The theme this week on the Retirement Quick Tips Podcast is: The New 3.3% Rule For Retirement

So far this week, I’ve been talking about how new research from Morningstar may alter recommendations for a safe withdrawal rate in retirement from 4% down to 3.3%. A number of assumptions about future returns for stocks and bonds is the primary driver for that change, so  today, I’m talking about 4 reasons why the 4% rule for retirement withdrawals still works. 

#1 - the 4% rule still works if you can be flexible with withdrawals. What I mean by this is that you can reduce or stop your withdrawals all together from your portfolio in a market downturn. This often requires cash reserves of at least 12-18 months and some other income to support your lifestyle and expenses - like social security. But if you can be flexible with your withdrawals in retirement, and cut back on travel or big purchases when your portfolio is having a year of lean or declining returns, that should allow you to support a higher withdrawal rate. 

The 2nd scenario where a higher withdrawal rate is still sustainable is if returns are better than expected and inflation calms down. The 3.3% withdrawal rule assumes some fairly pessimistic returns for stocks and bonds, but if that doesn’t materialize and you can still achieve average returns in the mid single digits - say 6-7%, you could easily support a withdrawal rate closer to 4%. 

The 3rd reason why a higher withdrawal rate still works is the 3.3% rule for withdrawals in retirement assumes you need your money to last for 30 years. We don’t know how long we’re going to live, but if you retire closer to 70, you’re likely to only need your money to last for 15-20 years in retirement, not 30. Spending a decade less in your retirement years, means your portfolio can support a higher withdrawal rate in retirement without you worrying about running out of money.

And the last reason why you can probably sustain a higher withdrawal rate in retirement is research that says your spending will go down anyways as you move through retirement, which challenges the baseline assumption that’s built into the withdrawal rate analysis, which is that your spending will increase every year at the rate of inflation. Chances are, it won’t. I actually dedicated an entire week to this topic of reduced spending in retirement, so if you want to hear more about that, check out episodes 1051-1057, published the week of August 30, 2021. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast. 

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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance