3 steps to getting a solid handle on your retirement savings in this shaky market
— Financial adviser Bill Bengen In some areas of life, working backwards or reverse engineering the answer you’re looking for can help. Retirement savings might be one of those areas.
Why 4.7% the first year? Because that’s the distribution program financial adviser Bill Bengen thinks will give you a high probability of not outliving your money, based on his seminal 1994 study of past market performance and his revision of that study in 2020. Bengen’s new work says 4.7% is the new “SAFEMAX” withdrawal rate under poor conditions — his word for the most someone can take the first year with a low probability of depleting their nest egg. Take more than 4.7% from your nest egg the first year, according to the new adjustment, and you run the risk of outliving your money. Take less, and you may leave more on the table than you’d like.
Here we arrive at the first uncertainty — market conditions may change during retirement and the 4.7% withdrawal rate may make a portfolio adjustment necessary. Bengen said: “Protect your nest egg; don’t let it get smashed by a bear market early in retirement.” He continued: “Buy and hold works best for saving for retirement, but doesn’t apply to folks in retirement. . . .We don’t have any historical period over last 100 years which contains such a high CAPE and inflation in this range.”For those not yet retired, the second step is to apply an inflation rate to adjust the distribution dollar value you think you’ll need.
An inflation assumption of 3.5% a year is a higher number compared to the rate of inflation from 1982 up until 2021, which averaged 2.76% according to data from the Minneapolis Fed. But it may be realistic for the next two decades. It may even be low.
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