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The 4% Retirement Rule Is Back: J.P. Morgan

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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.

(Related: The Advisor & The Quant: Is the 4% Rule Dead?)

“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.

J.P. Morgan found through analysis of roughly 60,000 households making the transition from working to retirement that spending actually increases initially for retirees as they front-load spending on medical care, the house and leisure.

”Retirees try different things but they can adjust spending pretty quickly” if their retirement accounts have poor returns. “Personal spending is one way to mitigate the impact of poor returns,” Roy said.

3. Medicare Is Complicated. Clients Need Help.

Roy said her group is getting “tons of questions” about Medicare, including eligibility, because many clients are still working and have health coverage through their jobs, and some have health savings accounts. Both can affect how they should interact with Medicare.

They have questions about when to sign up for Medicare and whether they can contribute to an HSA. They must sign up for Medicare during the period three months before the month they turn 65 or three months after  — a seven-month window — to avoid penalties, and they cannot contribute to an HSA once they’ve signed up for Medicare without suffering a penalty, said Roy. Wealthy clients may also be subject to additional premiums for Medicare.

She “encourages advisors to talk to clients to make sure they are engaging them during open enrollment [for Medicare] and the solution they choose … [which] continually change over time … Clients want to know the costs, understand Medicare generally and when they need to enroll.”

Roy said J.P. Morgan sees Social Security and Medicare as key issues that can help advisors add value to their practice. Advisors can designate an individual to specialize in those issues, knowing that this involves a time commitment, or make referrals to other specialists, but “advisors should help clients clients “generally understand the landscape [and] be clear where they draw the line,” Roy said.

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