Advisors working with clients nearing or in retirement may be happy to learn that despite the late economic and business cycle, which will likely mean lower equity returns, the expectations are not all negative, according to the latest Guide to Retirement from J.P. Morgan Asset Management.
“Cash and fixed income are suddenly more attractive assets [for retirement holdings and] a slightly more conservative portfolio portfolio will support a slightly higher spending level than most people think,” said Anne Lester, head of retirement solutions at J.P. Morgan Asset Management, at a recent briefing on the new report.
1. The 4% Rule Is Back
Moreover, said Lester, the 4% rule for withdrawals from a typical balanced retirement account “works better now than it used to because of lower inflation rate and higher fixed income return.”
The 4% rule is essentially a “rule of thumb” suggesting that annual withdrawals of 4% from a balanced retirement account each year will provide enough money for about 30 years of retirement. It has been criticized for not adequately taking into account low interest rates, volatile equity markets, taxes and investment fees, rising retirement costs and irregular retirement spending.
“For the first time in five years or less, retirees need less [for spending] due to lower inflation,” said Katherine Roy, chief retirement strategist of J.P. Morgan Asset Management. For a 40/60 stock/bond portfolio, “the 4% rule never looked better,” added Roy, whose modeling assumes a 2% inflation rate; a pre- and post-retirement return of 6% and 5%, respectively; 40/60 stock/bond allocation and 30 years in retirement starting at 65 for the primary earner and 62 for his or her spouse.
2. Spending in Retirement Is Uneven
Despite its revived credibility, according to J.P. Morgan, the 4% rule is not always followed, primarily because retirees’ spending “is not set,” said Roy.