Why It's Time to Rethink the 4% Retirement Rule - WSJ Your Money Briefing

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[00:01]
Deel Representative
Deal replaces fragmented payroll vendors with one global system. No third parties hire, manage and pay teams in 150 plus countries. Operate like a local everywhere. Visit deel.com WSJ this is yous Money
[00:20]
JR Whalen
Matters from the Wall Street Journal. Welcome to youo Money Matters. I'm JR Whalen in New York. Despite the recent steep declines on Wall street stocks and bonds at very expensive levels and with retirements lasting longer, it's a good time to rethink how much you've put away for when you retire and what types of equities and components you have in your retirement savings. Wall Street Journal reporter Ann Tergeson joins us to discuss. So Ann, traditionally what comes into play is the 4% rule. What is that?
[00:52]
Ann Tergeson
So the 4% rule is something that retirees can rely on to tell them how much they can afford to spend each year in retirement and not run a risk of going broke. So the 4% rule pertains to you balanced portfolio, say 60% stocks, 40% bonds. And it says if you retire, you look at the balance that you retire with, say it's a million dollars. You can afford to take 4% of that or $40,000 and spend that in the first year of retirement. For each subsequent year, you get to adjust that $40,000 by inflation. So if inflation goes up by 2%, you increase the $40,000 by 2%. So for each year that goes by, you start with the 40,000 do. For each year that goes by, you adjust by inflation, you give yourself a raise. And the idea is that over a 30 year retirement, you will not run a risk of going broke.
[01:45]
JR Whalen
But the times, they are a changing and there could be a reason to adjust from that 4% rule.
[01:51]
Ann Tergeson
Right? So more very recent research or fairly recent research by some well regarded financial experts have looked at instead of looking at past returns and saying, okay, you know what worked in the past, the answer is the 4%. What would work if we try to forecast future returns? The idea here is that with stocks and bonds both expensive, the odds are higher that our future returns will be lower than the long term averages. So these researchers looked at that idea, they tried to incorporate lower future returns into their modeling. And what they discovered is that if you want to have an absolutely, you know, if you want to run like very little to no risk of running out of money over a 30 year retirement, you should use instead of a 4% rule, a 3% rule. So in other words, just withdrawing 3%.
[02:49]
JR Whalen
You know, one of the people you spoke with in your story described retiring now as dangerous. That's pretty daunting.
[02:57]
Deel Representative
Yeah.
[02:58]
Ann Tergeson
I mean, again, you know, these guys, they look at the valuations, right? At current valuations, bond yields are very low. You know, again, prices are high on both bonds and stocks. So they look at these valuations and that's where they come to that conclusion.
[03:13]
JR Whalen
We're speaking with the Wall Street Journal's Ann Tergeson and you're listening to your Money Matters from the Wall Street Journal. Welcome back, everybody. So, Ann, a study you highlight in your story shows that in retirement, reducing stock exposure in the early years of retirement and then adding exposure in over time could be beneficial.
[03:33]
Ann Tergeson
Right? Again, this is a strategy that takes into account the possibility that when you retire after a long run up in stocks or bonds or both, generally those assets are at pretty high valuations. They're expensive. You're at greater risk in that kind of environment of suffering a reversal. Stocks are expensive today. Maybe they sell off and your million dollar nest egg is only worth $800,000 suddenly. The idea is retirees are most vulnerable to losses in the five or so years immediately following retirement. If during those years there's a big sell off and retirees are also taking money out. Of course, most retirees are because they need income to live on. The combination of stock market losses and withdrawals to support yourself can really very fairly quickly deplete savings. The idea is to try to protect against losses in those first five or so years immediately following retirement. The idea then is instead of doing a steady decline in stock market exposure, a lot of people will enter retirement with something like 60% or 50% in stocks. The idea is that instead of entering retirement at that level and slowly declining over time, when you enter retirement, you actually reduce to 30% or so, and then you actually over time add equity exposure back so that you can get long term growth in the portfolio without taking a lot of risk in the immediate post retirement years where it really matters most.
[05:15]
JR Whalen
And a lot of the rules and the best practices we've seen are based on 30 years of market performance and economic landscape. And they don't necessarily look to the future. But in today's climate, you really do have to keep the telescope of your retirement portfolio on what might happen down the line.
[05:31]
Ann Tergeson
If you don't want to be thinking about stock market risk, et cetera, use the 3% rule, take 3% out of your portfolio, cap your spending at that, and just go on that autopilot of giving yourself annual adjustments for inflation. A lot of people who are in retirement, they can't afford to live on 3% or certainly in the earlier years of retirement, people want to spend more. They're more active. You can use a strategy that allows you to spend 4% or 5% from your portfolio. A lot of strategists will start with 5% with the idea that if you're willing to cut spending in years when markets decline, you can play it a little bit looser in terms of not adhering strictly to a 3% withdrawal rate.
[06:17]
JR Whalen
That's the Wall Street Journal's Anne Tergerson joining us. Ann, thanks for being with us.
[06:21]
Ann Tergeson
You're welcome.
[06:21]
JR Whalen
Thank you for listening to your Money Matters. I'm JR Whalen in New York for the Wall Street Journal.
[06:27]
Deel Representative
Still running global payroll like a relay race. Deal replaces fragmented payroll vendors with one global system. No third parties hire, manage and pay teams in 150 plus countries with in house local experts and white glove delivery and deal plugs into what you already use. Workday SAP, Netsuite operate like a local everywhere. Visit d e e l.com WSJ that's d e e l.com WSJ.

Summary4 min read

Episode Overview

Title: Why It's Time to Rethink the 4% Retirement Rule
Podcast: WSJ Your Money Briefing
Host: JR Whalen
Guest: Ann Tergeson, Wall Street Journal Reporter
Date: February 12, 2018

This episode investigates the 4% retirement rule—long considered a gold standard for retirement withdrawals—and explores recent research suggesting that retirees may need to adopt more conservative withdrawal strategies due to expensive stock and bond markets and longer retirements. The discussion covers recent studies, practical strategies to preserve retirement savings, and the real risks retirees face in today’s climate.

Key Discussion Points and Insights

1. Explaining the 4% Rule

[00:51] - [01:45]

Definition: The 4% rule is a guideline for retirees to gauge how much they can spend each year without outliving their savings.
- With a balanced portfolio (e.g., 60% stocks, 40% bonds), retirees can withdraw 4% of their starting balance (e.g., $1 million → $40,000 in year one).
- Each subsequent year, the withdrawal adjusts for inflation.

“So the 4% rule is something that retirees can rely on to tell them how much they can afford to spend each year in retirement and not run a risk of going broke.”
— Ann Tergeson [00:51]

2. Reasons to Rethink the 4% Rule

[01:45] - [02:49]

Changing Market Conditions: Stocks and bonds are more expensive than they have been historically.
Lower Expected Future Returns: New research factors in the likelihood that future returns will be lower.
- If aiming to virtually eliminate the risk of outliving one’s savings, retirees should consider a 3% withdrawal rate instead.
Expert Caution: Retiring now is seen as particularly risky given current valuations.

“If you want to have...very little to no risk of running out of money over a 30-year retirement, you should use instead of a 4% rule, a 3% rule.”
— Ann Tergeson [02:18]

“One of the people you spoke with in your story described retiring now as dangerous. That’s pretty daunting.”
— JR Whalen [02:49]

3. Sequence of Returns Risk & Early Retirement Strategy

[03:12] - [05:15]

Sequence of Returns Risk: The initial years after retirement are crucial. Suffering large losses early, while making withdrawals, can quickly erode savings.
Revised Allocation Strategy:
- Instead of starting with high equity (e.g. 60%) and gradually reducing it, some recommend:
  - Start with a lower equity allocation (e.g. 30%) upon retirement, then gradually increase it as you age.
- This approach attempts to minimize vulnerability to market downturns shortly after retirement and pursue growth later on.
Flexibility Is Key: Retirees should adjust their strategy if they encounter poor early market conditions.

“The idea is retirees are most vulnerable to losses in the five or so years immediately following retirement. If during those years there’s a big sell-off and retirees are also taking money out...the combination...can really very fairly quickly deplete savings.”
— Ann Tergeson [04:08]

“Instead of entering retirement at [60% stocks] and slowly declining over time, when you enter retirement, you actually reduce to 30% or so, and then you actually over time add equity exposure back...”
— Ann Tergeson [04:48]

4. Navigating Spending and Withdrawal Rates

[05:15] - [06:17]

Conservative Approach: Use a 3% withdrawal rate, especially for those averse to risk and market fluctuations.
Real Life Adjustments:
- Many retirees find it hard to live on 3% withdrawals, especially in earlier, more active years.
- Adaptive Strategies:
  - Spend more (e.g., 4-5%) but be willing to cut spending during poor market years.
  - Some advisors suggest starting higher but adjusting plans as markets and personal circumstances change.

“A lot of people who are in retirement, they can’t afford to live on 3%...People want to spend more. You can use a strategy that allows you to spend 4% or 5%...if you’re willing to cut spending in years when markets decline...”
— Ann Tergeson [05:47]

Notable Quotes & Memorable Moments

“Retiring now is dangerous.” [Paraphrased from expert cited by Ann Tergeson; [02:49]]
“If you don’t want to be thinking about stock market risk, et cetera, use the 3% rule.”
— Ann Tergeson [05:31]
“A lot of people...want to spend more [early in retirement]...You can use a strategy that allows you to spend 4% or 5%...if you’re willing to cut spending in years when markets decline.”
— Ann Tergeson [05:47]

Important Segment Timestamps

[00:51] — The origins and basics of the 4% rule
[01:51] — Why new research suggests lowering the withdrawal rate to 3%
[02:49] — Risks of retiring in the current market environment
[03:32] — Strategies for reducing stock exposure at the beginning of retirement
[05:15] — The importance of considering future market conditions, not just past performance
[05:31] — Options for retirees who need more flexibility in spending

Summary Takeaways

The conventional 4% rule, based on past market performance, may be overly optimistic given today's high asset valuations and lower expected returns.
Conservative retirees should consider a 3% withdrawal rate to better ensure their savings last.
Adjusting stock allocation strategy and being flexible with withdrawals—especially cutting spending in poor markets—can help manage risks in retirement.
Retirees are most vulnerable to market downturns in the first few years after leaving the workforce; extra caution is warranted during that period.
There is no one-size-fits-all strategy; balancing risk, personal spending needs, and market realities is crucial for retirement planning.

Loading summary

Transcript16 lines

[00:01]
Deel Representative
Deal replaces fragmented payroll vendors with one global system. No third parties hire, manage and pay teams in 150 plus countries. Operate like a local everywhere. Visit deel.com WSJ this is yous Money
[00:20]
JR Whalen
Matters from the Wall Street Journal. Welcome to youo Money Matters. I'm JR Whalen in New York. Despite the recent steep declines on Wall street stocks and bonds at very expensive levels and with retirements lasting longer, it's a good time to rethink how much you've put away for when you retire and what types of equities and components you have in your retirement savings. Wall Street Journal reporter Ann Tergeson joins us to discuss. So Ann, traditionally what comes into play is the 4% rule. What is that?
[00:52]
Ann Tergeson
So the 4% rule is something that retirees can rely on to tell them how much they can afford to spend each year in retirement and not run a risk of going broke. So the 4% rule pertains to you balanced portfolio, say 60% stocks, 40% bonds. And it says if you retire, you look at the balance that you retire with, say it's a million dollars. You can afford to take 4% of that or $40,000 and spend that in the first year of retirement. For each subsequent year, you get to adjust that $40,000 by inflation. So if inflation goes up by 2%, you increase the $40,000 by 2%. So for each year that goes by, you start with the 40,000 do. For each year that goes by, you adjust by inflation, you give yourself a raise. And the idea is that over a 30 year retirement, you will not run a risk of going broke.
[01:45]
JR Whalen
But the times, they are a changing and there could be a reason to adjust from that 4% rule.
[01:51]
Ann Tergeson
Right? So more very recent research or fairly recent research by some well regarded financial experts have looked at instead of looking at past returns and saying, okay, you know what worked in the past, the answer is the 4%. What would work if we try to forecast future returns? The idea here is that with stocks and bonds both expensive, the odds are higher that our future returns will be lower than the long term averages. So these researchers looked at that idea, they tried to incorporate lower future returns into their modeling. And what they discovered is that if you want to have an absolutely, you know, if you want to run like very little to no risk of running out of money over a 30 year retirement, you should use instead of a 4% rule, a 3% rule. So in other words, just withdrawing 3%.
[02:49]
JR Whalen
You know, one of the people you spoke with in your story described retiring now as dangerous. That's pretty daunting.
[02:57]
Deel Representative
Yeah.
[02:58]
Ann Tergeson
I mean, again, you know, these guys, they look at the valuations, right? At current valuations, bond yields are very low. You know, again, prices are high on both bonds and stocks. So they look at these valuations and that's where they come to that conclusion.
[03:13]
JR Whalen
We're speaking with the Wall Street Journal's Ann Tergeson and you're listening to your Money Matters from the Wall Street Journal. Welcome back, everybody. So, Ann, a study you highlight in your story shows that in retirement, reducing stock exposure in the early years of retirement and then adding exposure in over time could be beneficial.
[03:33]
Ann Tergeson
Right? Again, this is a strategy that takes into account the possibility that when you retire after a long run up in stocks or bonds or both, generally those assets are at pretty high valuations. They're expensive. You're at greater risk in that kind of environment of suffering a reversal. Stocks are expensive today. Maybe they sell off and your million dollar nest egg is only worth $800,000 suddenly. The idea is retirees are most vulnerable to losses in the five or so years immediately following retirement. If during those years there's a big sell off and retirees are also taking money out. Of course, most retirees are because they need income to live on. The combination of stock market losses and withdrawals to support yourself can really very fairly quickly deplete savings. The idea is to try to protect against losses in those first five or so years immediately following retirement. The idea then is instead of doing a steady decline in stock market exposure, a lot of people will enter retirement with something like 60% or 50% in stocks. The idea is that instead of entering retirement at that level and slowly declining over time, when you enter retirement, you actually reduce to 30% or so, and then you actually over time add equity exposure back so that you can get long term growth in the portfolio without taking a lot of risk in the immediate post retirement years where it really matters most.
[05:15]
JR Whalen
And a lot of the rules and the best practices we've seen are based on 30 years of market performance and economic landscape. And they don't necessarily look to the future. But in today's climate, you really do have to keep the telescope of your retirement portfolio on what might happen down the line.
[05:31]
Ann Tergeson
If you don't want to be thinking about stock market risk, et cetera, use the 3% rule, take 3% out of your portfolio, cap your spending at that, and just go on that autopilot of giving yourself annual adjustments for inflation. A lot of people who are in retirement, they can't afford to live on 3% or certainly in the earlier years of retirement, people want to spend more. They're more active. You can use a strategy that allows you to spend 4% or 5% from your portfolio. A lot of strategists will start with 5% with the idea that if you're willing to cut spending in years when markets decline, you can play it a little bit looser in terms of not adhering strictly to a 3% withdrawal rate.
[06:17]
JR Whalen
That's the Wall Street Journal's Anne Tergerson joining us. Ann, thanks for being with us.
[06:21]
Ann Tergeson
You're welcome.
[06:21]
JR Whalen
Thank you for listening to your Money Matters. I'm JR Whalen in New York for the Wall Street Journal.
[06:27]
Deel Representative
Still running global payroll like a relay race. Deal replaces fragmented payroll vendors with one global system. No third parties hire, manage and pay teams in 150 plus countries with in house local experts and white glove delivery and deal plugs into what you already use. Workday SAP, Netsuite operate like a local everywhere. Visit d e e l.com WSJ that's d e e l.com WSJ.