What You Need to Know
- Our research finds 61% of financial advisors most commonly use 4% as the withdrawal rate for clients.
- While client situations vary and rules of thumb are not optimal, I think 5% is a more realistic starting point for the average retiree..
- Here is a new approach based on how willing and able a client is to adjust their spending.
Nearly every financial advisor has heard of the “4% Rule,” which is based on research by Bill Bengen published in the Journal of Financial Planning in 1994.
This body of research suggests that a 65-year-old couple could take out 4% of their savings at retirement and safely increase that initial amount by the rate of inflation for 30 years. In a recent survey, we found that 61% of financial advisors most commonly use 4% as the withdrawal rate for clients, so it’s safe to say it’s a number that still resonates with advisors.
The most advisable initial portfolio withdrawal rate for most retirees may not be 8%, but advisors should be aware that 4% may also be too safe given some of the nuances around retirement planning.
While a recommended spending level will vary by household, I believe we need to update our general baselines around retirement spending levels, given that these rules are based on modeling tools that do not accurately capture retiree preferences and desires.