Retirement is supposed to be your chance to rest and relax after having worked hard for many years. Unfortunately, that peaceful retirement that many people dream about has become a lot more uncertain. Between the global pandemic, rising inflation, and market volatility, it can be difficult to determine exactly what your retirement nest egg will look like in 20 or 30 years. One of the biggest concerns we hear from our clients is not knowing how much they can safely withdraw from their retirement assets without fearing they will eventually run out of money.
Traditionally, the 4% “safe withdrawal rate” has been used as a gold-standard guideline (rule) by many financial industry pundits. But recent events of the past few years have called into question how sustainable this rule of thumb really is. If you have questions about how to make your retirement assets last throughout your golden years, read on to learn more about the demise of the 4% rule.
What Is the 4% Rule?
The 4% rule is a theory about how much money you can safely withdraw from your retirement assets each year without running out of money. It became widely publicized after Bill Bengen’s research in 1994 which showed that withdrawing up to 4% of retirement assets, and then adjusting annually for inflation, could sustain the typical 30-year retirement with research going all the way back to 1926. (1)
Is It Outdated?
A quick Google search of the 4% rule will turn up article after article debating whether or not it is broken and outdated. Recent research conducted by Morningstar suggests that it is. Three analysts found that the historical variables that made Bill Bengen’s conclusion possible no longer apply in our current economic environment. (2) These factors include:
- Low Bond Yields. Yields on long-term bonds are historically low, at just 1.43% as I write this article, for a 10-year bond, (3) compared to the 15.68% rate in September 1981. (4) Coupled with rising inflation and the expectation that interest rates will also rise, many experts question how today’s bonds can sustain the traditional 4% retirement withdrawal rate.
- High Stock Valuations. Stock valuations have also been historically high and many experts don’t fully understand why. From the 1870s to the 1980s, the U.S. stock market traded at very predictable values. Since 1990, however, stock valuations have skyrocketed. (5) This has made it difficult to predict future returns (and safe withdrawal rates), since experts are unsure where the market as a whole is headed.
Since past performance can’t be used to predict future returns, it’s important not to rely too heavily on research that is solely based on historical market performance. Instead, we think it’s better to reduce your exposure by using risk-reduction strategies in your portfolio.
Ways to Protect Your Retirement Savings
If this article has you worried so far, don’t panic yet! There are things you can do to help buffer your portfolio from market uncertainty.
One option to consider is using properly structured cash value life insurance as a volatility buffer. Cash value life insurance policies can be guaranteed to grow and as a result, do not experience the same downside risk that affects other assets (i.e. stocks and bonds). (6) Additionally, a well-designed cash value life insurance policy can act as a type of supplemental emergency fund that can be used for retirement expenses during a market downturn. By pulling from the cash value instead of your traditional IRA, 401(k) and/or investment account, you’re able to keep yourself afloat without having to sell your investment assets at a loss and drawing your assets down even farther. This helps to protect your retirement nest egg from decreasing too quickly by providing a liquid source of cash to use when market volatility is high.
Another way to protect your retirement assets from market fluctuation is by including guaranteed sources of income in your retirement plan. These sources include:
- Social Security. Consider delaying your retirement until age 70 to secure the maximum Social Security benefit available, since this can be a guaranteed source of income that is not impacted by the state of the market.
- Pension Income. This is another potential source of guaranteed retirement funding for some that can be utilized as either a lump sum or a stream of lifetime payments – with or without rights of survivorship. A thorough analysis should be conducted before determining which option makes the most sense for your situation.
- Annuity Income. An annuity is a type of insurance product for which you pay a premium amount in exchange for a guaranteed stream of income to begin presently or in the future. Many annuities offer income payments guaranteed for your lifetime, which ensures that you will not outlive your retirement funds. Options are available for survivorship payments as well.
The more you can rely on guaranteed sources of income, the less you will have to rely on the ups and downs of the market. However, one has to bear in mind the impact of inflation over a long period of time. Guaranteed streams of income often will not increase with inflation, or certainly not at the same rate as inflation. Many accept this trade-off for the fact they cannot outlive the stream of payments, regardless of the age attained.
Partner With a Professional
Regardless of whether the 4% rule is dead, it’s important to make sure your retirement funds are properly protected from the risk of running out of money. At Suncrest Advisors, we can help you navigate retirement by providing a thorough analysis of your current plan. If you have questions or would like to learn more, we would love to hear from you! Set up a free and confidential consultation by calling us at 888-827-0146.
Boyce Lowery is a 40-year veteran and established expert in the insurance industry. As the managing partner of Suncrest Advisors, he, his partner, and their associates all aim to provide financial security and peace of mind to business owners, executives and professionals, and high net-worth individuals across the United States. Along with more than four decades of experience, Boyce is a Chartered Life Underwriter® (the premier designation for insurance professionals signifying specialized knowledge in life insurance and estate planning) and a Chartered Financial Consultant® (known as the advanced financial planning designation). To learn more, visit https://suncrestadvisors.com/ or connect with Boyce on LinkedIn.
(3) https://www.cnbc.com/bonds/. Accessed 12/8/2021