Kenn Tacchino, Widener University – Rethinking The 4% Retirement Rule

On Widener University Week: The 4% rule of retirement withdrawal might need a re-write.

Kenn Tacchino, professor of taxation and financial planning, explains why it may not work for all situations.

Kenn Tacchino is a professor of taxation and financial planning and chair of the department of economics, finance and taxation at Widener University. He is a three-time winner of the Widener School of Business Administration Distinguished Graduate Teaching Award. He has been the editor of the Journal of Financial Service Professionals since 2001. He was formerly a full-time faculty member and consultant to the American College and former director of the New York Life Center for Retirement Income at the American College. He writes a monthly column for “RetireMentors,” which is part of the Market Watch (Wall Street Journal) website. The column is dedicated to helping consumers plan their retirement.

Rethinking The 4% Retirement Rule

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If you are nearing retirement, you have most likely heard of the so-called 4% rule. This common refrain says you should withdraw no more than 4% of your portfolio each year of retirement to avoid running out of money before you die.
But, it may be time to rethink this strategy.
The reality is the 4% rule – or drawing down $40,000 plus inflation each year on a $1 million retirement portfolio – may unnecessarily restrict spending.
Ironically, this withdrawal rate was revised to 4.5% by its creator soon after it was published. However, people still insist on using 4%, or less, in some cases.
For some ultra-risk-averse people, the rule serves a purpose.
But, for many, the rule can be adjusted to provide extra cash flow. Research shows that when the 4% rule is used, 96% of people will die with all of their retirement assets intact or with more than they started with.
The goal needs to be to maximize spending without putting yourself in a position to have inadequate resources in retirement.
So what are your other options?
In many cases, research recommends increasing the withdrawal rate, even as high as 5.5%, in conjunction with some common sense precautions.
For example, you can use a bucket strategy in which you separate pools of investments by risk level and the anticipated time of withdrawal. This strategy works if you match income with expenses and adjust when necessary.
Another highly-regarded strategy is the flooring strategy – or classifying retirement expenses as essential or discretionary.
Any strategy you and your financial adviser chose needs to focus on your unique needs and provide a well-rationed stream of income for every stage of retirement.

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