The 2.7% Rule for Retirement Spending | Summary and Q&A

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December 22, 2022
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Ben Felix
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The 2.7% Rule for Retirement Spending

TL;DR

The traditional four percent rule for retirement spending is no longer considered safe, with recent research suggesting a lower withdrawal rate of around 2.7 percent.

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Questions & Answers

Q: Why is the traditional four percent rule no longer considered safe?

The four percent rule was based on biased data, a 30-year withdrawal period, and focused only on U.S. stocks and bonds. These factors may not accurately reflect current market conditions and longevity risk.

Q: How does recent research suggest a lower withdrawal rate?

Recent research takes into account a broad sample of developed Equity markets and corrects for survivorship and data biases. It suggests a safe withdrawal rate of around 2.7 percent, depending on asset allocation and international diversification.

Q: How does longevity risk impact the safe withdrawal rate?

Longevity risk, or the risk of living longer in retirement, significantly affects the safe withdrawal rate. Adjusting for longevity, a 65-year-old American couple in 2022 may sustain a spending rate closer to 2.7 percent with an internationally diversified portfolio.

Q: What other strategies can help ensure sustainable retirement spending?

Retirees can make adjustments to their spending, supplement their income, or consider options like deferred government pensions or annuities. It's important to consider inflation, asset allocation, and portfolio diversification to improve safe withdrawal rates.

Summary & Key Takeaways

  • The traditional four percent rule for retirement spending is based on biased data and may not be suitable for current market conditions.

  • Recent research suggests a lower withdrawal rate, between two and three percent, depending on the portfolio and life expectancy.

  • International diversification and considering longevity risk are crucial in determining a safe withdrawal rate.

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