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How to get a guaranteed retirement spending rate of 4.3%


Stop the presses! The 4% spending rule may be alive after all—at least for now.

I’m referring to the famous research from William Bengen in 1994 that focused on how much a retiree could withdraw from his portfolio every year and be sure not run out of money over a 30-year retirement. Based on U.S. stock and bond data from 1926 to 1991, he found that a 50% stock/50% bond portfolio could support withdrawing each year an amount equal to 4% of the portfolio’s net worth at the beginning of retirement (inflation adjusted).

Increasingly in recent years, studies have found that this 4% rule needs to be reduced, in order to reflect the distinct possibility that stocks’ and bonds’ expected returns in future years will be lower than they were in recent decades. In fact, as I reported recently, one new study found that the safe spending rate should be as low as 1.9%.

Since that column was published, however, I have come across a strategy that avoids this depressingly low spending rate. In fact, with this strategy you can lock in a spending rate in excess of 4% for the next 30 years.

The strategy is in concept very simple, though as I will describe further in a minute, it is not a panacea and executing it takes some effort. The strategy calls for building a ladder of individual TIPS—the Treasury’s Inflation-Protected Securities—with a different bond maturing in each year of your retirement. TIPS, of course, are similar to traditional Treasury notes and bonds except that their quoted yields are above and beyond changes in the Consumer Price Index. If held to maturity, and assuming the U.S. government doesn’t go broke, you have a guaranteed inflation-adjusted return for the life of the bond.

Allan Roth, the founder of Wealth Logic, an investment advisory firm, from whom I learned about this strategy, told me in an interview that he initially was skeptical of this TIPS strategy, thinking it was too good to be true. So he put his money where his mouth was, investing a million dollars of his money in constructing a 30-year TIPS ladder.

It worked. He now has a portfolio that will provide a guaranteed cash flow of an inflation-adjusted $43,000 each year for the next 30 years—4.3% of the portfolio’s starting value. (An article of his at the Advisor Perspectives website provides more detail.)

Since this 4.3% guaranteed spending rate is so attractive, you might consider this TIPS ladder strategy to be a no-brainer. But there are several things to keep in mind about it:

  • This strategy’s return is as attractive as it is because TIPS yields are now significantly positive. But, as you can see from the accompanying chart, those yields have spent a significant chunk of time in recent years in negative territory. The 10-year TIPS currently has a real yield of 1.70%, for example, versus minus 1.15% one year ago. The spending rate you can lock in with this TIPS ladder strategy is dependent on TIPS yields that prevail when you create the ladder—presumably when you retire.

  • The TIPS Ladder strategy can only last 30 years, since that is the longest maturity TIPS that the U.S. Treasury offers. That’s a drawback, for two reasons. First, according to the actuarial tables, there is nearly a 25% probability that one member of a 65-year old couple retiring today will live more than 30 years. Secondly, with a 60% stock/40% bond portfolio there is a good probability—though not a guarantee—that it will be worth a lot when you (and your spouse) die and therefore allow you to leave an inheritance to your heirs. You give up that possibility when going with the TIPS Ladder strategy. For that and other reasons, Roth recommends that it be just one element of a comprehensive retirement plan, but not the only element.

  • The TIPS Ladder strategy requires investing in individual TIPS. That’s important to know because almost all of us who have ever invested in TIPS have done so via a mutual fund or ETF. The market for individual TIPS is relatively illiquid, and bid-asked spreads can be significant. Furthermore, it is quite a complex process to allocate just the right amount to each rung of your ladder so that you will have constant inflation-adjusted cash flow for the next 30 years.

  • There currently are no TIPS that mature between 2033 and 2039, which means that the TIPS ladder will have a number of missing rungs. Roth has proposed a workaround, which he discusses in his article to which I linked above.


The bottom line? For now, and as long as this window of opportunity exists because TIPS’ yields are as high as they are, and so long as you’re willing to do the extra leg work to purchase just the right amount of the various TIPS of different maturities, you can lock in a 30-year spending rate of more than 4%.

The existence of this strategy is not inconsistent with the conclusion of the study I reported on earlier that found that the safe spending rate could be as low as 1.9%. Richard Sias, a finance professor at the University of Arizona and one of that study’s co-authors, stressed in an email that their study didn’t say you’d for sure run out of money in retirement if your spending rate was more than 1.9%. It instead found that, to be confident that you wouldn’t run out of money, you and your financial planner might need to assume a rate that low when planning your retirement.

That’s an important distinction.

Sias added that it’s always possible that the stock and bond markets over the next 30 years will be above-average performers, just as it’s always possible that TIPS yields will be high when you retire. But neither possibility is guaranteed, and that’s their point.

Social Security

Given this uncertainty, Social Security becomes an even more important piece of the retirement finance puzzle than it was before. That in turn means it’s crucial to dispel the many myths about Social Security that have scared many retirees and near-retirees—and a new book helps to do just that.

It’s written by Martha Shedden, co-founder and president of the National Association of Registered Social Security Analysts, who I have interviewed before for my Retirement Weekly column. Her new book is entitled “Avoiding Social Insecurity: The Retirement You Desire, the Social Security You’ve Earned,” in which she interviews yours truly. She informs me that Kindle readers will be able to Kindle readers will be able to download the book for free on Nov. 17 and 18, so here’s your chance to read it without charge. (For the record, I receive no financial compensation from the book.)

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at [email protected].


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