The old 4% rule is what everyone uses to evaluate the success of one’s retirement plan. Ask anyone how much money they can take out of their portfolio and without hesitation it seems that person will say 4%.
Why? “Well… that’s what everyone says, right?”
Well, because everyone says it does that make it right for you? Everyone also said to eat low fats and high carbs, and look where that got us.
Now, this is not an indictment of Bill Begen’s 4% rule article that came out in the Journal for Financial Planning in 1994. Back then it made perfect sense.
But it’s now 25 years later. Think a change should be considered? After all, are people living longer or shorter than they were in 1994?
What are bond rates now, compared to 1994 and the previous history of the markets in which Bengen based his rule?
What were stocks doing in the years up to the point Bengen did his study? Can we assume the same rates of returns going forward?
I’d be hard-pressed to encourage any of my clients to use ANY model based on past numbers that simply are not achievable today.
10 year Treasury is half of what it historically is.
No one, and I mean, NO ONE, would argue stocks are undervalued relative to historical numbers.
Finally, people are living longer, in case you hadn’t heard.
Thus, if you’re banking on the 4% rule to dictate your retirement success, I highly suggest you think again.
Joe Tomlinson did the grunt work for us in the article I reference in this video. And what you’ll see should shock you out of any complacency you had.
What worked before, won’t work now.
You’ve been warned. Prepare accordingly.