The Very Latest Retirement Data

The information in this post comes from an article entitled, “Retirement Drawdown: Tips to Make the 4%-Percent Rule Work” by Steve Vernon, detailing the results of a new study by Chris O’Flinn and Felix Schirripa.

It was a little annoying to find this the same day I posted “The 4% Retirement Solution Revisited” but such is life. For the first time I have discovered the origin of the 4% rule. It was first proposed in a 1994 paper published by William Bengen. His research determined that, “Based on his early research of actual stock returns and retirement scenarios over the past 75 years, Bengen found that retirees who draw down no more than 4.2 percent of their portfolio in the initial year, and adjust that amount subsequent every year for inflation, stand a great chance their money will outlive them. In the same article, his analysis showed that "Retirees who draw down 5 percent a year run a 30 percent chance their nest egg will run out of steam before they do." (Wikipedia)

Using the same methodology developed by Bengen, O’Flinn and Schirripa expanded the original data set to include all retirement periods beginning each month since 1926. The end date for this study, June 2009 includes the most recent stock market collapse.

For all 20 and 25 year retirement periods:

No examples of failure with these portfolio periods if invested in 75% stocks and 25% bonds

No examples of failure with a portfolio invested in 50% stocks and 50% bonds in a 20 year retirement

2% failure with a portfolio invested in 50% stocks and 50% bonds in a 25 year retirement

For all 30 year retirement periods:

4% failure with a portfolio invested in 75% stocks and 25% bonds

8% failure with a portfolio invested in 50% stocks and 50% bonds

For all 35 year retirement periods:

8% failure with a portfolio invested in 75% stocks and 25% bonds

15% failure with a portfolio invested in 50% stocks and 50% bonds

The author wryly observes that since O’Flinn and Schirripa note that since the 4% rule failed when there was high inflation or a stock market crash early in a retirement period, “Don’t retire before the market crashes or before there’s high inflation!” Hmm, I’ll try to keep that in mind.

I think there are some important take aways from this new data. First, the old conventional wisdom that recommends holding your age in bonds. For example at age 60 I should be holding 60% in bonds and 40% in stocks may be too conservative. Perhaps the new conventional wisdom that recommends 115 – your age in stocks is more appropriate. At age 60 that would be 45% in bonds and 55% in stocks. Maybe an even more aggressive portfolio is worth the risk. Unfortunately, psychological data indicates that the quality of the decisions we make tends to peak in our mid 50s and then, even if we do not suffer from any cognitive disability such as Alzheimer’s, our decision making ability begins to decline. Will I be able to pick stocks at 85?

Secondly, it would appear that the most important question is one of life expectancy. Data from the Boeing Company that was prominently posted on our bulletin board a work showed that each year worked beyond age 55 cut life expectancy by two years. Boeing, like my employer, is primarily a mix of skilled technicians, engineers, and administrative support personnel. Therefore, could we project that for each year you work past 55 there will be 3 fewer retirement years to fund? This, of course, is highly dependent on the nature of your work, genetic makeup, and lifestyle. There are only three careers that seem to provide a statistically high number of people who love their jobs. These are medical doctor, college professors, and religious professionals. Many of these people are highly energized by their work and never really completely retire. On the other hand, a 55 year old brick layer would almost certainly shorten his life if he continued to work. Also, the wear and tear on the body would undoubtedly produce serious disabilities requiring expensive medical treatments. I don’t have data to support this conclusion, but people who hate their jobs tend to live less healthy lifestyles. They tend to drown their sorrows in alcohol, tobacco, and unhealthy foods.

I used this one before and will probably use it again.

Proverbs 3
[5] Trust in the LORD with all thine heart; and lean not unto thine own understanding.
[6] In all thy ways acknowledge him, and he shall direct thy paths.