Wednesday, March 31, 2021
With longevity, volatility, and inflation, the usefulness of the 4% rule for retirement distributions.
A new white paper that was released by the Alliance for Lifetime Income. The paper is called "Planning for Retirement Income Within a Increasingly Volatile and Uncertain World," and discusses common retirement planning income assumptions.
The paper was written by Colin Devine and Ken Mungan who stated in the paper, “[t]he results provided by our research and models present substantial cause for concern, particularly within a world where increasing volatility has arguably become the norm.”
The authors of the paper found that, under normal conditions, the 4% rate is strong and "it poses a small 16% risk that retirees will run out of assets within the first 20 years of retirement."
Devine and Munger found that the 4% rule could be faulty by extending their research beyond the 20-year point in retirement. "In each portfolio allocation assumption, the failure rate of the 4% rule crossed the 50% threshold somewhere between a person’s 30th and 40th year of retirement."
The authors further mentioned that looking at a person's average life expectancy is not enough since "half of the population could be expected to exceed it. . .Extending the time horizon out to 25, 30, 35 or even 40 years suggests that for each of these time periods there is simply much too high a risk of outliving income.”
Special thanks to Joel C. Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.