Is the 4% Rule obsolete?

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Over the half decade I’ve written this column and attempted to practice what it preaches, a central pillar has been the so-called 4% Rule. As originally postulated by Certified Financial Planner and author William Bengen, that’s the rule of thumb that retirees can safely withdraw 4% of the value of their portfolio each year without fear of running out of money in retirement. (That’s the gist, although you have to make adjustments for inflation.)

Problem is, with “lower for longer” interest rates and the spectre of negative interest rates, is it still realistic for retirees to count on this guideline? Personally, I find it useful, even though I mentally take it down to 3% to adjust for my own pessimism about rates and optimism that I will live a long, healthy life. I polled several sources to see if they still believe in the 4% Rule, or whether a 3% or even 2% rule might be more appropriate now.

“I think the 4% Rule is a reasonable rule of thumb,” says financial planner Aaron Hector, vice-president of Calgary-based Doherty & Bryant Financial Consultants. “If someone needed a starting point to determine how much they can take out of their portfolio, it is a reasonable place to start. Is it perfect for all people? No!”

However, fee-only planner Robb Engen, the blogger behind Boomer & Echo, is “not a fan of the 4% Rule.” Moreover, he says, Canadians are forced to withdraw increasingly higher amounts each year once we convert our RRSPs into RRIFs, so the 4% Rule is “not particularly useful, either.” RRIF withdrawal requirements, which begin at 5.28% of the value of your RRIF at age 71, rising steadily until it hits 20% at age 95, make the rule more or less moot. However, Hector counters that “as RRIF withdrawals progressively increase and become much higher than 4%, the excess withdrawn can be reinvested into TFSA or non-registered accounts.” As such, he says the 4% Rule should be viewed as a “spend” rule, not necessarily as a strict withdrawal rule.

Still, Engen thinks the rule doesn’t hold up because current bond yields are so low, and the rule fails to account for rising expenses and investment fees. “We’re also living longer, and there’s a movement to want to retire earlier. So shouldn’t that mean a safe withdrawal rate of much less than 4%?” 

Spending varies over a typical retirement. It may make sense to withdraw more than 4% early on if you’re postponing CPP and OAS to 70. Once those kick in, you may decide to withdraw (or “spend,” in Hector’s view) less than 4%.   

It’s best to be flexible. That may be intuitively obvious, but if your portfolio is way down, you should withdraw less than 4% a year. If and when it recovers, you can make up for it by taking out more than 4%. “This might still average 4% over the long term but you are going to give your portfolio a much higher likelihood of being sustainable.”

Still, some experts are still enthusiastic about the rule. On his site earlier this year, Robb Engen cited U.S. financial planning expert Michael Kitces, who believes there’s a highly probable chance retirees using the 4% Rule over 30 years will end up with even more money than they started with, and a very low chance they’ll spend their entire nest egg. 

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