remember that 4 rule inflation and lower returns means that it may be more like 33—or even lower but the better move for retirees just might be to scrap the old rule entirely and take a more dynamic approach rules of thumb help make an abstract and complicated process easier the 4 rule was never meant as a onesizefitsall solution but with so many people endeavoring to turn their life savings into a paycheck in retirement the rule has become entrenched in the zeitgeist and not surprisingly its limitations are widely misunderstood based on actuarial tables and thousands of marketreturn scenarios the rule determined that a heterosexual sameage couple that retired at 65 withdrew 4 from their nest egg in the first year and then adjusted that amount for inflation every year after had a high likelihood of not outliving their money as long as they made no changes to that plan or their portfolio for the rest of their lives this is not a realistic look at retirement academics and the financialservices industry have long grappled with how to help retirees with the withdrawal calculus finding the right withdrawal rate is even more crucial for today’s retirees previous generations could live off portfolio income when bonds yielded 4 to 5 today yields on 10year bonds are closer to 15 and negative after factoring in inflation relying on more stocks isn’t likely to make up the difference because a dozenyear bull market means that future stock returns aren’t likely to match those of the past some retirement researchers worry that nearterm stock returns could be just half of the 10 projections that historical average returns would suggest that leaves retirees and nearretirees in a tough spot morningstar looked at withdrawal rates for various allocation mixes that ensured a 90 chance of not running out of money over rolling 30year periods from 1930 to 1990 an allcash portfolio meant that retirees could safely withdraw only 14 to 25 investing entirely in stocks allowed for a withdrawal rate of anywhere from 32 to 65 depending on market volatility and when that volatility hits someone’s retirement historically speaking taking less risk with a more balanced portfolio was the smart move investors were able to withdraw 37 to 6 with much less worry of volatility derailing their plans going forward from here though is another story based on morningstar’s research the projected starting safe withdrawal rate for the next 30 years is 27 for those with money in their mattresses and 29 for people with everything in stocks the highest safe withdrawal rate is 33 for portfolios with 40 to 60 in stocks—well below the historical “safe” withdrawal rate of 4 but even that may be misguided “if you retire now or soon this fixed withdrawal rate just can’t apply to you there is too much uncertainty about inflation and possibility of a market drop” says david blanchett who heads retirement research at qma the quant unit of pgim researchers are increasingly favoring a more flexible retirement strategy—long seen as anathema—in part to contend with the market’s vagaries but also based on research around retirees’ spending patterns a shift from the 4 rule also allows for more customization women for example may need a more conservative withdrawal rate given their longer life expectancies higher healthcare costs and typically lower social security benefits—a result of career breaks for caregiving and the wage gap says indya yulli managing director at registered investment advisory firm beacon pointe advisors if 33 of your portfolio doesn’t sound like enough to live on you may be tempted to load up on stocks in hopes of increasing the size of your portfolio but that could backfire looking at a series of prospective withdrawal rates methods and allocation mixes—over rolling periods in a 30year stretch—the range of withdrawal rates wasn’t that wide even when retirees opted for a heavy equity mix too much in stocks adds volatility potentially hitting at retirees’ most vulnerable time in their early years of retirement want a higher withdrawal rate more fixed sources of income—a pension social security or even a fixedincome annuity to cover basic expenses—could allow for a more variable and higher withdrawal rate for the discretionary items retirees willing to have a withdrawal plan that allows for some swings in the amount of money at their disposal each year could withdraw as much as 6 to start as long as they are prepared to halve that if the market veers this may not be as tough a behavioral change as it seems research shows that people adjust if their portfolio is at risk of being depleted faster than expected suggesting that retirees may be able to stomach more flexibility than the conventional wisdom held wealthier people of course are better able to tolerate variable strategies since a bad year could mean cutting back on discretionary spending rather than on necessities like rent or housing costs based on morningstar’s analysis there were two approaches—both of which result in variability in income from year to year—that allow for higher withdrawal rates one is an iteration of the minimum distributions that the internal revenue service requires at age 72 from taxadvantaged accounts like individual retirement accounts and 401k plans assuming a 21year life expectancy at the beginning of the withdrawal period morningstar found this translated to an average 476 starting safe withdrawal—or 3 if all the money was in cash and as much as 66 if everything was in stocks the reason it factors in both portfolio value and life expectancy which means that it’s impossible to run out of money—though it also means less left at the end for heirs another popular approach that can lead to a higher rate was popularized by financial planner jonathan guyton it essentially gives retirees a “raise” when their portfolio has done well and calls for them to pull back when it has taken a hit if the starting withdrawal rate was 4 of 1 million or 40000 and the portfolio increased to 14 million in the second year the retiree could take 40000 plus an inflation adjustment—let’s assume the average annual rate of 3—for a total of 41200 that amount—41200—is just 29 of the enlarged portfolio since it’s less than the starting 4 withdrawal the retiree gets a 10 raise over what she would have typically collected pocketing 45320 if the market took a hit she would take a 10 cut for example if in the second year of retirement that 1 million portfolio shrank to 700000 the retiree would reduce the inflationadjusted 41200 she would have normally pulled in the second year by 10 taking out 37080 as someone gets further into retirement they can start reducing the haircut since the biggest risk is getting hit by a market downturn early on the other factor that retirees need to focus on now is asset allocation if the prior rule of thumb was 100 minus your age for stock allocations—so a 70yearold has 30 in stocks—blanchett says the better calculation today may be subtracting one’s age from 120 now that 70yearold has about half of her assets in stocks advisors are also reassessing bonds whereas roughly half of a bond allocation in the past may have been parked in municipal bonds or core fixed income beacon pointe’s yulli is taking some of that allocation and putting it into private credit or direct real estate investments in multifamily housing medical offices or industrial warehouses that should hold up decently if the economy slows and better withstand inflationary pressures and higher rates than bonds traditional core fixed income is now down to just about a third of the bond allocation rather than half with shortterm bonds and treasury inflationprotected securities rounding out the nonstock portfolio as a hedge against higher rates the more flexible approaches work better for those with substantial nest eggs since reductions in withdrawal rates may mean less discretionary spending but won’t hurt their ability to fund necessities those who retired from careers that paid bonuses or were dependent on commissions may be more comfortable with the variability that comes with a dynamic withdrawal this approach also works best for people not looking to leave large bequests those who can stomach the flexibility and want to leave money to their heirs can carve out the bequest and use the withdrawal approach on the rest life comes with twists and turns retirement is no different—and flexibility creates resilience