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Home / Investment / Should Retirees Say Goodbye To The Four Percent Rule?


Retirement-4-Percent-RuleFor several years financial experts have been expounding on the 4 percent retirement fund spending rule. The theory being that you could take that amount plus the rate of inflation out of your accounts each year and your funds should be able to last throughout your lifetime. This theory was first developed in the 1990s by financial planner William Bengen, then later refined by the elite among retirement planning experts.

That theory was based on an in-depth study of stock market trends going back to 1926. Within the theory, you could allocate your assets with 60 percent in large company stocks and 40 percent in intermediate term bonds. When your funds were allocated in this way, you could then withdraw 4 percent the first year, then 4 percent plus the rate of inflation each year after and your funds would last your lifetime.

Events over the last few years have begun to cast a shadow of doubt on the theory. These events, which have included a sustained rout on the market, have caused financial planners around the world to begin considering alternatives. Here are a few ideas that may help you stretch your retirement funds over your post-work life.

Annuities Over Bonds

One theory holds that you can replace the bond aspect of your fund allocation with a simple form of  annuity called a single-premium immediate annuity. These products currently return at a rate that offers cash more safely and reliably than bonds or bond funds. The catch? Investors lose instant access to their cash. So, if you have a need for a large chunk of cash for long-term care or other emergency, you cannot immediately access the invested cash. In response to that shortcoming some planners believe that using variable annuities with guaranteed income benefits is more responsible.

Use The Tax Man?

Some advisers are advising clients to follow the IRS’s life expectancy tables as a guide for their retirement spending plans. The tables are used to establish minimum requirements for withdrawals from individual retirement accounts. These guidelines can be found in Appendix C of IRS publication 590. You can find this publication on According to this way of thinking you can divide your total retirement savings by the listed life expectancy to arrive at the amount that you can safely withdraw each year. Let’s say that you had a balance of $400,000 and retired at age 65. According to the IRS, your life expectancy would be 20.5 years. So, $400,000 divided by 20.5 allows you to withdraw around $19,500 your first year of retirement. Each subsequent year would vary based on the rate of return you had during the previous year and a lowering the life expectancy number by one.

Stock Prices Rule

One theory requires quite a bit of of stock market knowledge. It holds that if stocks are over-valued when you retire, your funds will bring lower rates in coming years. If they are under-valued at retirement, the opposite will hold true. You or your financial adviser would have to determine safe withdrawal rates based on the P/E 10 for Standard & Poor’s 500 stock index. Basically, if the S&P index is over 20 (overvalued), you should withdraw 4.5 percent the first year. After that you can take the 4.5 percent plus the previous year’s rate of inflation out of your accounts. Fair value for the market would place the P/E 10 at 12-20, so you can withdraw 5 percent the first year, adding the rate of inflation for subsequent years. If the index is below 12(under-valued), you can withdraw 5.5 percent, adding the rate of inflation each year thereafter. You can easily track the P/E 10 at

As a final thought, please remember that these are simply theories based on short term research. Each year the stock market surprises many of the experts. Your financial planner should be consulted before you commit to any type of spending plan. If you do not have one, please consider using the tools that your retirement plan has available to you before making any withdrawals.


About the author: Jerry Coffey


Jerry Coffey spent many years in a debt-riddled gray area somewhere between broke and desperately broke. His seemingly endless need for more and more cash led him to payday loans, repossessions, bankruptcy, and depression. After years of the same financial style, he heard a piece of advice that inspired him to find a way to change. The advice: ''The very definition of a fool is someone who continues to do the same things, but expects different results.'' This led him to a much more frugal lifestyle that sees all of his bills paid on time and a growing savings account. Even the seed of a retirement account has begun to sprout.


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