The world of fiduciary retirement planning may have moved on from the 4% "safe withdrawal" rule, but that doesn't mean the public — or even the advisor community at large — is ready to set it aside.
As one recent article published by the Canadian newspaper The Globe and Mail demonstrates, the rule is still commonly presented as an apparently foolproof strategy for protecting one's retirement portfolio while (hopefully) meeting a decent standard of living.
Simply limit your withdrawals to 4% or less and your retirement will be a success, the argument goes, but take 5% or more and you're flirting with disaster.
The only problem with that simple message, which is true under a specific set of market assumptions and longevity projections, is that it is short of context and therefore potentially misleading.
"Yes, this is still being debated," Moshe Milevsky, a finance professor at York University in Toronto, said of the article in a post on X Monday. "Lord have mercy."
In an email to ThinkAdvisor, Milevsky said that the public's interest in the 4% rule was understandable but was also "getting tiresome."
"It's getting tiresome to repeat the same things over (and over) again," Milevsky said, referring to the planning industry's cautionary view of using rules of thumb in such a complex domain. "Using the 4% rule for retirement in 2024 … is just passe. Period. The (scholarly) world of financial practice has moved on to much more comprehensive and rigorous approaches."
17 June 2024 AD
Yes, this is still being debated.
Lord have mercy. pic.twitter.com/wWuB2tIgeU
— Moshe Arye Milevsky (@RetirementQuant) June 17, 2024
Milevsky, who is also a consultant to U.S. financial firms, has been writing about a number of alternative frameworks for income planning, for example using annuities in conjunction with an intelligent drawdown rate. Other planners are bringing forward new frameworks and metrics beyond simple probabilities of success and failure, including analyzing the magnitude of failure in Monte Carlo simulations.
Bringing such metrics and strategies into the planning effort allows advisors and their clients to move beyond binary planning scenarios and to embrace a new degree of flexibility in the planning process, one that can help their clients maximize spending in retirement while protecting them from the worst-case scenario of retirement bankruptcy.
Unfortunately, Milevsky said, the general public, and even many in the advisor community, tend not to read such research — unless they are students who are tested on the material.
The Income Faucet
"Think of the process of washing your dishes in your sink, efficiently," Milevsky said. "The 4% rule for retirement income is really about the aperture or rate at which the faucet should be opened, which indeed is part of the overall process of washing dishes. But there is so much more to the process."
Other factors include soap quality, scrubbing utensils, the depth of the sink and even the temperature, according to Milevsky — let alone the degree and nature of the dirtiness of the dishes.
"Back in the 1990s when the 4% rule was designed, people were just learning how to wash dishes, so it was all about the faucet," Milevsky said. "In 2024, cleaning dishes is much more sophisticated."
Another important warning for clients to hear is that people today tend to live much longer in retirement than they did 30 years ago when the 4% rule was first tabulated, and empirical data shows retirement spending fluctuates a lot based on people's real-world needs.
Still, the 4% rule remains ubiquitous, and it is even recommended by some financial advisors.
