When it comes to retirement, the 4 percent rule just doesn’t cut it for most people.
That’s according to a new PwC US report that says the notion of withdrawing 4 percent per year in retirement may work for the wealthy but could be disastrous for everyone else.
If Americans stick to the idea of 4 percent annual withdrawals — which has been de rigueur since 1994 — they’ll run out of money before they run out of retirement, PwC said. Even the affluent will see their wealth significantly reduced.
Why is that, when the 4 percent system seemed to work so well for so long?
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According to the report, the theory could actually be based on an anomaly — a period of abnormally high interest rates, although what we’re now experiencing is, of course, considered a period of abnormally low interest rates.
The paper also suggests that coming up with a new “rule” needs to take into consideration two factors.
The first is the “sequence of returns” risk, which points out that a loss in the value of retirement assets early in retirement will mean that subsequent withdrawals simply dig the hole deeper.