Is 4.5% Still Safe?
From: fa-mag.com
About four years ago, I authored an article for Financial Advisor in which I examined risks to the “4.5% safe withdrawal rule,” which I had developed over many years of research. At that time, my conclusion was that the rule was still viable. But when you consider the case of the person who retired on January 1, 2000 (someone who had to contend with not just one but an unprecedented two huge stock market declines within 10 years), the rule was under slight duress. I opined that the rule’s survival depended on the avoidance of a sustained bout of double-digit inflation in the near future, the kind of inflation the U.S. endured in the 1970s, which was a key element giving rise to the 4.5% rule in the first place.
In this article, we’ll examine the evolution of “SAFEMAX” (the historically lowest safe withdrawal rate) from the late 1920s to the present, to establish a frame of reference. We will then revisit the “sustainability” prospects for people who retired in either 2000 or 2008. In both years, people entered retirement on the cusp of major stock market declines, which in the past have been associated with low safe withdrawal rates.
Four years ago, there just wasn’t enough data to draw any conclusions about withdrawal sustainability for the 2008 retiree; now clearer indications are available.
