Why the 4% rule doesn’t work anymore

#86: Pretty much everyone in the FIRE community has heard of the 4% rule.

It is the starting safe withdrawal rate number for a 30-year retirement horizon that was proposed a few decades ago by retirement researchers.

And it has attained near pop culture status in the FIRE community because it’s such a simple mental shortcut to answer the question: “how much can I safely withdraw from my portfolio each year in retirement and have high confidence that I’ll be financially secure for the rest of my life?”

This is easily the most important question for ANY retiree, and especially early retirees. So, it’s no wonder this topic is so intensely discussed in the FIRE community.

More than a few early retirees and FIRE bloggers swear by the 4% rule and have plunged into their own retirement using this withdrawal rate expecting that it will carry them through for the rest of their lives.

But when you ask the quants – the economists with the PhDs – there is broad agreement that the 4% rule no longer works most of the time.

But why not?

This week, I invited the renowned retirement economist Wade Pfau, PhD/CFA, who is Co-Director of the American College Center for Retirement Income, to share insight on why the 4% rule no longer works in today’s environment. He suggests an alternate safe withdrawal rate number that may be better suited for today’s retirees.

We discuss:

• Why Dr. Pfau thinks the 4% rule is flawed today + how the world has changed since the 4% rule was first proposed
• Pfau’s recommended safe withdrawal rate number for the current environment (including assumed asset allocation)
• How Pfau thinks safe withdrawal rate planning will differ for early retirees
• Pfau’s thoughts on asset allocation in the current environment of rising interest rates, high inflation, and high asset valuations
• What Pfau personally projects as his assumed real rate of return on stocks for his own portfolio
• How annuities can play a crucial role in your retirement portfolio depending on your investor risk profile and desired stock allocation
• Pfau’s framework of 4 retirement styles + optimal asset allocation for each

Check it out here:

https://hackyourwealth.com/4-percent-rule

What do you think your safe withdrawal rate number is? And what asset allocation do you assume for that? Let me know by leaving a comment.

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Links mentioned in this episode:

• Wade Pfau
• Retirement Planning Guidebook
• Safety-First Retirement Planning: An Integrated Approach for a Worry-Free Retirement
• How Much Can I Spend in Retirement?
• Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement
• Schedule a 1:1 consultation with me
• HYW private Facebook community

 Intro/Outro: Old Bossa by Twin Musicom.