The retirement planning establishment seems to be making a slow shift away from “the number” as a primary goal or target for baby boomers and other prospective retirees. Instead, greater emphasis is being placed on retirement income as a primary planning goal. I think most of this shift is occurring because the so-called 4% withdrawal rate rule has been exposed as flawed and potentially dangerous.
I have written about the 4% rule in the past. It is based in large part on statistical analysis of historical market returns and asset allocation theory. Then we had a “Black Swan” event in 2008-2009 where correlations converged on 1:1, meaning that every asset category- stocks, bonds, real estate, commodities, etc. fell at once. Even some money market funds “broke the buck.” No 4% rule can survive such an event. Moreover, we can’t assume that the recent Black Swan event is over and/or will not recur in our retirement lifetime.
As further evidence of the refocus on income planning instead of the “number”, have a read of this recent article from CNN/Money: Retirement: Whats your magic number?
Note the reference in the article to “wealth illusion” whereby individuals tend to overestimate the amount of sustained retirement income they can expect to derive from a pile of money.
The article also mentions Putnam’s new “Lifetime Income Analysis Tool.” I have not tried this tool, as it is apparently available only to Putnam customers or at least serious prospects. There is also a link to the T.Rowe Price Retirement Income Calculator which is available online to anyone. I tried it and found its output useful. The problem is that it doesn’t adequately explain the assumptions that are used.
In general, I am pleased to see this increased emphasis on income over the magic retirement number. As I have in the past, I encourage you to run a theoretical retirement spending budget of your own as a first planning step.