What Better Bond Yields Mean for the 4% Retirement Withdrawal Rule

After an ugly few years, the bond environment has become a bit brighter recently: Yields are up thanks to the Federal Reserve’s war on inflation, and as expectations grow that the central bank will cut rates in 2024, price appreciation seems like a good bet. Bonds’ roller-coaster ride got us to wondering about retirement income, and specifically the 4% rule, which holds that withdrawing 4% of a portfolio annually, adjusted for inflation, can sustain a 30-year retirement. For this week’s Barron’s Advisor Big Q, we asked wealth management professionals whether rejuvenated bond yields are good news for the 4% strategy. What jumped out in their responses, however, was the extent to which they played down the popular rule, calling it a starting point, at best, for retirement income planning.

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Sam Solem, portfolio manager, Intrepid Capital: The 4% rule has been a good general guide. It was originally constructed based on a lengthy period of market data, and depending on the math that you’re inputting, it gets you 30 to 35 years of retirement. Low rates made it harder to get income, which made people probably want to be a little more conservative on withdrawals. With 5.5% rates, it’s definitely easier to get a risk-free rate of income. But we think it all comes down to the individual retiree. We build custom retirement plans using planning software. And it all depends on the individual retirees’ goals, spending plans, and the assets they have.

We don’t believe the rates are going to stay at 5.5% for, say, the next five or 10 years. We recommend continuing to plan for rate and market volatility. Another factor is that people are living longer. So that’s why we recommend balancing the risk of rate and market volatility with longevity. We don’t think it’s a good time to speed up withdrawals just because of high rates. Instead, we think it’s a great time to take advantage of liquid credit strategies, especially short-duration ones. You can get 8% to 12% annual yield in a pretty short-duration credit strategy, and that’s really attractive. You know, Fed funds at 5½ is nice. But for a retiree to have a portfolio of liquid credit, getting 8% to 12% is a lot better, and then really cushions retirement.

Mallon FitzPatrick, head of wealth planning, Robertson Stephens: Does the current bond environment change the 4% rule? Probably not. The original rule is based on 50 years’ worth of data in markets, so it’s meant to account for the volatility of yields in the bond market.

The 4% rule answers a specific question, which is how much can I take from an account or set of accounts without depleting them over a long period? That’s all it answers, and that’s not that useful to us when our clients would like to know whether they can live their lifestyle in financial security throughout their entire retirement without running out of money.

To answer that question, we have to look at the assets we expect they’ll have in retirement, their costs, other income sources, and inflation. That used to be hard in 1994, when the 4% rule came out. It’s much easier today. We can pull that data together about a client, and they can almost answer most of it on the spot for us. And we have great forecasting tools.

For retirement plans, we typically use our investment office’s long-term capital market assumptions to simulate how the client’s assets will perform throughout their lifetime. From there we can determine a safe withdrawal rate to help avoid depleting assets. It’s possible we use [4% rule creator Bill] Bengen’s market assumptions or something more conservative such as the inflation rate for portfolio growth, but we are rarely asked to.

Then we can project forward and say, “Based on the information you’ve given us, and how we think you’re going to spend, our best guess is that you’ll either be fine,” or “You’ll be OK and we’ll need to meet every couple of months,” or, “Wow, we’ve got to do a lot of things now to make sure that you can retire and live the life you want to live.”

Laurie Belew, market leader, West Texas office, Cerity Partners: I thought back to the early research on the 4% rule, and remembered that similar withdrawal rate outcomes were concluded even in very different yield environments. So I wouldn’t conclude that yields alone make the 4% rule work. I think the rule is a reasonable starting point for conversations, as many rules are, because people are familiar with them. But we don’t want to rely on it in a vacuum. We would want to look at more detailed spending in retirement and adjust for potential changes. Rules of thumb don’t really account for individualized behavior.

We take a step back and look at the bigger picture in how we advise clients on what a safe withdrawal looks like for retirement. We would want to look at both return assumptions and inflation assumptions. I think of a different type of risk tolerance with clients: It’s not necessarily a tolerance for market volatility, but a client’s willingness to accept the possibility that they may need to make spending adjustments throughout retirement. And that can help us develop how aggressive or conservative we need to be with withdrawal rates.

Jaime Barnes, private wealth advisor, Skyeburst Wealth Management: I think the success of the 4% rule was premised on low rates, easy money, and for the most part, an equity market that continued to appreciate. The past two years obviously have seen bond prices retreat as inflation has continued to move higher. That being said, I think there’s an opportunity now that yields are higher to provide retirees with a more stable, more reliable income stream with regards to the 4% rule. I also think it has caused advisors to need to be a little more strategic in how they think about it. Before, we might have just focused on returns on the equity side to provide that 4%. But now we have to pivot and maybe rely a little more on the income that’s generated from bonds.

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