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Let’s talk about the 4% rule, why this may no longer work for retirement, and what you can do to prepare – Enjoy! Add me on Instagram: GPStephan | Join My Free Newsletter For More Information: http://grahamstephan.com/newsletter
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The 4% Rule:
This basic retirement rule suggests that could spend 4% of your portfolio every single year, without running out of money in retirement, in the worst case scenario – so, if you had a million dollars, that’s $40,000 to spend on whatever you like. However, others argue it’s too simplistic – and could leave you broke, in the event it were to fail.
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He argues that the 4% rule was based on a 30-year retirement which means, if you plan to live MORE than 30 years without working, there’s a strong chance you’ll run out of money.
In addition to that, ENTIRE portfolio was based the performance of United States Stocks and Bonds, which have seen some of the strongest returns throughout THE ENTIRE WORLD, and it’s unclear whether or not that will continue. He cites what’s known as the “Equity Premium Puzzle,” which suggests that investors are compensated EXTRA for taking on additional risk – but, when those risks never materialized – investors simply get “lucky,” and – eventually, that “luck” could very well “run out.”
For example, he mentions one study that shows how the United States could simply be the ultimate “survivorship bias,” with high stock market returns being the exception – not the norm. Because of that, they suggest that stocks may only return 4% above risk-free treasuries, instead of the historical 6% that we’ve all gotten used to, leading, of course, to lower returns.
The OTHER issue is that, once you look BEYOND the United States…you’ll begin to see that MOST developed countries have returns that are NOWHERE CLOSE to the 7-10% annually that we’ve seen here. Vanguard even says that “going from a 30-year to a 50-year retirement horizon decreases the probability of success from 81.9% to 36.0%”
HOW TO PREPARE:
If you want to “retire” for longer than 30 years, you’ll likely need to reduce your spending to 3%, depending on how long you want to live off your investments. For some people, this might mean spending the 2.7% that Ben Felix recommended, or it might mean spending 3.5% if you want to retire for 35 years. But, knowing that the 4% rule was only meant to last 30 years, is going to help point you in the right direction in terms of how much you need.
This means that – when times are good – you spend more, but when your investments are down…you spend less.
-DIVERSIFY INTO INTERNATIONAL MARKETS.
Throughout the last 50 years, INTERNATIONAL stocks have actually outperformed the US on several occasions – and, even Vanguard believes that using a mixed portfolio could increase the chance that your money lasts by more than 20%.
Honestly, I think Vanguard really just summarizes it perfectly: They say “By adding international diversification to the portfolio, the withdrawal rate can increase from 2.6% to 2.8%. By reducing fees from 100 bps to 20 bps, the rate can rise further to 3.3%. Finally, by using a dynamic spending rule, the rate can rise to 4.0%.”
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