Breaking the 4% Retirement Spending Rule

JP Morgan joins us among those who criticize the 4% rule for determining retirement spending. While widely accepted among financial planners, the rule has various weaknesses. By using the rule methodically, retirees have a major risk of spending either too much or too little in retirement based on their circumstances. JP Morgan constructed a model that, like the spending formulas we’ve suggested, is dynamic. A retirees’ spending varies based on changes in his or her own situation, including changes in the portfolio value. You can find a report explaining JPM’s new model here. The model also varies a retiree’s investment portfolio based on changes in circumstances, as do our recommendations.

Over the past decade, retirees have been forced to navigate the dual investment challenges of extremely low interest rates and elevated market volatility. Many have relied on the popular 4% rule to draw down their portfolio assets, but this approach—developed in the very different market climate of the 1990s—has increasingly been called into question in terms of providing a truly sustainable retirement income stream. As a result, the rapidly growing number of investors preparing to enter retirement may wish to consider different withdrawal options.

Our research suggests investors and their financial advisors should look beyond the static rules of the past when seeking to achieve stronger results from retirement income withdrawalstrategies. A portfolio-based solution using a more robust withdrawal rate framework may help investors better address their retirement funding needs by embedding market risk, longevity risk and evolving personal investment criteria in a way that a cash-flow-based approach simply cannot.