Forewarned is forarmed: save more, withdraw less

Most retirement and financial planners assume you can withdraw 4% of your nest egg per year and not have to worry about running out of money before you “shuffle off this mortal coil.”  

This 4% withdrawal rate is based on a multi-year analysis of PAST returns.  But, the future will not look like that past.  

Bonds’ historic return of over 5% will not recur when 10 year rates are 2%, 30 year rates are 3%, and future inflation will likely be higher than today’s 2% (when inflation rises, bond rates rise, and that means bond prices fall–leading to returns likely worse than 2-3%).

Stocks are not selling at price to earnings multiples of 15 times or less, so equity returns will not resemble the 10% many have come to expect.  My expectation is for -3% to 9% returns from equities over the next 6 years.  

No matter what combination you use of 2 to 3% from bonds and -3% to 9% from stocks, it will not add up the numbers used to derive the 4% withdrawal rate. 

So, what rate should you use for the future?

In my 2nd quarter client letter, I argued for the rule of 30, which implies a 3.33% withdrawal rate and 30 times your annual spending in savings.

Recent research from Morningstar and an article on Marketwatch argue that I may be too optimistic, that a 2.8% rate is a smarter aim-point (to have a 90% chance of not running out of money).

Regardless of how you want to look at it, the reality is that people need to save more to reach retirement and should plan to withdraw less when they get there.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Forewarned is forarmed: save more, withdraw less

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