Voices: Is the 4% rule still ‘safe’ for retirement planning?
May 15, 2019 by Allan S. Roth
CHICAGO – Think your client’s most expensive purchase is their house? Think again. It’s retirement — and none of us really knows how much it will cost them.
Try as we might to forecast the expense, it’s only getting harder. Morningstar’s head of retirement research, David Blanchett, starts with the 4% rule, but even that’s not failsafe. Blanchett notes historic returns supported that rule (in which a client can spend down 4% of a portfolio each year, increasing with inflation). But stock valuations are currently high and, along with many others, he forecasts lower returns for stocks, especially over the next 10 years. Those nearing retirement are most at risk.
Offsetting these lower stock returns, Blanchett states real spending declines between ages 70-90 as clients slow down and spend less. Also, fixed expenditures have real inflation-adjusted declines. Yet life expectancies continue to increase, especially for the wealthy. A wealthier 65-year old couple has a 40% probability that at least one will live to age 95 or beyond. Healthcare expenditures are rising significantly faster than inflation.
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