WSJ: Say Goodbye to the 4% Rule

There are plenty of articles about shortcomings of the 4% rule - which is still a great *starting point* if not a real plan. The WSJ brings up a few alternatives to help overcome the problems with the 4% rule:

http://online.wsj.com/article/SB10001424127887324162304578304491492559684.html?mod=googlenews_wsj

Some of the adjustments/alternatives discussed:

(1) using annuities (SPIAs) instead of bonds (2) tie withdrawals to the life expectancy tables rather than a the traditional 4% rule's inflation-adjusted 4% (of whatever your starting balance was) - using last year's end-of-year balance every year. (3) Kitces' rule pegging withdrawals to market valuations (specifically, the PE10 of the S&P500)

Some really good food for thought here. It seems most discussion of investing and portfolio construction is geared towards accumulation phase, not distribution phase. The 4% rule caught on in a huge way because it was simple, understandable, and based on history, generally helpful. The well known shortcomings - failure when there are early periods of poor returns, and having withdrawals entirely untied from performance of portfolios or valuation - are things that nobody's truly come up with a perfect solution for. It's nice to see some discussion of this in the popular press.

In a similar vein, I've seen lots of articles about the "bucket method" but very few about the actual mechanics of *living* with the buckets - they describe how to set the buckets up in year one, but what do you do the next year and the year after - how do the buckets "evolve" and how do you modify it over the course of different potental performance? -- living off a portfolio is just not that simple, and if it doesn't work out, it's not the same as deciding to work a few extra years, since it won't be clear that it's not worked out until years after you've stopped working.

--
David S. Meyers, CFP(R)
http://www.MeyersMoney.com
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Fine tuning the withdrawal rate is nearly impossible (I think) to where the resources are just enough to get one to end of life.

The only way to do it is to be very conservative, in which case, unless things go very wrong, there will be a huge pot of money left behind. In other words, bank interest or interest from treasuries itself should be so much that it pays for all expenses (including taxes on the interest) and continues to add to the principal forever, growing the principal beyond the average interest rate.

Even so, things like medical bills can bankrupt fairly well-healed folks.

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