How to Get a Guaranteed Retirement Spending Rate of 4.3%

In recent years, studies have increasingly found that this 4% rule needs to be softened, to reflect the distinct possibility that the expected returns of stocks and bonds in the coming years will be lower. compared with recent decades. In reality, as I recently reportedone new research see that safe spending rate the lowest is 1.9%.

However, since that column was published, I have found a strategy to avoid this shockingly low spend rate. In fact, with this strategy, you can lock in a spending rate in excess of 4% over the next 30 years.

This strategy is very simple in concept, although as I will describe more in a minute, it is not a panacea and its implementation takes a bit of effort. This strategy calls for building a personal TIPS ladder — Treasury Inflation Protected Securities — with another bond maturing each year of your retirement. TIPS are, of course, similar to traditional Treasuries and bonds except that their quote yields are higher and exceed changes in the Consumer Price Index. If held to maturity and assuming the U.S. government doesn’t go bankrupt, you have a guaranteed inflation-adjusted return over the life of the bond.

Allan Roth, the founder of Wealth Logic, an investment consulting firm, with whom I learned about this strategy, told me in an interview that he was initially skeptical about this TIPS strategy, think it’s too good to be true. So where did he put his money, investing a million dollars of his money in building a TIPS ladder in 30 years.

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

Since this 4.3% guaranteed spend rate is so attractive, you can consider this TIPS ladder strategy as a no-brainer. But there are a few things to note about it:

• The returns of this strategy are just as attractive because the TIPS yield now has a significant positive value. However, as you can see from the accompanying chart, those yields have spent a considerable amount of time in recent years in the negative territory. For example, the 10-year TIPS now has a real yield of 1.70%, compared with negative 1.15% a year ago. The percentage of spending you can lock in with this TIPS laddering strategy depends on the dominant TIPS yield when you build the ladder — perhaps when you retire.

• The TIPS Ladder Strategy can only last 30 years, as it is the longest-term TIPS offered by the US Treasury Department. That’s a downside, for two reasons. First, according to the calculation, there is almost a 25% probability that a member of a 65-year-old couple who retires today will live more than 30 years. Second, with a 60% stock / 40% bond portfolio, there is a good probability – although not a guarantee – that it will be worth a lot when you (and your spouse) ) dies and thus entitles you to leave your inheritance to your heirs. You give up that possibility by following the TIPS Ladder strategy. For that and other reasons, Roth recommends that it’s just one element of a comprehensive retirement plan, but not the only one.

• The TIPS Ladder Strategy requires an investment in individual TIPS. It’s important to know because almost all of us who have ever invested in TIPS have done so through mutual funds or ETFs. The individual TIPS market is relatively illiquid and bid spreads can be substantial. Furthermore, allocating the right amount to each of your ladders is a rather complicated process for you to have continuous inflation-adjusted cash flow over the next 30 years.

• There are currently no completed TIPS between 2033 and 2039, which means that the TIPS ladder will have some steps missing. Roth suggested a workaround, which he discusses in his article I linked above.

Key point? For now, and as long as this window of opportunity exists because the yields on TIPS remain as high as they are, and as long as you are willing to do the extra work to buy the right amount of different TIPS of different maturities , you can lock in a 30-year spending rate of more than 4%.

The existence of this strategy does not contradict the conclusion of the study I reported earlier that the safety margin ratio can be as low as 1.9%. Richard Sias, a finance professor at the University of Arizona and one of the co-authors of that study, stressed in an email that their study doesn’t say you’re certain to run out of money in retirement if your spending ratio is low. your spending is more than 1.9%. Instead, it found that, to be confident that you won’t run out of money, you and your financial planner may need to assume a low rate when planning your retirement.

That is an important difference.

Sias added that there is always a chance that the stock and bond markets over the next 30 years will perform above average, as well as a chance that TIPS yields will be high when you retire. But no possibility is guaranteed, and that is their point of view.

Social Security

With this uncertainty, Social Security has become an even more important piece of the retirement finance puzzle than it once was. That means it’s important to dispel many of the Social Security myths that frighten many retirees and near-retirees — and a new book will help do just that.

It was written by Martha Shedden, co-founder and president of National Association of Registered Social Security Analysts, whom I interviewed previously for my Retirement Weekly column. Her new book is titled “Avoiding Social Insecurity: The Retirement You Want, The Social Security You’ve Earned,” in which she interviews your reals. She informed me that Kindle readers would be able to Kindle readers will be able to download the book for free on November 17 and 18, so here’s your chance to read it for free. (For the record, I received 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 contacted at [email protected].