The 4% rule and its failings

The 4% rule and its failings

There are plenty of articles about shortcomings of the 4% rule – which is still a great *starting point* if not a real plan. The WSJ brings up a few alternatives to help overcome the problems with the 4% rule:

http://online.wsj.com/article/SB10001424127887324162304578304491492559684.html?mod=googlenews_wsj

 

Some of the adjustments/alternatives discussed:

(1) using annuities (SPIAs) instead of bonds

(2) tie withdrawals to the life expectancy tables rather than a the traditional 4% rule’s inflation-adjusted 4% (of whatever your starting balance was) – using last year’s end-of-year balance every year.

(3) Kitces’ rule pegging withdrawals to market valuations (specifically, the PE10 of the S&P500)

 

Some really good food for thought here.  It seems most discussion of investing and portfolio construction is geared towards accumulation phase, not distribution phase.  The 4% rule caught on in a huge way because it was simple, understandable, and based on history, generally helpful.  The well known shortcomings – failure when there are early periods of poor returns, and having withdrawals entirely untied from performance of portfolios or valuation – are things that nobody’s truly come up with a perfect solution for.  It’s nice to see some discussion of this in the popular press.

In a similar vein, I’ve seen lots of articles about the “bucket method” but very few about the actual mechanics of *living* with the buckets – they describe how to set the buckets up in year one, but what do you do the next year and the year after – how do the buckets “evolve” and how do you modify it over the course of different potental performance? — living off a portfolio is just not that simple, and if it doesn’t work out, it’s not the same as deciding to work a few extra years, since it won’t be clear that it’s not worked out until years after you’ve stopped working.

 

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