Dividends4Life: Testing the 4%-a-Year Retirement Rule

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Testing the 4%-a-Year Retirement Rule

Posted by D4L | Tuesday, March 13, 2012 | | 0 comments »

The next five years could determine whether a rule of thumb for retirees' withdrawals from their portfolios remains valid in these turbulent times, says Bill Bengen, a financial planner in Southern California. Mr. Bengen is the creator of the 4% rule for retirement withdrawals. In a study published in 1994, he said that if retirees withdrew 4% of their nest egg in the first year, and then increased the dollar amount by the inflation rate every year, their savings would easily last 30 years.

In recent years, as stocks have become more volatile, many observers have wondered whether Mr. Bengen's rule still holds. So far, he thinks it does. However, he says the next five years could be crucial, particularly for individuals who retired in 2000 and have experienced two major stock-market downturns since then. He expects stock returns to be low for a while; if that is coupled with high inflation rates, "then retirees have a big problem," he says. He doesn't think a sharply higher inflation rate is likely in the near future, "but you never know," he says.

Source: Wall Street Journal

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