Our goal at Keel and Long is to help you feel financially secure by reaching your financial goals. With nearly 20 years of combined experience, we specialize in financial planning, including portfolio management and 401k plan services. We’re ready to help you make your financial dreams a reality. Submit a consultation request – it’s free! 

Maybe you’ve heard of the 4% rule, whether you are just looking into your retirement savings options or you’re waiting eagerly for the day you’re able to retire. The 4% rule helps retirees decide how much they should withdraw from their retirement funds every year. If you choose to adhere to the rule, you should keep a steady stream of income while keeping your account balance at an adequate level for future years.

Financial experts have differing opinions on the 4% withdrawal rate. The creator of the rule even suggests that a 5% withdrawal rate may be realistic.

In a recent article, “The State of Retirement Income: Safe Withdrawal Rates,” The Morningstar answers the question, what’s a safe withdrawal rate for retirees? “We estimate 3.3%. However, there are various factors that could affect this percentage, resulting in the retiree withdrawing a significantly higher amount. This report explores ways that retirees can make their savings last longer  without  compromising  their standard of living. ”

According to Ben Henry-Moreland, a Senior Financial Planning Nerd at Kitces.com, high equity valuations and low bond yields won’t (necessarily) break the 4% rule. Henry-Moreland takes issue with several of The Morningstar’s claims: “But the investment return assumptions that Morningstar used for its analysis were so low – with real returns averaging just 5.7% for equities and 0.5% (!) for fixed income over 30 years – that, if those projections were to come to pass, the next 30 years would be among the very worst market environments in U.S. history.”

What really drives safe withdrawal rates is the sequence of returns. Per Henry-Moreland, the results of The Morningstar’s report would have been more realistic “if they had only forecast 15-year instead of 30-year returns, since the 15-year period is both easier to predict on current market data and more predictive of safe withdrawal rates.”

However, Morningstar’s conservative return assumptions help highlight the benefit of the 4% rule, which was meant to withstand worst-case financial scenarios. Therefore, historically, a 4% initial withdrawal rate might still work. Henry-Moreland reminds us that, “today’s market conditions do merit caution (as there is reason to believe that the next 15 years could experience below-average portfolio returns), in reality, such conditions were precisely what the 4% rule was created for, to begin with!”