Friday, January 18, 2013

Some Common Sense on the 4% Rule

The 4% withdrawal rate in retirement has become the gold standard in financial planning.  Unfortunately, while it looks good in practice it might not work in real life (meaning the client could be at great risk of running out of money).  The logic beyond the 4% rule is that in retirement a client could withdraw 4% of their portfolio every year, for example a $1mm portfolio could sustain withdrawals of $40,000/year over the retirement period.  The problem with this is that you need a certain growth rate in the market and you need to avoid large losses to make this work and unfortunately the market doesn't really care what you need, it will do what it will do. 

The article above in FA  Magazine not only tackles this but also suggests one answer is to use tactical portfolios to avoid large drawdowns.

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