海角社区官网

Elevated stock valuations 鈥� which are getting close to all-time highs 鈥� increase the odds of a bear market clawing back prices and valuations to more typical levels in the next few years.

If you鈥檙e on the cusp of retirement now, that could result in less money than expected to stretch over a long retirement.

The good news is you should still do just fine if you stick with retirement withdrawals based on a well-tested 鈥渟ustainable鈥� withdrawal rate in the neighbourhood of four per cent.

That metric, based on a rough consensus of financial research, is also called the ‘safe’ withdrawal rate or the ‘four per cent rule.’ It makes sense to use it as a benchmark and sometimes vary it up or down a little based on individual circumstances.

Just recognize that now is a bad time to get aggressive by planning much higher withdrawals with much greater risks.

How the four per cent rule works

The four per cent sustainable withdrawal rate provides a rough guideline of the steady annual cash flow you can draw from savings each year in retirement with little risk of outliving your money.

You calculate it this way: If you retire at age 65 with a balanced stock and fixed income portfolio, in the first year you can withdraw four per cent of the initial amount in your portfolio, plus inflation adjustments in each subsequent year. That maintains withdrawals at a constant level adjusted for inflation to support a stable retirement standard of living.

So if you retired at age 65 with a balanced portfolio of $600,000, you could withdraw four per cent, or $24,000, in the first year. If inflation is three per cent, you could then withdraw $24,720 in the second year ($24,000 plus a three per cent inflation adjustment), with further inflation adjustments in each subsequent year.

The four per cent sustainable withdrawal rate has stood the test of time based on lengthy historical data.

Research shows that retirees investing in a balanced portfolio of stocks and high-quality bonds earning market returns would have been able to sustain withdrawals at least at the four per cent level for any 30-year period since the 1920s without running out of money.

So, someone retiring at age 65 would have been able to withdraw at that rate and have their savings last until at least 95.

U.S. financial planner William Bengen conducted the original U.S. research that established that metric in the early 1990s. Subsequent research has found broadly similar results after updating it to cover recent years, expanding the scope to other countries including Canada, and tweaking many of the assumptions.

While recent studies typically produce results in the same ballpark, some results are a bit higher, others a bit lower.

Bengen himself tweaked his asset allocation assumptions to raise his number first to 4.5 per cent, and then to 4.7 per cent in his recent book, 鈥淎 Richer Retirement.鈥�

On the other hand, Morningstar, a U.S. financial research firm, used a different methodology to come up with a sustainable withdrawal rate of 3.7 per cent this year, after calculating a four per cent rate last year.

While the four per cent withdrawal rate is neither foolproof nor guaranteed, it is designed to withstand exceptional misfortune. Chances are far higher that you鈥檒l enjoy much better results, allowing you to increase withdrawals at some point or leave a hefty bequest to your heirs.

Beware of the bears in retirement

Nonetheless, the possibility of a severe and protracted bear market is a particular threat to retirees. In that case, a high withdrawal rate could force you to keep selling stocks at beaten down prices for an extended period.

Then, if your withdrawals have been overly aggressive, your portfolio may become so depleted that it doesn鈥檛 benefit much when stock prices eventually recover. This is known as ‘sequence of returns risk’ because of the way the math works: a large percentage loss early in retirement has a much greater impact than an equal percentage loss late in retirement.

While no one can reliably predict the timing and depth of the next bear market, they tend to follow periods when valuations have gotten expensive.

Bengen says there has only been one bear market in recent decades that occurred when stocks were relatively cheap (which occurred in the early 1980s after interest rates were jacked up to fight inflation.)

The current cyclically adjusted price-to-earnings (CAPE) ratio for the benchmark U.S. S&P 500 Index is a little under 40, as of mid-last week. That compares with a long-term average close to 17. And it is only a little less than the all-time-high of just over 44 reached in December 1999, at the peak of the nineties tech boom.

That is cause for caution, but not despondency.

The retiree who started drawing from their portfolio in 2000 after the tech boom peak quickly encountered a nasty bear market. Nonetheless, Bengen says in his book that the year-2000 retiree is still doing okay if they stuck with a withdrawal rate of 4.7 per cent or less. He says their savings appear on track to last the stipulated 30 years when reached in 2030.

When it comes to retirement, one size doesn鈥檛 fit all

While the four per cent withdrawal rate is a good benchmark, one number doesn鈥檛 fit everyone.

It can be varied a little based on individual circumstances, with a range of perhaps three to five per cent covering most situations.

Factors which may justify a higher-than-average withdrawal rate (at least to start with) include: if you鈥檙e able and willing to be flexible and cut back spending and withdrawals later if you experience adversity; having good back-up assets like a paid-for home or cottage that you鈥檙e willing to sell or borrow against if necessary; or you retire significantly later than age 65 (because your savings doesn鈥檛 have to last quite as long).

Factors which may entail a relatively low withdrawal rate include:

鈥� If you don鈥檛 have flexibility to cut back spending and withdrawals if you start to run short of money.

鈥� If your adviser charges hefty fees that aren鈥檛 justified by the value of their advice.

鈥� If聽you lack backup assets to tap into if necessary.

鈥⒙營f you retire much earlier than 65 (because you need to stretch out your withdrawals over a longer retirement).

鈥� Or you just want to play it safer.