Old rules, like spending 4% of your assets each year, were simple but wrong. Retirees need a more versatile strategy to provide a stable income.
Inflation is why the 4% rule never made any sense.
I've always found it strange that we put one of the most complex and difficult financial problems on senior citizens. After you retire it's very hard to know how to invest and how much to spend each year. You must plan around many unknowns, how long you’ll live, what you’ll need to spend on health care and what will happen to markets. Saving while working is the easy part, but spending down a retirement nest egg is much, much harder, and leaves much less margin for error. It also gets much less attention from the finance industry and policy makers.
Enter the 4% rule, the idea that if you spend 4% of your assets each year you’ll have enough to last you through retirement. It was a well-intentioned effort to reduce the complexity to one simple guideline. But it's deeply flawed, and that's become all the more apparent as inflation creeps up and poses another source of risk to retirement income.
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Allison Schrager is a senior fellow at the Manhattan Institute and a contributing editor of City Journal.
This piece originally appeared in Bloomberg Opinion