A recent Barron’s article made the case for retirees being able to withdraw 5% per year from their portfolios, opening with, “It’s time to throw out the 4% rule and give your retirement paycheck a raise.” The sentiment is a sharp contrast from the publication’s 2022 article floating the idea that retirees might need to downgrade from 4% to 1.9%. Even the Wall Street Journal has wavered, platforming an academic paper that found “a retiree who wants no more than one-in-20 odds of ‘financial ruin’ should withdraw just 2.26% a year.”
Each percentage point can represent significant sums of money. So, the decision to veer from the 4% rule of thumb should not be taken lightly. Withdrawing too little could prevent folks from living the retirement lives they earned, but taking out too much could lead to financial ruin.
So, what’s the verdict? Can retirees withdraw 5% annually and still sleep well at night? Barron’s emphasizes portfolio management strategies and higher return expectations to make their case as to why the 5% withdrawal rate can be effective.
1. Higher Expected Market Returns
Barron’s reports a JPMorgan projection that U.S. stocks could return 8% annually and bonds around 5% over the next 20 years, aligning with historical averages. This forecast implies that portfolios could sustain a higher withdrawal rate if markets meet these expectations. Even William Bengen, the creator of the original 4% rule, has updated his guidance, suggesting that something close to 5% could be feasible with an adjusted investment mix that includes a higher percentage of stocks.
2. Flexibility And Moderate Spending
In the same article, financial heavyweight David Blanchett highlights that retirees have more spending flexibility than earlier models assumed. Rather than sticking rigidly to 4%, he asserts, retirees can adjust withdrawals based on market performance, and a 5% rate could still be sustainable through a 30-year retirement. The strategy works better when retirees can be flexible in bull and bear markets.
3. Income Investing With A Bucket Strategy
A key to sustaining the 5% rate is dividing a retirement portfolio into three “buckets.”
- Cash Bucket: This holds enough for near-term expenses (1-2 years) to provide stability during market downturns, ensuring retirees don’t have to sell off growth assets in a poor market. This area includes money market funds, and ultra short term treasury bonds.
- Income Bucket: This contains a variety of bond categories, and alternative income areas such as real estate investment trusts, and master limited partnerships that can generate steady income for intermediate expenses (five to eight years). Barron’s suggests diversifying into these sectors and selecting certain funds to produce solid yields.
- Growth Bucket: This houses a variety of equity categories, including dividend paying stocks, dividend growers, and areas with more focused growth potential like technology companies or small caps, all in an effort to outpace inflation and help the portfolio continue to grow for future withdrawals.
4. Diversification Into High-Yielding Sectors
Including higher-yielding investments such as utilities, REITs, and MLPs in the overall mix can offer steady cash flow, and returns that help sustain the portfolio over time. These areas of the market seek a more predictable income stream to support a higher withdrawal rate.
5. Rebalancing And Flexibility
As retirees spend down the cash bucket, gains from the growth bucket, such as appreciated stocks, can be sold during strong markets to replenish cash reserves. This cyclical approach allows retirees to maintain their withdrawal rate without drawing down on growth assets during downturns, thereby prolonging the portfolio’s life.
Big Picture
Overall, the recent Barron’s article promotes the 5% withdrawal rate because the author seems to believe this income-oriented bucket strategy, combined with proper diversification into income-generating and growth assets, allows retirees to adapt to market changes and maintain a steady income to help ensure their savings can last through retirement.
Ultimately, Barron’s proposes that when retirees invest and withdraw with disciplined yet flexible strategies, the higher rate can work over a 30-year retirement, assuming a well-balanced portfolio and favorable market returns.
No one has a crystal ball, but years of studying this topic have shown ample evidence to justify arguing in favor of the 4% Plus Rule of thumb. It’s a balanced approach that takes the conjecture out of trying to time the market or predict interest rates. The framework has demonstrated a potential for keeping retirees near the bullseye while still allowing some wiggle room. When the markets are strong, it might be okay to withdraw closer to 5%. When things are uncertain, scaling back to around 4% often makes sense. Many retirees find that the 4% plus approach gives them a solid foundation without being overly stringent.
Bottom Line
There will always be another article by another publication obsessing over the ideal withdrawal rate. Some may scare readers into withdrawing less, while others could influence them to withdraw more. The truth is that having a plan is more critical than the specific withdrawal number. Winging it or making emotional decisions are recipes for turbulence, instability, and anxiety.
No plan is perfect, but using the tried-and-true 4% plus rule of thumb as a guideline, combined with a solid financial plan and a nimble attitude toward adjustments, can help retirees find the tools they need to enjoy their lives and remain financially secure. After all, the goal is to enjoy retirement, not stress over percentages.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. Investing involves risk, including the possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. For stocks paying dividends, dividends are not guaranteed, and can increase, decrease or be totally eliminated without notice. Fixed-income securities involve interest rate, credit, inflation, and reinvestment risks; and possible loss of principal. Diversification can reduce (but not eliminate) the risk of loss. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.