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Retirees May Need to Rethink 4% Rule


For decades, financial planners have recommended to retirees that a 4 percent withdrawal rate from their nest eggs would be sustainable through the years, almost guaranteeing that they wouldn't run out of money.

Now it turns out that the 4 percent rule may be too generous and could put many of us at risk for outliving our savings.

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The annual 4 percent withdrawal rate has helped most retirees retain their savings over the years. But new research by Morningstar Investment Management suggests that relying on that 4 percent rule of thumb today is risky, thanks to a market in which bond yields and dividends have hovered at record lows for years.

Using that 4 percent rule, there's a 50 percent chance that you'll run out of money in about 20 years if low rates persist, assuming a portfolio of 60 percent bonds and 40 percent stocks, the research showed.

So what's the new guideline for withdrawing money from your retirement portfolio, regardless of the financial markets' performance? It's not clear there is one.

But the researchers did suggest at least starting with an initial withdrawal rate of about 2.5 percent to raise the odds of not running out of money.

Here's why the 4 percent rule worked in previous generations: According to research from the investment firm Vanguard, for most years from 1926 to 2011, yields from a portfolio of 50 percent stocks and 50 percent bonds  exceeded 4 percent. But that figure has been dropping steadily and was just 2.8 percent in 2011.

Using the IRS life-expectancy table to determine required minimum withdrawals from accounts may serve you well, the  Wall Street Journal pointed out. But whatever your strategy, advice from a financial planner is always recommended.

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