I’ve posted Entry #225 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s titled Today’s Investors Have Little Idea What Makes for a Safe Retirement.
Juicy Excerpt: The key point of the article is to point out that most financial planners have lost faith in the “4 percent rule,” the claim that retirees can safely take out an inflation-adjusted 4 percent of their stock portfolio to cover their annual living costs. This is of course a good thing. It is likely that we will be seeing millions of failed retirements because of the heavy promotion of the long-discredited studies advocating the 4 percent rule. But the Schwab article does a poor job of explaining how the 4 percent rule came to let us all down.
The article cites two reasons why following the 4 percent rule is now widely considered to be a bad practice: (1) Market conditions are different; and (2) The sequence of returns that an investor sees can have a big effect on the withdrawal rate that will work for him. I am a huge critic of the 4 percent rule. I was arguing that it was a dangerous rule back in 2002, nearly ten years before the Wall Street Journal and scores of other big-name publications jumped on the bandwagon. But I feel compelled to say that the Schwab article is not being even a little bit fair to the authors of the studies that were once thought to support the 4 percent rule.