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

Today, I’m talking about the forward-looking assumptions that are driving this change from a 4% safe withdrawal rate in retirement to a 3.3% withdrawal rate. 

Here’s why according to Christine Benz, the director of personal finance and retirement planning at Morningstar and a co-author of the new research on the 3.3% rule:

“Retirees have enjoyed a “trifecta” of positive market developments over the past several decades…Low inflation, low bond yields (which have boosted bond prices) and strong stock returns have helped buoy investment portfolios and safe withdrawal rates,” she said.

The dynamic has perhaps lulled near-retirees into a false sense of security, Benz said.

Bonds are “highly unlikely to enjoy strong gains over the next 30 years,” and high stock prices are likely to fall as they revert to the average, according to the report. Inflation is also an issue, but the research anticipates that inflation will moderate and won’t be a huge problem over the course of a 30-year retirement. 

And this is where the research must be taken with a grain of salt. They’re trying to project likely return scenarios out over a 30+ year retirement. Plenty of stocks are overvalued at the moment, but there are still plenty of high quality stocks that are fairly valued, or even under-valued. And income and total return from bonds may improve over time as the interest rate climate changes. 

Are their assumptions realistic? I think so, but the 4% withdrawal rule also assumes moderate returns and has held up well under back tested scenarios under a variety of stock and bond market conditions. Even back tested in the 1970s where we had dismal stock returns and high inflation, you still didn’t run out of money if you retired during that time. 

Will you be more likely to never outlive your retirement savings if you adopt the 3.3% rule, compared to the 4% rule? No question! But you may also unnecessarily restrict your spending based on overly pessimistic assumptions. 

So tomorrow, I’m going to talk more about when and why a higher 4% withdrawal rule still works in retirement. 

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