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By Christine Benz | 10-18-2012 02:00 PM

Is the 4% Withdrawal Rule Still Viable?

The well-known retirement rule of thumb is still a reasonable starting point, but investors will want to customize their strategy based on investment expenses, their time horizon and allocation, market performance, and more, says Vanguard's Maria Bruno.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Setting a sustainable withdrawal rate is a key factor in success during retirement. I recently sat down with Maria Bruno, a senior investment analyst at Vanguard, to discuss her research on withdrawal rates.

Maria, thank you so much for being here.

Maria Bruno: Thank you, Christine.

Benz: You work a lot on retirement-related research. You recently did a piece where you examined the 4% rule for retirement portfolio withdrawals. Let's start out by talking about what that means exactly, and what assumptions underpinned that 4% rule research?

Bruno: The 4% spending rule really is … I say, it's a rule of thumb, because it's really a guideline for someone who is entering retirement, [with respect to] how much they could spend from the portfolio, while still balancing a good expectation of not outliving the assets during their lifetime. So it's meant as a starting point for someone at that stage, and it does assume that you have a balanced portfolio. So, we look at that in terms of how much can one spend without potentially depleting their portfolio over their planning horizon.

Benz: I think sometimes people get confused. When they hear 4%, they think they will withdraw 4% every year. In reality the research that underpins the 4% rule actually means, you look at 4% of your portfolio on Day 1 of retirement, and then you inflation adjust that every year, correct?

Bruno: Yes, primarily. There are different methods, of course, but the body of work around the 4% spending rule of thumb typically is a dollar amount grown by inflation. So, it does look at the portfolio balance when you start spending, and then it adjusts that withdrawal amount every year for inflation.

Benz: So, you revisited the viability of that strategy. We're in a very low-yield environment. In the past, the retiree may have been able to get that whole 4% from taking income from their bond and stock portfolios. Now a total return approach for most people is probably more realistic. But you found that in general, that 4% rule still holds up as a decent starting point.

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