By James Saft
(Reuters) – In a world of low structural investment returns retirees need to reconsider the assumption that they can draw down 4 percent a year of their savings.
Known as the 4 percent rule, this popular guideline is running smack into what looks to be an extended period of low returns in stocks and bonds.
Obviously, this is important not just for retirees, who may have little choice but to cut back on consumption, but for savers too, who will need to save more or work longer to safely meet their targets. It equally applies to foundations and endowments, which struggle with how much they can fund and still keep contributing in perpetuity.
For all investors, a low-return world is one in which high fees are especially damaging.
Popularized by financial advisor William Bengen, who did the original research behind the idea in the 1990s, the 4 percent rule holds that an investor who wants her retirement assets to last for 30 years should draw down 4 percent of the principal in the first year, increasing drawdowns annually by inflation.