The upshot is that you may need to save even more upfront to enjoy the retirement lifestyle you want.
Some academics and financial planners say the so-called 4 percent rule, which was conceived two decades ago, is out of step with 21st-century realities. But others maintain that, with some modifications, it can still be relevant.
The rule calls for saving enough money so that, in conjunction with your
The problem, some say, is that given the returns you're likely to reap on your investments, taking 4 percent-plus every year could lead to outliving your money.
"If someone can afford to take less than 4 percent, we advise that," said
A study published in the
The study concluded: "The 4 percent rule cannot be treated as a safe initial withdrawal rate in today's low interest rate environment."
"We're dealing with an environment today where bond yields are at a historic low," said study co-author
Here's how the 4 percent rule works: If you have a
One problem with the 4 percent rule is that it assumes people need their money to last for 30 years past retirement, said
Today, retirees often live longer than 30 years, "because they retire younger and live longer," Richardson said.
Regrettably, he added, some end up retiring earlier than they planned -- or wanted to -- because of circumstances beyond their control, such as layoffs.
Another issue with the 4 percent rule is what's known as the sequence-of-returns risk.
Essentially, it means that negative investment returns in the first few years of retirement can seriously erode your assets.
"If you have a big market drop early in your retirement and you keep on spending the same amount, it means you have to spend an increasing percentage of whatever is left," Pfau said. "That digs a hole for the portfolio."
Consequently, many financial planners suggest that retirees adjust their spending based on their investment returns. Cut back in the lean years and save the big expenses for the flush years.
"If we have a couple of great years, I may tell clients, let's take a little and pay off things that need to be dealt with," Richardson said. "If you know you're going to have to buy a car, let's do it now."
"Then," he added, "when things are bad you can scale down without really having to change the lifestyle."
To be sure, some financial planners say the 4 percent rule can still work.
The key, they say, is to seek out alternatives to investing big chunks of your portfolio in fixed-income investments such as bonds. Investing in preferred stocks, real estate investment trusts and stocks that pay dividends, such as utilities, can yield solid returns without a lot of risk.
"We have gone to some nontraditional sources of income," said
There is, however, a fundamental problem with the 4 percent rule that neither tweaking portfolios nor being flexible on spending from one year to the next can cure.
"Most Americans haven't saved enough money to begin with," said
Financial planners say that, in those situations, they work with clients to reset their expectations for retirement and reduce expenses.
"We start to ask, what is it you really have to have to make yourself happy?" said Richardson.
One way to significantly reduce expenses is moving to a more affordable area.
"We tell people, maybe you don't want to try and live in
Many people choose to delay retirement because of insufficient savings.
"Some people say, I don't think I will ever be able to retire," said financial adviser
Katzenstein recalls, years ago, seeing a cartoon in which a client walks into a financial planner's office and announces: "I'm retiring this coming Thursday. I haven't saved a dime. This is your chance, financial planner, to become a legend."
"None of us in this industry," Katzenstein added, "want that client to come in."
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