What are retirees really looking for? Like any human being, they are more comfortable if they can gauge their chances of success before launching an investment plan. Specifically, for many retirees and their financial advisors, their planning starts with trying to achieve the “4 percent rule” – that is, if they take out 4 percent of their portfolio value each year, it is assumed that their money will last about 30 years.  Now, as much as the 4 percent rule of retirement spending is being criticized these days, it is still the closest thing our industry has to an agreeable figure. 

Regardless of what figure we use as a retiree’s benchmark, what we want to know is whether their chances of achieving it are as strong in the future as they have been at other points throughout history?  The goal of this article is to address a critical question for retired and pre-retired investors (which I assume to be those three to five years from retiring).

Can a person rely on making 4 percent per year for the next 30 years (to withdraw and live on) using the same traditional methods that were successful during the past three decades? I recently approached this along with my analyst, Mark Jakupcik, with the aim of drawing conclusions about how investors can prepare for what could happen if bond market history repeats itself.  Given where U.S. benchmark interest rates are today, this should be a concern for all retired/retiring investors, many of whom are counting on something like the “4 percent retirement withdrawal rule” as a guide to avoid outliving their money. 

We Know Only What We Have Experienced
I have consistently found that most investors and their financial advisors know and understand the times they have lived through as investors, but not much before then, other than the single, giant period from 1926 to the present. My fear is that investors are so jaded and comfortable following the friendly markets of the past three decades that they don’t see the possible hurricane on the horizon.  Sure, there are plenty of articles about the possibility of rising interest rates in the next decade and beyond. But studies of retail investors consistently find that about two-thirds of those surveyed do not even know that rising rates cause bond prices to decline. And if you look at how much money has flooded into bond funds during the last several years of historically low interest rates, you can see that public opinion still largely regards bonds as “safe” investments.  This is an accident waiting to happen, all because the conditions that existed before they were conscious of investment markets are unknown to them. If they did not live through it, they don’t know it and don’t care to. 

To study this, we looked at the last two 30-year consecutive periods: December 31, 1953 – December 31, 1983, and  December 31, 1983 – December 31, 2013.

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