Over the weekend, I read an article on Vanguard.com warning against using the “4% Rule” for retirement planning.
This rule suggests that you can retire successfully for 30 years by living on 4% of your savings each year. (e.g. if you have $1 million in retirement investments, you could expect it to produce $40,000/year of spendable income).
The Vanguard perspective was negative toward this assumption for a variety of reasons.
- They didn’t project strong returns for the 60/40 stock/bond portfolio with their 10-year modeled projections.
- The original calculations did not include investment management fees which can eat into portfolio profitability.
- They felt the inflation-adjusted spending rate might be too rigid and aggressive.
- For those looking to retire early or live longer than a 30-year retirement horizon would allow, the plan was especially risky.
They suggested:
- Investing in a portfolio heavily weighted in international bonds (30% of all bonds) and equities (40% of all equities).
- Using a flexible draw-down strategy in which you spend less when the market is doing poorly.
The good news is that these figures did not account for fixed-benefit pension plans or social security, so you may end up doing better than you would if you were “just” living off savings.
Curious to hear how you are managing your retirement planning before and after retirement!
Are you ready for retirement?
Now I’m concerned I’m not as well-positioned as I thought I was.
