Heading into retirement, it’s fair to wonder if you have enough saved. And you’re not alone. The Employee Benefit Research Institute (EBRI) found that only six out of 10 American workers feel very or somewhat confident about having enough money for a comfortable retirement. The EBRI found that rising medical and long-term-care expenses and the uncertain finances of Social Security and Medicare are key areas of concern.
In response to such concerns, many advisors now suggest a revision to the “4% rule.” Spending 4% of your nest egg in retirement each year (and then adjusting the distribution upwards each year to reflect inflation) had been seen as a savvy way to preserve most of your savings to last until a ripe old age.
These days, 3% is coming into vogue. And there’s plenty of scary talk to back it up. “Retiring now is pretty dangerous,” said David Blanchett, head of retirement research at Morningstar to the Wall Street Journal. “No one knows what will happen in the future, but among those who make forecasts, there is an expectation for lower returns.”
It’s surely true that the stock market will be hard-pressed to deliver the kinds of robust gains in the coming decade as we’ve seen in the past decade. As you build out a long-term financial plan, it’s wise to assume that stocks will return around 5-6% on average, per year.
That’s just below the estimate made by legendary investor Warren Buffett, who wrote the following: “The economy, as measured by gross domestic product, can be expected to grow at an annual rate of about 3 percent over the long term, and inflation of 2 percent would push nominal GDP growth to 5 percent, Buffett said. Stocks will probably rise at about that rate and dividend payments will boost total returns to 6 percent to 7 percent.”
Trouble is, few people now expect the U.S. economy to grow at a 3% rate. (Global growth should exceed that level, which is a strong argument for exposure to fast-growing emerging markets). And the "Oracle of Omaha" wrote that analysis in 2013, and stocks went on to deliver stellar returns over the next five years. Periods of strong market returns are often followed by periods of more lackluster returns.
Here’s another way to think about the “4% rule” vs. the newly-suggested “3% rule.” An analysis conducted by Gerstein Fisher Funds found that “a withdrawal rate of 4% (often cited as a benchmark in financial planning for sustainable withdrawals) is indeed generally successful, unless inflation exceeds 5% annually.”
And it’s increasingly clear that a surge in inflation to past peaks is one of the few things we need not worry about these days.
Of course, there is no such thing as set-it-and-forget-it when it comes to retirement strategies. An annual check-up can help clarify how your income and assets will hold up throughout your retirement years.