Is The 4% Rule Obsolete? Was It Always Fatally Flawed?

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Rethinking Retirement: Sustainable Withdrawal Rates for New Retirees in 2015 finds that a “safe” withdrawal rate for today’s retirees may be considerably lower than 4%. According to the WealthVest Marketing white paper, which was released today, the 4% rule was created for research purposes and formulated using overly simplified assumptions that do not reflect today's reality.

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“A retiree starting retirement as of 1/1/15, would have over a 50% probability that they would outlive their savings if they pursued a traditional 4% withdrawal rate strategy from their savings,” said Wade Dokken.

Rethinking Retirement: Sustainable Withdrawal Rates for New Retirees in 2015 finds that a “safe” withdrawal rate for today’s retirees may be considerably lower than 4%. According to the WealthVest white paper, which was released today, the 4% rule was created for research purposes and formulated using overly simplified assumptions that do not reflect today's reality.

“A retiree starting retirement as of 1/1/15, would have over a 50% probability that they would outlive their savings if they pursued a traditional 4% withdrawal rate strategy from their savings,” said Wade Dokken.

"WealthVest has a deep interest in the myriad issues of the current retirement crisis," said Wade Dokken, Co-President and Founder of WealthVest. "Prior to this ground-breaking study, no major research paper combined fund management fees, financial advisor fees, and the current market valuation risks to forecast a safe withdrawal rate for investors as of 1/1/15,” said Dokken. "Our research indicates that a safe withdrawal rate for a current retiree, using a standard 60/40 stock bond portfolio, is well under 2% per year, allowing for growth for inflation. This is less than half of the traditional 4% rule," finished Dokken.

These new findings are published in the September issue of FA Magazine which is printed on September 1st, 2015. Click here to view a copy of the article published in FA Magazine.

Author Wade Pfau, Ph.D., Chartered Financial Analyst®, explained that sequence of return risk—the chance of earning negative returns early in retirement—along with increasing longevity, investment fees, and current market circumstances (including low bond yields and relatively high stock market valuations) make a 4% withdrawal rate more risky than many financial professionals realize.

“It is a fallacy to conclude that just because the 4% rule worked in the U.S. historical data, it can be expected to continue to work just as well for today’s retirees,” said Pfau. “Retirees are vulnerable to sequence of returns risk once they begin taking income from investment portfolios. If early investment returns are poor, a sustainable withdrawal rate may be significantly lower than the rate implied by average portfolio returns over an entire retirement period.”

Evan Simonoff, editor of Financial Advisor Magazine and publisher of the Pfau/Dokken research, stated, “This meticulously researched white paper by Dr. Pfau and Mr. Dokken spotlights a phenomenon that many have suspected and few have proven. The mass affluent in America led a charmed existence in the second half of the 20th century that was replicated in only a few other nations. As the world becomes more interconnected, correlations among financial assets in different nations are already becoming more closely correlated. Should this trend continue, financial advisors would be wise to examine the experiences of retirees in other developed nations and consider them when devising retirement projections for their clients.”

Rethinking Retirement explores the probability of success (or failure) for various withdrawal rates in diverse retirement circumstances and offers valuable insights about sustainable rates for new retirees. You can get a copy of the paper here: http://www.fa-mag.com/rethinking-retirement-wealthvest-0815.

Wade D. Pfau
Wade D. Pfau, Ph.D. and CFA, is a Professor of Retirement Income at The American College for Financial Services in Bryn Mawr, PA. He serves as the Director of Retirement Research for McLean Asset Management and inStream Solutions.

Named to the “Power 20” men and women who are shaping the financial advisory industry, by InvestmentNews in 2013, as well as its “40 Under 40” list in 2014, Pfau has become a well-respected leader in the financial industry. He was on the Investment Advisor 25 list for 2014 and received Financial Planning Magazine’s Influencer Award. Pfau is a two-time winner of the Journal of Financial Planning Montgomery-Warschauer Editor’s Award, a two-time winner of the Academic Thought Leadership Award from the Retirement Income Industry Association, and a best paper award winner in the Retirement category from the Academy of Financial Services.

Pfau is host of the Retirement Researcher website, a monthly columnist for Advisor Perspectives, a RetireMentor for MarketWatch, a contributor to Forbes, and an expert panelist for the Wall Street Journal. His research has been discussed in print editions of The Economist, The New York Times, Wall Street Journal, and Money Magazine.

Wade Dokken
Wade Dokken is Co-Founder and Co-President of WealthVest Marketing, alongside his partner, Lincoln Collins. WealthVest designs, markets, and distributes private pension solutions focused on high consumer value. Wade was among the founding U.S. executives and served as National Sales Manager, Chief Marketing Officer, and CEO of American Skandia, a $43 billion variable annuity company. Dokken oversaw the sale of American Skandia by Goldman Sachs to Prudential Insurance in 2003. Dokken is also the author of “New Century, New Deal,” a public policy analysis of the challenges facing Social Security in the coming decades. Dokken’s career started at PaineWebber in 1984.

Evan Simonoff
Evan Simonoff is editor-in-chief and editorial director of Financial Advisor magazine, which he co-founded in 2000. Prior to launching Financial Advisor, he served as editor-in-chief of Financial Planning from 1990 to 2000. A widely recognized expert on personal finance and investments, his articles have appeared in Fortune, Business Week and The New York Times. Before covering investments and personal finance, he edited a newsletter on mergers and acquisitions for investment bankers and institutional investors. Simonoff received a bachelor's degree from Boston University and a master's degree from Columbia University.

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