Is 3% the New 4%?
The news on retiree withdrawal rates is better than it seems.
There's been much discussion about the rule of thumb that retirees can safely spend 4% of their initial assets each year during retirement, adjusted for inflation. That is, somebody who retires with a $500,000 nest egg can withdraw $20,000 in year one, $20,000 adjusted for year one's inflation rate in year two, and so forth. The 4% rule has been in force since the early 1990s, when a rocket engineer (and financial planner) named Bill Bengen published an article that popularized the notion. Recently, the rule has come under attack.
Earlier this year, both The New York Times and The Wall Street Journal pronounced the 4% rule to be on its deathbed. The problem is the combination of low bond yields and high stock valuations. With 10-year U.S. government bonds yielding less than 3%, there's no way to achieve a 4% payout without assuming either a large amount of credit risk or expecting equities to carry the weight. The former is not acceptable, and the latter is not credible. Consequently, some now argue that 3% is the new 4%.