The recent market declines triggered by the COVID-19 pandemic raise important questions for those in or near retirement. When you add in historically low yields on fixed income investments and an uncertain economic future, questions arise about how retirees will weather the storm. Among other things, some may be questioning whether the 4% rule on investment withdrawals remains viable.
Since its first introduction in 1994 (see below), the 4% rule—which I prefer to think of as more of a guideline—has been the subject of both praise and debate. Its simplicity wins support from retirees, and its alignment with historical market return data wins support from many advisors and academics. Yet it’s also the subject of much debate, with many questioning its future applicability given today’s high equity valuations and low interest rates.
One aspect of the 4% rule that deserves more attention is what I call the “4% budget.” How a retiree spends the 4% is as important—perhaps more important—than whether 4% is the best withdrawal rate.