Is There a Magic Bullet for Retirement?

4% overlaying a lamp and a neon graph with a spike up

Jill and I were on vacation last week. We had fun just hanging around with our twins as they prepare to go off to college. Maeve is doing her nursing internship over at the hospital on Martha’s Vineyard.  I did have one day, just me, at the beach catching up on some reading.  I came across an article describing how it’s often said that there is no magic bullet when preparing for retirement. 

Hmmm . . . I got thinking.

Did you know according to, they define a magic bullet as, “something that cures or remedies without causing harmful side effects: for example, ‘So far there is no magic bullet for economic woes.’

Funny how their definition specifically calls out economic worries, isn’t it? But to me, this reinforces the fact that there is no one perfect solution or strategy that can ensure financial success when you’re planning for retirement. There’s no magic involved at all, it takes careful planning, circled around a defined system and discipline to prepare to take potentially decades of income after you bid farewell to your career. 

Of course, most of us know that we should save as much as we can during our working years, but even then, how do we guarantee those savings will last our lifetimes? This is an issue that financial advisors grapple with on a regular basis as they work to prepare their clients for retirement. There are numerous investment concepts that you can use to help anticipate how much you need to save, where to invest it, and how to access it in retirement to ensure it lasts. One in particular is something called the “4% Rule”. I was recently discussing this with a retired gentleman I’ll call “Bill” from my church, who is an avid reader of financial news and always loves a good debate. He is adamant that the concept is outdated, for a number of reasons (I believe he actually used the term “hogwash”). So, with our time together this week, I’d like to take a look at what the 4% Rule means and how it bodes in today’s economic climate.

A little history – the 4% Rule was created by financial adviser Bill Bengen in 1994. Bengen published a paper based on his research that suggested, very simplistically, that retirees could withdraw 4% of their assets every year, increasing or decreasing that distribution annually based on inflation and have enough funds to last throughout retirement. His research was based on several decades’ worth of statistics on retirement and stock and bond returns and suggested that if retirees withdrew no more than 4% of their assets per year, they could reasonably expect their funds to last 30 years.

For almost three decades, the 4% rule has often been used as the rule of thumb for retirees in determining their withdrawal rate. But considering today’s market and economic conditions, can retirees really rely on this old standby to guarantee they won’t run out of money, especially if they are still using an outdated buy and hold, accumulation strategy?  Folks, I hate to say it, but the answer is no. 

While the 4% rule was designed to make it more likely that your retirement savings could last the remainder of your life, it doesn’t guarantee it. Not only that, but the rule is also based on the past performance of the markets, so it doesn’t necessarily predict the future. What was considered a solid strategy in the past may not work for today’s retirees and in modern market conditions. In addition, since the 4% Rule is based on retiring at age 65, your long-term financial needs will likely be different if you plan to retire significantly sooner or later than this

And another problem with the rule? The concept is based on averages, and retirees can’t spend averages. Right now, we have an investment market that is alarming from two perspectives: Stock prices are unusually volatile, while bonds are paying out historically low incomes. If equities experience a market correction, and your retirement funds take a plunge, this plunge will be difficult to recover from because your savings is being drawn down each year – you’re decumulating your portfolio. And the bond part of your portfolio may not be of much help, because rates are so low. If you’re only generating 3% coupons on your bonds, how can you withdraw 4% each year and expect bonds to beef up your capital?

Even Bengen himself has been elected to revisit the rule to update it. That’s because his original research only included two asset classes: Treasury bonds and large-cap stocks. Now, with a third class, small-cap stocks, he believes that 4.5% would be a safe withdrawal. Interestingly enough, many advisors believe just the opposite – that in today’s markets, increasing longevity, and more access to international markets (which were not considered as part of the original research), retirees may want to plan to take less than 4%, perhaps between 3-3.5% instead. 

So who’s right? With so much at stake, you can’t afford to leave your retirement approach to chance. According to Moshe Arye Milevsky, a finance professor at York University’s Schulich School of Business in Toronto, Canada, a better strategy would instead respond to multiple variables, like a retiree’s age, where the retirement income is saved or invested and personal goals for retirement₁. I believe you need to have a well-defined and thorough retirement system, one that uses tactical and strategic asset management to react quickly to changing markets. Coupled with a downside risk mitigation system that attempts to put you in the highest probability of financial success, this can give you a better chance of retirement success with income you can comfortably count on for life – no magic needed.

So as always – be vigilant and stay alert, because you deserve more!

Have a great week.

Jeff Cutter, CPA/PFS, offers investment advisory services through Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield. 

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