See a sample reprint in PDF format.Order a reprint of this article nowFUNDS MONTHLY MARCHUpdated March 1, 2013, 5:23 p.m. ETJournal ReportInsights from The ExpertsRead more at WSJ.com/WealthReportMore in Investing in Funds & ETFsAre Expensive Fund Managers Worth It?Note to Self: Remember the Lessons of2008Online Resources for ETF InvestorsEqual-Weight Indexing Works...SometimesPodcast: Reassessing Your RetirementVoteIf you plan to retire in five years or less it may beRelated VideoBy KELLY GREENECan your nest egg last your whole lifetime? It's getting tougher to tell.Conventional wisdom says you can take 4% from yoursavings the first year of retirement, and then thatamount plus more to account for inflation each year,without running out of money for at least threedecades.This so-called 4% rule was devised in the 1990s byCalifornia financial planner William Bengen and laterrefined by other retirement-planning academics. Mr.Bengen analyzed historical returns of stocks and bondsand found that portfolios with 60% of their holdings inlarge-company stocks and 40% in intermediate-termU.S. bonds could sustain withdrawal rates starting at4.15%, and adjusted each year for inflation, for every30-year span going back to XXXXXXXXXXWell, it was beautiful while it lasted. In recent years, the4% rule has been thrown into doubt, thanks to anunexpected hazard: the risk of a prolonged market routthe first two, or even three, years of your retirement. Inother words, timing is everything. If your nest egg loses25% of its value just as you start using it, the 4% may nolonger hold, and the danger of running out of moneyincreases.If you had retired Jan. 1, 2000, with an initial 4%withdrawal rate and a portfolio of 55% stocks and 45%bonds rebalanced each month, with the first year'swithdrawal amount increased by 3% a year forinflation, your portfolio would have fallen by a thirdDow Jones Reprints: This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients orcustomers, use the Order Reprints tool at the bottom of any article or visit www.djreprints.comSay Goodbye to the 4% RuleIf the conventional wisdom no longer holds about spending in retirement, what are the alternatives? Here arethree of them.Say Goodbye to the 4% Rule for Retirement - WSJ.com1 of 5
time to adjust your investing strategy.MarketWatch's Andrea Coombes discusses tips onhow to improve your 401(k) plan. (Photo:Shutterstock.com)2013 will bring new factors to consider as you planyour retirement savings, including, but not limitedto, the Fiscal Cliff. MarketWatch's ChristopherNoble discusses tips on how to protect your fundsin the coming year. (Photo: AP)Nearly two-thirds of Americans between the agesof 45 and 60 say they plan to delay retirement,Lauren Weber reports on Markets Hub. Photo: APJohn Kuczalathrough 2010, according to investment firm T. RowePrice Group. And you would be left with only a 29%chance of making it through three decades, the firmestimates.That sort of scenario has left many baby boomers whoare in the midst of retiring riddled with angst. "Themind-blowing aspect of retiring is all these years you'reaccumulating and accumulating, and then you need tostart drawing down, and you have no idea how to dothat," says Al Starzyk, a 66-year-old retired printingexecutive in Williamsburg, Va.So, if you can't safely withdraw at least 4% a year froma balanced portfolio of equity and bond funds, what doyou do? Here are three alternative approaches thatretirement specialists say may work better to ensureyour money lasts as long as you do:Use annuities instead of bondsPairing the most plain-vanilla type of annuity—called asingle-premium immediate annuity—with stocks,retirees can generate income more safely and reliablythan if they use bonds for that piece of their portfolio,says Wade Pfau, a professor who researches retirementincome at the American College of Financial Services inBryn Mawr, Pa.To arrive at that conclusion, he plotted how 1,001different product allocations might work for a65-year-old married couple hoping to generate 4%annual income from their portfolio.Using 200 Monte Carlo simulations for each productallocation, and assuming returns based on currentmarket conditions, the winning combination turns outto be a 50/50 mix of stocks and fixed annuities, Mr.Pfau says. If inflation accelerates more than the marketsnow expect, inflation-adjusted annuities would becomemore attractive, he adds."There is no need for retirees to hold bonds," he says.Instead, annuities, with their promise of income for life,act like "super bonds with no maturity dates," he says.But immediate annuities have one big drawback: Thebuyer loses access to his or her savings in exchange forthose guaranteed payments. In other words, if you havea sudden long-term-care need or some other type ofemergency, there's no way to recapture a large chunk ofSay Goodbye to the 4% Rule for Retirement - WSJ.com2 of 5