by Michael Cocco, CFP®, AXA Advisors

Back in the early 1990s, a California financial planner named William Bengen developed a retirement income strategy known as “the 4 percent rule.” Basically, it says that as long as you withdraw no more than 4 percent of your initial portfolio, adjusted for inflation, each year during retirement, you shouldn’t run out of money.

For years, financial professionals used this “rule” to determine how much clients should withdraw from their retirement assets each year. But today, many are not so sure it’s a good idea. Here’s why.

The 4 percent rule was developed in a different economic time:
• In the 1990s, it seemed like you couldn’t lose in the stock market. Today, investors are more likely to experience volatility, making it nearly impossible to count on a consistent return.
• Back then, the yield on a three-month Treasury bill was 6 percent. Today, it’s close to zero. Even in 2002, the five-year U.S. Treasury yield was still 4.5 percent. Today, it’s less than 2 percent. Without an interest rate at or above 4 percent, investors can’t be sure that they’ll replace the assets they take from their portfolio each year.

Some now use 4 percent as a starting point.

Some financial professionals believe in using the “4 percent rule” as a starting point for retirement income planning, rather than using it as a hard and fast rule. That way, they can incorporate flexibility into the strategy, giving clients a greater chance of having income throughout for as long as they live.

Here are a few suggestions for your retirement income strategy:

Adjust your spending based on market performance: If the market performs well, take a little more. If it performs poorly, take a little less. That way, you’re consistently pulling out a similar percentage of your current assets – not your initial balance.

Don’t take it if you don’t need it: There may come a time when you’ll need a larger percentage of your assets for health reasons, so if you don’t need it now, don’t take it.

Consider adding guaranteed income to the mix: By investing a portion of your assets in an annuity, you may be able to receive enough guaranteed income each year to cover some everyday expenses in retirement. Some variable annuities offer income benefits that provide withdrawals of 4 percent each year. Adding guaranteed income to the mix can give you more flexibility with your other assets, as well as more confidence that your assets will last as long as you do.

Michael Cocco is a certified financial planner with AXA Advisors in Nutley. He may be reached at   or (973) 667-8650.

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