deriving a realistic approach to determining retirement needs. Income, although important, is not an accurate indicator as to what percentage will be needed at retirement.

The savings of Americans has been woefully inadequate to use as a measure of needed available capital to access during their retirement years. Debt load can hamper the availability of disposable income and should be reduced prior to retirement. The largest debt individuals are likely incurring is mortgage and other credit debt. Some current expenses may cease to exist with retirement, if planned correctly. The retiring of pre-retirement expenses may include, but is not limited to: educational funding, child care, work and family leisure travel, meals, etc. However, the retirement years will bring with them increased expenditures related to implementing stayed-off goals, healthcare and medical services costs, travel, inflation, interest rate and repurchase risk, and other retirement-related expenses, such as a second home, charitable giving, etc.

A rule of thumb approach used by some financial planners assumes a percentage of current income to approximate how much will be required in retirement years to maintain a similar standard of living. According to Schieber, “… rules of thumb in regard to target saving and replacement rates can be very misleading” (35). Financial planners inherently use assumptions in formulating the savings necessary for a client to reach their goal and use current earnings and savings to determine retirement needs. However, the importance of considering expenses should not be dismissed and ultimately may be the best indicator for post-retirement asset availability.

Therefore, a more comprehensive analysis is needed versus the rule of thumb approach. Expense analysis is necessary to illustrate the level of savings and asset accumulation needed in the pre-retirement years with the anticipated carry-forward into the post retirement period. These costs and the other examples cited are an important determining factor in developing a plan to meet the needs in both pre- and post-retirement. The 4% Rule may still work for some, but not all. Determining what will work best for you will always be important, as we are all unique individuals and our needs differ.

Consulting with a knowledgeable fiduciary financial advisor, i.e., Certified Financial Planner professional, sooner rather than later would seem to be a heuristic method and proactive action. The importance of mapping out a plan based upon your goals and capabilities in saving, investing, and striking a balance with family, work, and leisure remains paramount. There are many things to think about to ensure a smooth transition when you’re ready to retire may include: insurance policies (long-term care, life, disability, etc.), correct allocation and diversification of your portfolio, thinking about an exit strategy from your business related activities, retirement funding (IRA, Roth products, 401(K), pension plans, etc.), maximizing Social Security timing and related benefits and more!

Time can be your friend and nemesis. It all depends on how you approach the opportunities and challenges — both pre- and post-retirement. The choice is yours!

About the AuthorH. William Wolfson, DC, FICC, MS, MPAS is a financial consultant, advisor and candidate for CFP® certification. He is a member of the Financial Planning Association of Long Island, the New York State delegate to the American Chiropractic Association (ACA), and a member of the New York and Florida chiropractic associations. He retired after 27 years of chiropractic practice and can be contacted at drhwwolfson@gmail.com and his published articles viewed at https://www.linkedin.com/pub/h-william-bill-wolfson/14/a55/226.

ReferencesSchieber, Sylvester J. “Retirement Income Adequacy: Good News or Bad?” Benefits Quarterly 20.4 (2004): 27-39.

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