Withdraw This Much From Your Retirement Accounts Yearly?

[xray]

SmartAsset
JPMorgan Says You Can Safely Withdraw This Much From Your Retirement Accounts Yearly
Mike Obel
Sat, December 10, 2022, 9:00 AM

JPMorgan Chase says ongoing inflation and an outlook for sharply lower returns for investors means that retirees should toss the long-standing 4% rule. That’s the rule that says retirees can safely draw down their savings by 4% per year without having to worry that they’ll run out of funds before they die. Failure to toss this rule could mean having to cut back on your spending or even seeing your savings disappear. Instead the big bank advises drawing down no more than 2% or 3% of your nest egg each year. Consider working with a financial advisor as you plan for a worry-free retirement.

What Is the 4% Rule

The 4% rule was first articulated in 1994 by financial planner Bill Bengen. It calls for spending 4% of your retirement savings in the first year of your retirement and then adjusting that percentage each year for inflation. Doing that would have kept retirees from running out of money in every 30-year period since 1926, even when economic conditions were at their worst, according to Bengen.
 - For example, a retiree with $1 million in savings would withdraw $40,000 in the first year of his or her retirement. Because all subsequent withdrawals are adjusted for inflation, the same retiree would withdraw $41,200 in their second year of retirement if inflation was 3%.

Why It’s Time to Toss the 4% Rule

Earlier this year, however, Bengen said the 4% rule needs to be tossed. And the reasons for doing so are numerous. For one thing people are living longer. According to the Social Security Administration, the average man turning 65 today can expect to live until age 84.3. His female counterpart can expect to live, on average, until age 86.6. Research has suggested that millennials may live well into their 90s and beyond, so there’s even more pressure to make retirement savings stretch.
 - The 4% rule also doesn’t take into account individual savings rates. Millennials have the lowest participation rate when it comes to saving in an employer-sponsored plan and a recent report shows that 56% of them are less likely to save for retirement outside of work. That means that a significant number of young workers could come up short in retirement.
- JPMorgan also advises retiring the 4% rule because of prospects for lower returns and higher inflation – “that all economists now see on the horizon” – means the 4% rule could be a prescription for serious financial trouble. While the S&P 500 earned on average 10% over the last 10 years, the bank’s recently published long-term capital market assumptions forecast a 60/40 portfolio returning just 4.3%.
- As an example, the bank said there is a nearly 100% likelihood that a 60-year-old with a $30 million taxable portfolio would run out of money if she spent 4% of her portfolio (i.e. $1.2 million) for the next 30 years.

What to Do Instead

Given the degree of variability in retirees’ spending habits and investment results, JPMorgan offered six factors to weigh as you develop a withdrawal strategy that is tailor-made for you.

- Tax rates – What is your combined federal, state and local tax rate?
- Financial commitments – Do you aim to leave a legacy or benefit your descendants?
-Additional resources – Are you the owner of illiquid but unencumburded assets like real estate, trusts or an inheritance?
-Healthcare expenses – How would you estimate your ongoing medical needs?
- Life partners’ ages – A 65-year-old couple today faces a 72% probability that at least one will live to age 90 and a 44% chance that person will live to be 95 years old.
-Portfolio composition – How much do you have in taxable versus tax-deferred (i.e. traditional IRA) versus tax-free (i.e. Roth IRA) accounts? If you have a concentrated position, you might need to earmark more to account for that risk so as to avoid jeopardizing your lifestyle. Perhaps you have a lot of embedded gains and will need extra funds to pay taxes when those are eventually sold.

 Other analysts have also found alternatives to the 4% rule. A Morningstar study found that using an initial withdrawal rate of 3.3%, a retiree with a portfolio split equally between equities and bonds has a 90% probability of maintaining a positive account balance after 30 years. The heavier the portfolio’s equity position, the lower the initial withdrawal rate should be.

Bottom Line

Here's How Much JPMorgan Says You Can Pull From Your Retirement Accounts Yearly
The prospect of continued high inflation and sharply lower market returns of 5% or less means that the 4% withdrawal rule needs to be substituted for a rule that calls for withdrawing 2% to 3%. Be sure to weigh all the relevant factors as you come up with a withdrawal strategy that fits your risks and estimated needs.

Tips on Retirement

A financial advisor can help you find creative ways to enjoy your retirement without spending more than 2% or 3% of your nest egg each year. Finding a qualified financial advisor doesn’t have to be hard. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

If you don’t have access to a 401(k), consider opening an IRA or a Roth IRA as a way to save for retirement.

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Comment: Income oriented investors need to take note of the above and check their portfolio's (taxable & Non-Taxable) for a "RETURN of >5%". Some income investors use 10% (or greater) requirement for acquiring securities for their portfolio's in both up/down markets....

Live Long and Prosper....

[yogibearbull]

Bengen has moved beyond his rule that he mentioned years ago - 4% of initial COLA-adjusted over 30 years. In the current Barron's, Bengen is quoted as saying that retirees may withdraw 4.7% (i.e. higher, not lower than 4%) but should reassess if inflation remains high. He may be thinking that not all retirees have 30 years and he seems more flexible than many who are stuck on his old rule.

[Mustang]

Bengen increased the initial withdrawal percentage when he added small cap to the asset allocation. The 4% rule is based on the worst possible retirement period in history, the stagflation years 1966 to 1995. In his 1994 report he never called it the 4% Rule. He said that he considered 4% too low and 5% too high. I believe his actual calculation was 4.15% but I'm going off memory.

Two other studies have verified Bengen's results: the Trinity Study and Wade Pfau's 2018 update of the Trinity Study. People get the 4% Rule wrong all the time. It is for a portfolio that has between 50-75% stock. None of the three studies ever mentioned a 60/40 portfolio. Bengen used treasury bonds but investors typically earn more with corporate bonds. A 4% initial withdrawal is specifically for a 30-year payout period. The initial withdrawal can be increased to 5% for a 20-year payout and 6% for a 15-year payout.

A lot of writers have declared the 4% Rule dead but most are either selling annuities or comparing apples to oranges. They stretch the payout period to 35 years or they add taxes and advisor fees to the withdrawal. If taxes and advisor fees are added on top of the investor's 4% withdrawal then it isn't a 4% withdrawal. It's 5% or more and that was never expected to last 30 years.

A lot of analysts are using Monte Carlo simulations to disprove the 4% Rule. But some analysts question the accuracy Monte Carlo simulations. James Sandidge, a principal of Sandidge group, said, “Accumulating wealth is a linear process and predictable, but in the nonlinear world of retirement income, returns and standard deviations are not predictors of success and therefore are unreliable inputs for Monte Carlo analysis.” (“Should you use Monte Carlo Simulations to determine if your retirement portfolio will last”, Robert Powell, February 4, 2021). In the same article Michael Zwecher, author of Retirement Portfolios, is quoted as saying “It’s not so much the probabilities that make Monte Carlo analysis tricky to use, but the uncertainties — events unforeseeable with any useful probability — that require caution.”

Because of this many advisors using Monte Carlo simulations say it is foolish to chase probability of successes greater than 70%. Micheal Kitces suggested 50% was acceptable but rephrased the results to be more accurate. A 50% probability of success wasn’t a 50% probability of failure. It was a 50% probability that adjustments might be needed.

John Rekenthaler wrote (The “Math for Retirement Income Keeps Getting Worse: Revisiting the 4% Withdrawal Rule,” Morningstar, October 8, 2020) that in 2013 he thought everything was OK. He now thinks we are in changing times. He compared a 2013 retirement to a 2020 retirement. He said in 2013 the yield on treasury bonds was 3.6% and inflation was 2.3%. That made the real return 1.3%. In 2020 he said that yield was 1.4% and inflation was 1.7%. That made the real return negative. He showed that a portfolio of 100% treasury bonds might run out after 24 years.

That was not a surprise. Modern Portfolio Theory shows that 100% bonds has an unacceptable level of return/risk and all of the studies (Bengen, Trinity, Pfua) show that 100% bond portfolios have had unacceptably low historical success rates. Pfua’s update showed a 44% success rate.

Another Morningstar analyst (Amy Arnott, “Will the Real Retirement Income Number Please Stand Up,” Morningstar, March 3, 2021) using Monte Carlo simulations and a different set of assumptions found that the 4% Rule had an 86% probability of success. Not bad considering many think 70% is acceptable but she was looking for 90%.

Two other Morningstar analysts, Chistrine Benz and John Rickenthaler (“What’s a Safe Retirement Spending Rate for the Decades Ahead”, November 11, 2021), were also shooting for 90%. They included their assumptions in the report: equity returns 6-11%, fixed income returns 2.0-3.5%, inflation 2.1% and a 30-year payout period. Using those inputs they came up with a 3.3% initial withdrawal rate for a 30-year payout period.

The authors said the initial withdrawal rate for a 30-year payout could be increased from 3.3% to 3.9% by reducing the probability of success to 80%. (Arnott said a 4% withdrawal rate had an 86% probability of success.) They also said lower than inflation annual increases would increase the safe withdrawal rate. The Trinity study said that CPI overstates inflation by 1-1.5%. Kitces once wrote that good information has become available for retiree spending patterns. Retirees spend 1% less per year in their 60s, 2% per year less in their 70s and 1% per year less in their 80s (not including health care). For retirees who need the money to pay their bills lower inflation increases may be an option.

The problem with Monte Carlo simulations is that small changes to inputs can make large changes in outcomes.

In 2017 Michael Kitces wrote that the 4% rule was designed for the worst case scenario. Yet in a number of overwhelming scenarios returns were not bad enough to justify such a low initial withdrawal rate. Historically, the maximum initial safe withdrawal rate on a 60/40 portfolio falls between 4 and 10% with the average around 6.5%. For 1990-2017 period the maximum safe withdrawal rate was 7.5%.

The 4% Rules was never a start and forget withdrawal strategy. Even Bengen reviewed his clients portfolios yearly. Kitces made a comment recently during and interview that Bengen sometimes took his clients to 100% cash. The “4% Rule” was designed for the worst retirement period in history. Christine Benz even used it as an example in her video “Tune Up Your Portfolio in Uncertain Times” (Morningstar, Jan. 26, 2022). It is simple to use and is still a viable withdrawal strategy, especially when slight modifications are made.

[Chahta]

Mustang , I have never seen specific "stocks or funds" offered to apply the 4% guideline. Are there any requirements to make their calculations work? Index only or managed funds or dividend paying stocks to make it work? I did see they suggested adding SC to the mix.

[Mustang]

Dec 12, 2022 14:18:18 GMT Chahta said:

Mustang , I have never seen specific "stocks or funds" offered to apply the 4% guideline. Are there any requirements to make their calculations work? Index only or managed funds or dividend paying stocks to make it work? I did see they suggested adding SC to the mix.

In Bengen's original 1994 study he says "historical performance of portfolios consisting of 50-percent intermediate-term Treasury notes and 50-percent common stocks.   ("Determining Withdrawal Rates using Historical Data", By William P. Bengen)

The 1998 Trinity study says, "The Standard & Poor’s 500 index was used to represent stocks, and long-term, high-grade corporate bonds were used to represent bonds.  ("Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable", By Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz)

Wade Pfau wrote in his update "There was one important difference in the assumptions between William Bengen’s work and the Trinity study, which I think furthered some of the misunderstandings about the latter study. This difference regards the choice of bond indexes. While Mr. Bengen’s original research combined the S&P 500 index with intermediate-term government bond returns, the Trinity study used long-term high-grade corporate bond returns instead."  Pfau in his update used the slightly less volatile intermediate-term government bonds. ("Trinity Study and Portfolio Success Rates (Updated to 2018)", by Wade Pfau).

Note: I don't have links to those studies. I downloaded them and saved them on my hard drive.

The results of these studies were very similar regardless of bonds used.  They all showed that a stock allocation of 50-75% re-balanced every year was more successful than other asset allocations. They all showed a 4% initial withdrawal as 95-100% successful for a 30-year payout.

I think Mike Obel's article is a little misleading.  It says its time to toss the 4% Rule (Note: This is a 30-year payout period) But:

1. He talks about life expectancy.  At 65 the average man will live to 84.3, the average woman 86.6.  That is a 19 year payout for men and a 22 year payout for women.

2. He says that the 4% Rule doesn't consider savings rates.  I've never seen a single withdrawal method that did.

3. One of a 65-year old couple has a 72% probability of living to 90.  If they are the same age that a 25 year payout.  If one is 5 years younger then its a 30 year payout.

4. He talked about the Morningstar study that recommended an initial withdrawal of 3.3%.  That study has some odd results (probably because of inputs).

Here is a comparison to Pfau’s historical data findings reported earlier. Here are their assumptions again: equity returns 6-11%, fixed income returns 2.0-3.5%, inflation 2.1% and a 30-year payout period. The top number is for a portfolio that is 75% stock, the bottom 50% stock.

                       Initial Withdrawal Rate
 Payout Period               Monte Carlo        History
15-years                          6.0%/6.4%         6%/6%
20-years                          4.7%/4.9%         5%/5%
30-years                          3.2%/3.3%         4%/4%
40-years                          2.7%/2.8%         4%/3%

The results were very similar except for the 30-year payout.  This is what I found interesting.  Bonds had a 4-7% lower return than stocks but in every payout period the computer gave the portfolio with the biggest share of bonds a higher initial withdrawal rate.  They didn't mention the standard deviation used but I suspect volatility was one of the reasons why.  For computer simulations inputs make a big difference in the results.

Obel pointed out that portfolio heavier in bonds had a higher initial withdrawal but he never pointed out the inputs and asked why. It also goes against many other studies that showed the longer the payout period the heavier the proportion of stocks.  Bonds are horrible for long payout periods.  Here are some success rates from Wade Pfau's update. This table is for a 4% initial withdrawal.

Allocation         25 yr.       30 yr.      35 yr.       40 yr.
100% stock       99%         94%        91%        89%
75% stock       100%         98%        93%        92%
50% stock       100%        100%       97%        87%
25% stock       100%          87%       71%        45%
0% stock          79%          44%        28%        11%

[Mustang]

In 2020 Bengen increased the initial withdrawal to 4.5% his asset allocation was 30% US large Cap, 20% US small cap, and 50% intermediate term US government bonds. www.fa-mag.com/news/choosing-the-highest-safe-withdrawal-rate-at-retirement-58132.html?page=1

Michael Kitces compared Shillers CAPE ratio to the safe withdrawal rate (The Kitces Report, May 2008).

Shiller CAPE      Safe Withdrawal Rate
Above 20                   4.5%
12 to 20                     5.0%
Below 12                   5.5%

Bengen updated it to include inflation. This is the chart for inflation above 5.0%.

Shiller CAPE Safe Withdrawal Rate
6-8                       10.00%
8-10                      8.50%
10-12                    7.25%
12-14                    6.50%
14-16                    6.00%
16-18                    5.50%
18-20                    5.00%
above 20               4.50%

This research suggests the 4% Rule or 4.5% Rule is alive and well.  It was originally developed using the Stagflation years which included several years of double digit inflation.

[johntaylor]

Don't own this, but T Rowe's retirement income fund (TRLAX) says:

"The fund's managed payout program helps the fund to distribute a consistent amount of cash once per month throughout each calendar year. The payments are expected to produce an annual payout of approximately 5% of the fund's average net asset value over the trailing five years."

[uncleharley]

I wonder how long a healthy, 80 yr old is expected to live. 100 maybe???

[anitya]

Dec 26, 2022 15:50:02 GMT uncleharley said:

I wonder how long a healthy, 80 yr old is expected to live. 100 maybe???

Not specific to you, but

Not long enough that one should start living Now and effortlessly.  Too long not to take actions to improve one’s physical and mental well-being.  

It is funny that younger people are always looking into the future e.g., looking at 5yr5yr breakevens and 10 yr TIPS breakevens.  While both these have ranged between 1.5 and 2.5% over the past 10 yrs and then we get to 2021 and 2022 and see 8% inflation.

[Deleted]

Dec 26, 2022 15:50:02 GMT uncleharley said:

I wonder how long a healthy, 80 yr old is expected to live. 100 maybe???

According to nih.gov (Dr Fauci?) 7.0 more years av. life expec. in US for a 80 yr old white male and 9.1 for white female

[Fearchar]

steelpony10,uncleharley,

May we all be more than 2 standard deviations above normal!