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

Over the last couple days, I’ve been talking about the 4% rule, which is a short-hand rule of thumb that helps you calculate how much of your portfolio you can safely withdraw in retirement without running out of money. If you missed the earlier episodes this week, I encourage you to go back and listen to those so you can better understand where I’m going with explaining why the rule is now changing. 

Morningstar recently came out with some new research that recommends the 4% rule be revised downward to a 3.3% withdrawal rate in retirement? Today, I’ve diving into the rationale for the change. 

“Using forward-looking estimates for investment performance and inflation, they found that a 50% stock/50% bond portfolio should support a starting fixed real withdrawal rate of about 3.3% per year, assuming fixed real withdrawals over a 30-year time horizon and a 90% probability of success. This is because bond yields are low and stock valuations are high.” https://www.planadviser.com/3-3-withdrawal-rule-might-sustainable-retirees-going-forward/. 

Let’s break this down a little more, starting with the 90% chance of success. That means that running many simulations, using these assumptions, you made it through a 30 year retirement without running out of money if you started with a 3.3% withdrawal rate in retirement. That amount will increase every year for inflation so you can maintain your standard of living. 

Next we need to look at the portfolio assumptions. A portfolio that is invested 50% stocks and 50% bonds and cash is going to have a specific return and risk profile and there are a number of assumptions that need to be made about the range of possible future returns based on the allocation of the portfolio. 

And that’s why the 4% rule is changing to a 3.3% rule, because the assumptions for the returns on that 50/50 stock and bond mix are more pessimistic going forward because of higher stock valuations and lower projected returns on bonds. 

But keep in mind, these are forward-looking assumptions, and tomorrow we’ll dive more into these assumptions about future stock and bond returns that are bringing the safe withdrawal rate down to 3.3%. 

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

----------

>>> Subscribe on Apple Podcasts: https://apple.co/2DI2LSP

>>> Subscribe on Amazon Alexa: https://amzn.to/2xRKrCs

>>> Visit the podcast page: https://truenorthra.com/podcast/ 

----------

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