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No Longer a Rule

Retirement’s 4 Percent Rule Doesn’t Hold Up in Today’s Economy

Conventional wisdom used to tell us that a retiree could withdraw about 4 percent per year from their investment portfolio without running out of money for at least three decades.  This came to be known as the “4 percent rule,” and was based on historical calculations done by a financial planner in the 1990s. But if you’ve been counting on the “4 percent rule” for your retirement income plan, you could be in for a surprise. A recent study by Morningstar, one of the most recognized investment research firms, showed that this “rule” doesn’t hold up in today’s economic environment. 

The Morningstar study focused on today’s extremely low interest rates, averaging 2 percent, and calculated that a retiree’s nest egg would not grow enough during the first critical years for it to be able to last the duration of a retirement if 4 percent was withdrawn.  Instead, the study calculated that 2.8 percent was a more reasonable withdrawal rate.  However, depending on how much money was saved, it could be difficult for many retirees to live on just 2.5 to 3 percent per year.  So what are some steps to take to help you reach the retirement income you need?

Safeguard the Sources
If time is still on your side, make an effort to increase your savings, and if not, be sure your savings are protected from overexposure to risk.  No matter where you are on your journey to retirement, decrease unnecessary expenses due to fees and taxes.  These expenses will quickly eat into to the long-term value of your saved accounts. 

Create “Buckets” of Income
By having your income sources segmented for immediate, mid- and long-term needs, you can give your long-term investments more time to grow. The way you withdraw your money has an impact on its overall value and longevity, too.  Delaying Social Security benefits, for example, can increase the benefit amount by as much 8 percent per year.

Structure a Secure Income for Life
Insurance products like annuities can turn your savings into a guaranteed income source for a lifetime, no matter how long you live. Annuities are contracts with an insurance company, so the lump sum used to purchase the product becomes less accessible. Many companies allow for you to withdraw up to 10 percent of the account value per year if needed, in addition to the structured income payment, but anything more than that could face hefty penalties. 

While the Morningstar study should encourage many to take a second look at their income plan, the truth is that retirement income planning is very complicated; there is no one strategy that will work for all people at all times.  You have to create a plan that works for you in your specific situation. Strategies like safeguarding your savings, creating buckets of income and structuring an income stream can help be you on your way to a reliable retirement income. 


Christopher Scalese, financial advisor and president of Fortune Financial Group, is best known as Northeastern Pennsylvania’s Retirement Specialist. Scalese has spent the last two decades of his career assisting area residents with the financial transition from the working years to the retirement years. His primary goal is to help individuals structure their finances so that they have a steady income throughout their lifetime, while working to ensure their finances aren’t overly exposed to risk or unnecessary taxation. Scalese is an investment advisor representative, life and health insurance licensed and currently working on earning his Chartered Financial Consultant designation. Scalese received his Bachelor of Science degree in finance and Master of Business Administration degree from Wilkes University. For more information about Christopher Scalese and Fortune Financial Group, please visit

Investment advisory services offered through Global Financial Private Capital, LLC,
an SEC Registered Investment Advisor.

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