In David Ning's October 23, 2003 blog titled, The 4 Percent Safe Withdrawal Rule Declines to 3 Percent,Mr. Ning says that most investors will "do fine by sticking with a flexible version of the original 4 percent retirement rule." His proposed modification to the 4 percent rule to make it "flexible" is to "pause the inflation adjustment when markets decline." Of course, he doesn't say how long the pause will be required. It is now about 5 years since the stock market crash of 2008. Is it now ok, under Mr. Ning's proposed modification to recommence inflation adjustments?
As I have said many times in this blog, the 4% Rule is far from an optimal
decumulation strategy. And making unspecified modifications to it to
address some of its flaws does not make it appreciably better. Rather than
rely on set and forget strategy that is supposed to be "safe" with respect
to the risk of outliving one's assets (but may result in
significant underspending), you need to periodically crunch your numbers
based on your situation. The spreadsheets and actuarial process set
forth in this website make this task relatively easy.
Let's look at three different retirees, each with $500,000 of accumulated
retirement assets. Based on the spending spreadsheet in this website and
the recommended assumptions discussed in my previous posts, I will show you
that if you desire constant inflation adjusted spending in retirement, there
is no x% withdrawal rate that will work for all situations.
Robert retires at age 65, has no bequest motive and no other sources of
retirement income (other than Social Security). Using the Excluding Social
Security 2.0 spreadsheet and the recommended assumptions discussed in my
previous post, Robert can withdraw $21,725, or 4.3% of his accumulated
savings in his first year of retirement.
Ray retires at age 75. He has a deferred annuity starting at age 85 of
$35,000 per year and no bequest motive. Inputting his information into the
spreadsheet and the recommended assumptions shows that Ray can withdraw
$40,220, or 8.04% of his accumulated savings in his first year of
Richie retires at age 60. He has an immediate life annuity from his
company's pension plan of $20,000 per year and he wishes to leave $250,000
(in nominal dollars) to his heirs when he dies. The spreadsheet says that
he can withdraw $11,049, or 2.21% of his accumulated savings in his first
year of retirement.
So, while Robert might be ok using the 4% rule, Ray may be
significantly underspending and Richie may be
significantly overspending if they use it.