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In 1994, Bill Bengen published a revolutionary research that transformed the way retirees approached their revenue planning. He introduced a 4% rule, suggesting that pensioners can safely withdraw 4% of their portfolio in the first year of retirement, and then adjust this amount annually to inflation.
This strategy is designed to help retirees to keep their savings and avoid ran out of money during a 30-year pension.
Thirty-one years later, Bergen-Liquin Book, “Rich retirement: an over-exaggerated 4% rule to spend more and enjoys more,” is being published later this year-now believed that pensioners will surely withdraw 4.7% of their portfolio in the first year of retirement, compared to its original bending, while still securing their right to 4%.
However, before the retirees blindly follow Bengen’s reign of the thumb, in a recent episode of retirement decoding, he outlined eight key factors that should be taken into account when designing a pension revenue plan.
“Many people immediately hang at the beginning, what is my number? Is it 4%? Is it 5%?” Bengen said (see the video above or listen to down). “And there are a lot of things you have to look at before you get to that point.”
The first step in the development of your personal pension plan is to choose the scheme to withdraw money.
Most people do not realize that a 4% rule is now upgraded to 4.7% – based on a specific mathematical approach to retirement with retirement, which makes the serious fall in the market at the beginning of the pension, as well as historically high inflation periods, Bengen said. According to this rule, a pensioner with a million dollar IRA would withdraw $ 4.7% in the first year, or $ 47,000.
After that, Bengen said the percentage was no longer used. Instead, withdrawal is adapted to an annually on the basis of inflation, Similarly as social insurance. For example, if the inflation was 10%, the withdrawal next year would increase by 10%.
This method, Bengen said, aims to maintain the purchase power of retirees over time. However, this is just one of many approaches. Other strategies include withdrawing fixed percentage of assets, using anuitete or anterior consumption in premature retirement and decrease after about 10 years. And each approach has different financial implications, he said.
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The second factor is determining your “planning horizon,” Bengen said. This is one of the most challenging aspects of the development plan, because it is directly related to your life century as an individual and, if applicable, as a couple.
“You don’t want to plan to spend your last dollar with your dying breath because most of us can’t reduce that time,” he said.
And since it is impossible to predict longevity with precision, Bengen said it was wise to build a mistake – perhaps an additional 10 years or about 30% more than the life expectancy.
Considering the increasing expectations of life, with many people who now live in the past 100, he said it was better to plan conservative, not the risk of running out of money in the 90s.
“You don’t want to adjust it somewhere in the mid -1990s,” Bengen said. “You would like to take care of that when you retire.”
The third key factor is whether you will withdraw from a taxable or undeniable portfolio, as this may have a significant impact on your withdrawal rate, Bengen said.
The 4.7% rule assumes a bill that is not denied, like IRA. However, if you owe income taxes, interest and dividend in retirement, it will impair your Chief, ultimately reducing your sustainable withdrawal rate.
“My methodology assumes that an investment account used to finance withdrawal during retirement will pay all income taxes generated by investment income – realized gains, dividends and interest,” Bengen explained in his coming book. “For an elevated account, these taxes are by definition zero. I do not worry about the taxation of withdrawal from such accounts, because that money left the portfolio. Instead, I focus on what happens to the means while they remain in the portfolio. “
Because taxable accounts are subject to current tax liabilities, retirees must explain how taxes will affect their retreat. “The higher the tax rate, the more you pay the penalties in taxes,” Bengen said. “So you have to consider that.”
The fourth key factor is whether you want to leave money to your heirs. Often a neglected assumption of a rule of 4.7%, Bengen said, is that your portfolio balance will be zero to the end of your planning horizon – usually 30 years.
If your goal is to leave a significant inheritance, he said, you will need to adjust the withdrawal rate accordingly. This often means withdrawing less each year, sometimes significantly less.
“There is a high price that you need to pay to make your heirs happy, and you have to trade that you are happy during retirement,” Bengen noted. “It’s a discussion between you and your financial advisor.”
Ultimately, he said, this is a very personal decision.
“It’s a very individual thing and every person has to make that decision for himself,” he said. “But it’s a decision that must be made – you just can’t leave it in coincidence. It will affect your retreat.”
As you structure your investment portfolio, another factor is playing a key role in determining your withdrawal rate, Bengen said.
His research suggests that maintenance of shares distribution between approximately 47%and 75%, with the rest of the bonds and cash, results in a sustainable withdrawal rate of about 4.7%. Outside this range, whether you hold too little or too many shares, however, it can reduce your withdrawal rate.
In his research to develop a rule of 4.7%, he used a well -diversified portfolio of seven different assets, awarded in a fixed manner during a pension.
In addition, he noted that although many pensioners maintain the distribution of fixed assets, other strategies – such as the growing sliding path in the capital, where the exposure of shares begins lower and gradually increases – can actually improve withdrawal rates. Other methods, including protective fences that adjust the withdrawal on the basis of market conditions, offer alternative approaches to the management of the pension portfolio.
“There are so many ways to approach – fixed allocation, growing sliding trails, protective fences – but ultimately, this is a decision that every pensioner has to make,” he said.
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Bengen described the sixth important strategy, a portfolio rebalance, as one of the “four free handle” available to retirees.
Basically, rebalancing involves the periodic adjustment of your portfolio on the original asset distribution after a particular period. He is generally optimal once a year, he said.
In addition to the withdrawal optimization, rebalancing is also a critical tool for managing risk.
“It is important because it prevents the portfolio excessive at risk property such as shares and becomes so unstable that if you hit the stock market, it completely destroys,” Bengen said.
Some experts say pensioners should reduce supplies of stock given the reduction of the risk of portfolio, but Bengen’s research suggests otherwise. When testing different approaches, he discovered that reducing stock exposure during retirement actually reduces the rate of sustainable withdrawal – contrary to what many can expect.
“There are three choices: reduce supplies, maintain or increase them,” Bengen explained. “Of the three, the worst is to reduce the distribution of stocks.”
In his research, he discovered that reducing stock allocation reduces your retreat. “That’s the only thing you don’t want to do,” Bengen said.
The following is best to maintain a fixed asset distribution during retirement. And a slightly better approach is to start with a slightly lower stock distribution – such as 40% of stocks and 60% of bonds – and gradually increases exposure to capital over time, as this “growing sliding path” can slightly increase withdrawal rates.
Bengen’s research assumed that retirees invest in index funds with the aim of attracting a market return for each asset class, not exceeding it. For example, if a portfolio includes S&P 500 (^GSPC) The component, the goal is to simply reconcile the refund of the index – not to beat them.
However, for those who are sure of their investment abilities, Bengen provides analysis in their book on how larger yields can affect the retreat rates. He calculated how many retirement withdrawal rate could increase for any additional percentage point of refund – but he also warned of risks if these expectations were not fulfilled.
“Unless you are an exceptional person – and there are some who can beat the market – you may want to keep the index funds,” Bengen said. “If you do not reach your goal, the withdrawal rate will suffer and that is a real concern.”
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The final factor is when you want to receive your payments.
Many retirees prefer to receive withdrawal in a regular schedule, much like a salary. In his research, Bengen has taken over the withdrawal distribution throughout the year, which is aligned with this usual practice.
However, he also analyzed the impact of withdrawal as a lump sum, whether at the beginning or at the end of the year, and revealed that this could significantly affect the rate of sustainable withdrawal.
“If you take it out in the end or all that at the beginning, you will have a different number,” Bengen explained. “This will significantly differ from 4.7% or any number stems from an evenly scattered withdrawal pattern.”
Ultimately, planning retirement is not a “setup and forget it” – it requires constant monitoring and adjustment to keep the others along the way. During the 30-year retirement, unexpected challenges must appear, and as retirees respond to them, they can be as important as the initial plan itself.
“The 30-year plan will come across problems, like everything else,” Bengen emphasized. “And how do you deal with them is really important for the success of your withdrawal plan.”
