Dividends4Life: Is The 4% Rule Becoming The 3% Rule?

Is The 4% Rule Becoming The 3% Rule?

Posted by D4L | Monday, March 04, 2013 | | 0 comments »

For retirees following a total-return-and-withdrawal strategy to fund retirement, establishing a sustainable or "safe" withdrawal rate is crucial. Standard information in the retirement-advice industry has been that a 4% withdrawal rate is safe (that is, will not run out of money for 30 years) for a 60%-40% mix of stocks and bonds. Morningstar recently published a paper on this topic that has received surprisingly little attention considering its implications. The paper's conclusions are startling. After constructing a model MPT-type portfolio and running Monte Carlo tests of return scenarios that begin with the actual low bond yields that we have today, the authors reached the following conclusions:

1. ) Using this model, we find a significant reduction in "safe" initial withdrawal rates, with a 4% initial real withdrawal rate having approximately a 50% probability of success over a 30-year period. 2.) We find a retiree who wants a 90% probability of achieving a retirement income goal with a 30-year time horizon and a 40% equity portfolio would only have an initial withdrawal rate of 2.8%.

Source: Seeking Alpha

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