"The 4% Retirement Rule Is in Doubt. Will Your Nest Egg Last?" (move, years)
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Like Mathjak pointed out, the 4% rule is based on starting at the worst point in the past. So, I wouldn't worry yet but then again, who's to say whether we might be entering a sustained period of high inflation and poor market returns...wouldn't surprise me.
I think everyone would be prudent to have a plan to adjust as needed in retirement.
^^ I started to be aware of this possibility in 2008 as we were collapsing into the Great Recession.
Decided then to make worst case scenarios which became more important as Federal Reserve and Comptroller of the Currency started to mandate "Stress Testing" on financial institutions.
Better to be conservative on the projections, aggressive on meeting financial goals, and be generally aware on what's happening.
During the Great Recession, P/E ratios of the market plummeted from almost 45 to just over 15 - which in turn forecasted higher expected future returns. The past decade the S&P 500 has had a total return of over 358%. Currently, the P/E ratio of the S&P 500 is close to 30, implying lower future expected returns.
In chatting with my actuary, they told me that due to extended life expectancy, that the adjusted formula would be 3.5% per annum.
Which brings the one, single unknown factor in all this.
Life expectancy.
"Running out of money, before you run out of time", can be a scary thing.
Some have decided to "live it up" with the expectation of not living very long when retired. This is usually due to previous health challenges, or heredity traits, or dangerous lifestyle.
Some, in "high risk" occupations, desire the "rush" of high risk. When they don't acquire it, they create it. Sometimes, with suicide...
If we are talking about IRAs or 401Ks, always a little puzzled by the "4% rule".
Once you get to 72, by definition you will be drawing out more than 4% per year, to meet the RMD. Based on today's RMDs, doesn't it look like this? Not that most of us will be living to 100 but even at 85, you'd be pulling 6.5%.
Sure, but that's only because the government WILL eventually get the taxes that are owed and that's how they do it. After you withdraw it you don't have to spend it! You can save it or invest it any way you want.
In chatting with my actuary, they told me that due to extended life expectancy, that the adjusted formula would be 3.5% per annum.
Which brings the one, single unknown factor in all this.
Life expectancy.
"Running out of money, before you run out of time", can be a scary thing.
Some have decided to "live it up" with the expectation of not living very long when retired. This is usually due to previous health challenges, or heredity traits, or dangerous lifestyle.
Some, in "high risk" occupations, desire the "rush" of high risk. When they don't acquire it, they create it. Sometimes, with suicide...
All you have to do is eat the Standard America Diet (SAD) and you won't have to worry about extending life expectancy. Actually, the average lifespan in the USA has been trending down, so maybe up the 4% rule to 4.5%?
During the Great Recession, P/E ratios of the market plummeted from almost 45 to just over 15 - which in turn forecasted higher expected future returns. The past decade the S&P 500 has had a total return of over 358%. Currently, the P/E ratio of the S&P 500 is close to 30, implying lower future expected returns.
Over the past decade, the S&P 500 has trounced nearly everything else. By "everything else" I mean mid-cap, small-cap and international. Those who have been over-weighted in the S&P 500 have done well indeed. Those who have been more diversified, haven't done nearly as well.
Going forward, the question is, will there be a rotation away from the S&P towards the "everything else"? If so, then those with diversified portfoios have no cause for pessimism. But what if it happens to be the case, that during the good-times, the S&P rises more than other indices, but during bad times, they all fall just as much? Then indeed we have cause for worry.
The only guarantee is things will change. Nothing I can do about so I'm not going to worry about it. If I run out when I'm 80 I'll go on welfare and make you all support me my last years.
During the Great Recession, P/E ratios of the market plummeted from almost 45 to just over 15 - which in turn forecasted higher expected future returns. The past decade the S&P 500 has had a total return of over 358%. Currently, the P/E ratio of the S&P 500 is close to 30, implying lower future expected returns.
Couple things. PE ratios are just one set of data; by itself they are not a great predictor. If it were only that simple!
Even so, the S and P is currently at 4680. Earnings estimates for 2022 are ~ 250 which puts us at about a PE of 19. By that measure you might even say stocks are "cheap"!
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