The question of how to safely generate income from a retirement portfolio is one of the most challenging in financial planning. In the days when people had traditional pensions, their employers simply promised them a constant inflation-adjusted income for the duration of their retirements. As we have moved away from traditional pensions and into self-directed savings plans such as 401(k)’s and IRA’s, investors and advisors must create their own customized income plans. New research from Morningstar highlights what appears to be a better approach to creating a stable income stream from an investment portfolio. (more…)
Posts Tagged ‘4% rule’
Posted in 401(k), Asset Allocation, Commodities, Diversification, financial planning, Investors, Retirement, retirement income, retirement planning, tagged 4% rule, IRAs, Monte Carlo Simulation, probability of failure, Quantext Portfolio Planner, TIPS, ZVI Bodie on November 23, 2012 | 1 Comment »
Posted in Retirement, Risk, tagged 4% rule, actuaries, American Academy of Actuaries, Annuities, immediate annuities, Michael D. Hurd, pensions, RAND Corporation, retirement, retirement savings, Society of Actuaries, Steve Vernon, Susann Rohwedder on May 17, 2011 | 2 Comments »
Remember those kids from grammar school who were always top of the math class? They grew up to become actuaries. According to the web site of the American Academy of Actuaries, an actuary is an expert in “putting a price tag on risk.” They use math, statistics, economics and finance to predict the likelihood of future events and then try to come up with solutions.
They also appear to be the only people in the world who really understand pension plans.
Risks in Retirement
The Society of Actuaries (SOA) recently did an in-depth analysis of its 2009 study of the key risks in retirement. Since these guys are all about risk, it seems worth paying a little attention to the issues they highlight. (more…)
One of the most important questions that investors need to understand is how much income they can expect to safely draw from their portfolios over a long time horizon. This income problem is often characterized as an attempt to determine a safe or sustainable withdrawal rate (SWR).
I have written about sustainable withdrawal rates in a range of articles, as well as in detailed case studies. While there are many variations on the theme, the most commonly discussed outcome from SWR studies is what is called the ’4% rule,’ which states that you can safely draw an inflation-adjusted income equal to 4% of the value of your portfolio in the year of retirement. If you retire with $1 Million, you can draw $40,000 the first year, and then increase this amount each year by 3% to keep pace with inflation.
Questioning the 4% Rule
To begin any discussion of SWRs, it is important to understand the assumptions that go into the 4% rule. (more…)