Stocktake: Is the 4% rule is too risky for Irish retirees?

Financial advisers have long suggested retirees abide by the 4 per cent rule – the idea you can safely withdraw 4 per cent of your portfolio each year in retirement – but a new study suggests investors may need to play it safer.

Historically, the rule has worked in the United States. A strategy of withdrawing 4 per cent from a 60-40 stock-bond portfolio each year over a 30-year period would have failed less than 5 per cent of the time in the US, according to a recent study, The Sustainability of (Global) Withdrawal Strategies.

The problem is things are very different outside the US. The study looks at the historical performance of the 4 per cent rule in 22 different countries, including Ireland, and finds the failure rate “varies dramatically across countries” – from a low of 1.1 per cent in Canada to a high of 67 per cent in Italy.

In Ireland, the strategy has a failure rate of 34 per cent and an unsustainability rate of 59 per cent (the latter refers to situations where at some point in retirement the strategy appeared likely to fail, only for subsequent strong returns to make it feasible again).

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Ireland is no outlier. Across the different countries, the average failure rate is 30.7 per cent. A diversified global portfolio would have failed 22 per cent of the time and would have appeared unsustainable 44 per cent of the time.

On average, the strategy becomes unsustainable within eight years of retirement, necessitating smaller withdrawals.

One remedy is to take more risk in retirement, as an 80-20 stock-bond portfolio does better. Allocations aside, retirees should remember plans “are unlikely to work as expected” and that adjustments “may need to be made” along the way.