- It doesn’t coordinate well with other fixed-dollar sources of retirement income such as pension income, immediate income annuities or deferred income annuities.
- It doesn’t anticipate a specific bequest motive.
- There is no spending flexibility from year to year.
- There is no adjustment process for actual experience, spending deviations or changes in assumptions about the future.
- After the initial year, it is not based on how much assets you have or on how long you expect to live.
- It is a “set and forget” strategy that requires the retiree to have faith that it will work in the future based on analysis of historical returns that may have absolutely nothing to do with future returns.
- It doesn’t accommodate a retiree’s desire to have different spending pattern objectives for different components of the retiree’s overall spending budget.
- It requires the retiree to invest at least 50% of accumulated assets in equities, irrespective of the retiree’s risk preferences.
Thus, rather than looking at the current economic environment, Mr. Kitces looks into his rear-view mirror and encourages a new retiree to invest at least 60% of her portfolio in equities and withdraw 4% of her assets in her initial year of retirement with inflation increases each year thereafter. She can blissfully ignore actual investment experience. If her assets become too high in the future, she can increase her spending, apparently without much concern for having to reduce spending later on.
I have no problem with dynamic spending strategies (ones that can go up or down). I advocate a dynamic strategy. If you are not going to insure a significant portion of your wealth through lifetime annuity products, and you invest in risky assets, I believe you are going to have to live with a certain amount of variability in spending. But I don’t think in today’s current economic environment, you can withdraw something like 4% of your initial accumulated savings (with subsequent inflation increases) over a 30-year period and realistically expect to never have to decrease your spending. Retirees should be very cautious about using the 4% Rule with Mr. Kitces’ ratcheting modification. The research by Blanchett, Finke and Pfau noted above showed a less than 60% success rate (i.e., a greater than 40% failure rate) over a 30-year period for the 4% Rule based on their forward looking model and 60% investment in equities, and that is before application of any “ratcheting” increases advocated by Mr. Kitces.