A recent Wall Street Journal article, “The Rules of Retirement Spending Are Changing,” did not bring good news. Instead, the article clearly reveals that traditional financial planning rules for retirement will not work for those who have diligently saved to fund a comfortable life after decades of work.
I want to propose a different solution.
I completed the Certified Financial Planner (CFP) training over 40 years ago. Since then, little has changed concerning retirement savings and spending advice. That advice typically consists of investing in a diversified portfolio of stocks and bonds, preferably index-tracking mutual funds or ETFs.
With this savings plan, in retirement, withdrawals of four percent per year are made, increasing the payment each year for inflation. This strategy is the famous 4% rule. A retiree should be able to draw four percent of their retirement savings each year, and count on the money lasting for 30 years.
The theme of the Journal article is that “The 4% Rule” is outdated. Recently, Morningstar recommended that retirees start with no more than a 3.3% withdrawal rate. Things get worse from there. According to the next few paragraphs:
Some have argued it should go even lower. A group of researchers that includes American College of Financial Services professor Wade Pfau concluded in a 2013 study that the initial withdrawal would have to be capped around 2.5% for investors to have a high likelihood of making their money last over a 30-year retirement.
That calculation, based on forecasts of future returns, assumed investors had 50% of savings in stocks and 50% in bonds.
These updates to the 4% Rule now mean that a $500,000 retirement account would provide just $12,500 (2.5%) to $16,500 (3.3%) of annual income if you follow the guidance. I suspect someone with half a million saved for retirement expects that account to pay a significantly larger retirement income.
Remember that the goal for these rules is to have the retirement account last for at least 30 years. This means the initial principal amount, as well as earnings, will be spent entirely before you die, leaving nothing for your heirs.
For my Dividend Hunter members, I recommend a different approach. The Dividend Hunter strategy focuses on building a portfolio of high-yield investments. The recommended portfolio has a yield of around 8% – cash income that will stream into your retirement account no matter what happens with stock market values.
Investing your retirement money with a focus on cash income, using an 8% cash yield, here are the benefits:
- You can draw 5% to 6% per year and have dividend income remaining to reinvest.
- Reinvesting a portion of the income will grow your total income each year, allowing you to increase your retirement withdrawals every year even as you keep the percentage withdrawn the same.
- You don’t have to worry about being forced to sell shares to pay your expenses when the stock market is down.
- You don’t have to worry about running out of money in your mid-90s.
- Because you never have to sell shares to fund your retirement, this plan lets you leave a nice nest egg for your heirs.
As I noted above, the traditional financial planning rules have not kept up with the changing markets. Money and investment managers all work from the same playbooks, so you will not find many services that recommend a high-yield approach. Too bad, because I have thousands of Dividend Hunter subscribers who have well-funded, worry-free retirement plans.If you are not a Dividend Hunter subscriber, click here to check it out.Pay Your Bills for LIFE with These Dividend Stocks: FREE Online Workshop
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