Shortcomings of a “Minimum” Retirement Rule (Part 2)

Posted In: Financial Planning Investment News Retirement

2. It’s hard to generate withdrawable income when interest rates are low.

One benefit of the 4% rule in many investors’ eyes, is that you can typically get your portfolio to generate the income you withdraw each year. In the past, when rates on savings accounts were typically 4% to 5%, and bond rates were in the upper-single-digit percentages, the 4% rule worked well even with a portfolio split evenly between stocks and fixed-income instruments.

The current environment is much more of a struggle, because many safe fixed-income alternatives pay far less than 4%. To compensate, many investors have moved their portfolios into dividend-paying stocks, accepting higher than normal levels of risk in exchange for finding ways to generate income without having to sell off investments or dip into the principal of fixed-income balances.

There’s nothing inherent in the 4% rule that says you can’t make such sales or dip into principal, and, in fact, it’s expected in later years. But most retirees get nervous spending down their nest eggs, so the current low-rate environment presents a huge challenge.

3. Losses in the bond market are possible.

One big reason the 4% rule has worked so well over the past 40 years, is that the bond market has, generally speaking, provided positive returns to investors. In the late 1970s and early 1980s, the bond market struggled under the weight of high inflation and uncertain geopolitical and macroeconomic factors across the globe, and that sent rates to double-digit percentage levels. Since then, rates have trended lower, and that has added capital gains to the generous income payments that bonds have made.

Now, bond rates are low, and many see them as having nowhere to go but up. That introduces the potential for capital losses in the bond market. Those who invest in funds to get fixed-income exposure are particularly at risk, because unlike a regular bond, you can’t just hold a mutual fund or exchange-traded fund to maturity and get back your principal. The potential for low or negative bond market returns puts that much more pressure on stocks in order for the 4% rule to work.

The 4% retirement rule serves as a useful guide, but it’s not perfect. By realizing some of the shortfalls of this rule, you can make your own refinements that will tailor it to your particular needs.

 

Original article by Dan Caplinger via The Motley Fool March 4, 2016

http://www.fool.com/retirement/general/2016/03/04/3-serious-problems-with-the-4-retirement-rule.aspx

Ambassador Advisors is a Registered Investment Advisor. Securities offered through American Portfolios Financial Services, Inc. of Holbrook, NY, 631-439-4600 (APFS), member FINRA, SIPC. Investment Advisory Services offered through Ambassador Advisors, LLC. Ambassador Advisors is not owned or operated by APFS.

Any opinions expressed in this forum are not the opinion or view of Ambassador Advisors or American Portfolios Financial Services, Inc. (APFS). They have not been reviewed by either firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.

Recent Posts

Medicare and Medicare Supplemental Plans (Medigap) Part 1

How Proper Senior Care Planning Will Determine Your Financial Future
Part 1: Medicare 2019 – Wha...

Read More
This "FIST" Can Knock Out Multigenerational Family Wealth

Ambassador Advisors' unique perspective on finances is rooted in our value of Biblical stewardship. We believe everything we have ...

Read More


Let our professional financial advisors help you achieve the legacy you desire for yourself, loved ones, and organizations. Contact Us