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Opinion: Think you can count on the 4% rule in retirement? Think.


Then we’ll know exactly how much we need to save for a safe and comfortable retirement. We know how long it will take to make money. We know how much we need to spend each year. And, it is important that we know how much our investments will make each year.

Alas, for the real world! We don’t know how long we will live (that’s the argument for a lifetime annuity). We don’t know what will happen to inflation (that’s the argument for treasury bonds that are defended against inflation, or if they haven’t been overvalued yet). And, no, we don’t know how much of our investments will make each year.

I am always amazed at the confidence that the people who work in Money, Inc. confirms that they can make forecasts. What they don’t know, or don’t tell us, is that those forecasts are based on some very sketchy assumptions.

Among them: That the future will be like the past. And especially like the ‘American’ past.

Our country drew a straight royal movement in the 20th century. Our great international competitors destroyed themselves in wars. Our remaining adversary poses such a threat that the entire nation is left behind massive public investments in the technology and infrastructure that have transformed the economy: We can thank The Cold War for federal highways, space racing, the internet and more. Oh, and our ‘old world’ rivals helped us by letting people “get up and go” er… get up and go. What percentage of America’s spectacular rise came from the immigration wave that flooded these coasts between the 1870s and the 1920s?

Given all of this, it’s not really surprising that U.S. stock market returns have been among the best in the world in a century – despite the Great Depression.

What does this have to do with our retirement plan?

So many, so much.

The so-called ‘4% rule’ is the main basis of retirement thinking. It says we are almost guaranteed to retire well if we keep our money in stocks and bonds, withdraw 4% of our portfolio (or less) in the first year. retire and then just increase the amount withdrawn according to inflation. (This generally assumes a typical ‘balanced portfolio’ of 60% stocks and 40% bonds, such as tracked by the Vanguard Equilibrium Index Fund.
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and many others.)

Let’s do it, and we are 95% likely or better to be able to maintain our portfolio for 30 years.

That is an argument many have kept in mind. It becomes the standard rule of thumb for retirement planning.

Problem? It is purely based on excellent numbers from the US stock market over the past 100 years. The 4% rule assumes that your stocks (and bonds) will perform as well in the future as they did for happy investors over the past year.

The risks here are obvious. If we don’t get those happy returns, the 4% rule could fail. And now Javier Estrada, professor of finance at the IESE School of Business in Barcelona, ​​Spain, has run the numbers.

He’s looking at how the 4% rule will work if we end up with typical returns for the rest of the world. He looked at 120-year data from 22 different countries.

And it’s not good.

He writes the “failure rate” for the 4% strategy, “varies widely from country (and) time.”

And how. This strategy fails less than 5% of the time in the United States, meaning that 19 times out of 20 people pursuing this strategy can make money in at least 30 years without cutting back.

What is the failure rate of the same strategy in Italy? Err … 67%.

In France and Germany, this figure is more than 50%. In Japan, about 36%.

Even in the UK and Switzerland, the 4% rule has failed more than 20% of the time. And using worldwide data, Estrada calculated the general failure rate for the 4% rule would be 22%. In other words, once in five retirees are forced to lower their standard of living in order to have long-term maintenance money.

We have seen, thanks to AQR’s support Asness CliffsWhat percentage of the recent boom in US stock prices is the product of circle theory (the more the price increases, the more attractive they must be).

We also know that today’s low-yield bonds cannot, mathematically, produce equal returns to the past, when bonds have higher yields (if you know how to drop 5% a year from bonds. votes 1.6%
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Please let us know).

There is no simple answer. Perhaps we should be optimistic about future profits. Or maybe not.

But since no one has ever suffered so much money in old age, it’s even more meaningful to be cautious and wrong. That means spending less, saving more, investing better and working longer.

Hope for the best, but plan for the worst, as Jack Reacher wanted to say.

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