In very few cases does the money last for 30 years with the 4% rule
“The problem is that today’s situation is unprecedented,” Bill Bengen, who came up with the famous 4% rule almost 30 years ago, told The Wall Street Journal (WSJ). Because one can no longer refer so well to past economic developments when making forecasts for the next 30 years and current world events still have a strong influence on the investment market, the probability of going bankrupt despite the 4% rule has increased significantly. He recommends cutting back on annual spending, dropping the percentage to two or three percent.
Bengen’s 4% rule had said that investors should take 4% of their portfolio in the first year of retirement and then adjust that percentage for inflation each year. This ensures that you always have money in your account for the next 30 years. This strategy worked regardless of how large the portfolio actually was, Bengen had calculated the percentage based on detailed analyzes of the years since 1926. JPMorgan now reports that the probability of ending up without money with annual withdrawals of four percent is up to 100 percent increased. In the case of withdrawals of three percent, the probability is still up to slightly more than 30 percent and only in the case of annual withdrawals of two percent is the probability less than ten percent. This means that you have to save 30 to 50 percent more assets than before in order to have enough money when you retire.
Why does the 4% rule suddenly stop working?
JPMorgan cites high inflation and the prospect of significantly fewer payouts to investors in the coming years as the reason for changing the 4% rule to a 2% rule. The S&P 500, for example, has yielded an average of 10 percent over the past ten years, while the long-term forecast for payouts from a 60/40 portfolio is only 4.3 percent. Added to this is the longer life expectancy (which is why the money has to last longer) and the fact that the savings rates are not individually taken into account in the 4% rule. A study by the Transamerica Center For Retirement Studies found that only 67 percent of millennials even have a rough retirement savings plan.
What to do to avoid going broke
According to the WSJ, Bengen, who himself has been retired since 2013, will reduce his own expenses in the future due to inflation and fewer payouts. He also wants to change his investment strategy: if he would normally invest 55 percent of his money in stocks and 45 percent in bonds, he has now invested 20 percent in stocks and 10 percent in bonds – the rest are reserves in cash. He doesn’t feel comfortable with that, but in view of the rising interest rates, the moment is not the right time for investments.
JPMorgan recommends considering six different factors when considering retirement strategy: What is the tax rate? Should some of the assets be inherited at the end or can everything be used up? Are there other sources of income such as real estate? How much money will you have to spend on health in the coming years? How old is the partner and how long is he or she expected to live? How is the individual portfolio put together and what are the forecasts for the various investments?
In any case, the time of simple old-age provision seems to be over. That’s why JPMorgan recommends getting investment advice now at the latest and developing an individual pension plan.
Olga Rogler / Editor finanzen.net
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