Printer Friendly

Dr. Michael Finke.

The traditional 4% withdrawal rule is fine in a static world, but when was the last time the world was static?


For this reason, Michael Finke, professor of personal financial planning at Texas Tech, called the success of the traditional 4% rule a "historical anomaly" in a working paper published in mid-January.

"The 4% rule was based on the historical asset return in a market environment that doesn't look like the one that exists today," Finke told Investment Advisor in March.

"Our intention was to acknowledge the reality of lower returns moving forward," Finke recently explained, which in and of itself isn't controversial. But the methodology used and the conclusions he arrived at started a healthy debate over the best way to ensure clients' money lasts.

"Asset returns are a random walk. No one knows what bond returns will be in the future, but the market believes they will be negative," he said. "TIPS, for instance, are already negative. Nominal returns might go up, but real returns will be negative. It will either be a situation where they will be 0% for 20 years or slightly negative for 10 years."

So how did he arrive at such a bleak outlook? Not how one would think.

"We used the same methodology as others, but we did it to prove a point," Finke added. "The point was that we don't think the traditional withdrawal rates will address retirement income shortfalls; the supposedly safe methodology isn't as safe as it was in the past." -JS

No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2013 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:IA 25
Publication:Investment Advisor
Date:May 1, 2013
Previous Article:William Galvin.
Next Article:Angie Herbers.

Terms of use | Privacy policy | Copyright © 2019 Farlex, Inc. | Feedback | For webmasters