Young Research & Publishing Inc.

Investment Research Since 1978

Compensation was paid to utilize rankings. Click here to read full disclosure.

  • About Us
    • Contributors
    • Archives
    • Dick Young’s Safe America
    • The Final Richard C. Young’s Intelligence Report
    • You’ve Read The Last Issue of Intelligence Report, Now What?
    • Dick Young’s Research Key: Anecdotal Evidence Gathering
    • Crisis at Vanguard
  • Investment Analysis
    • Bonds
    • Currencies and Gold
    • Dividend Investing
    • ETFs & Funds
    • Investment Strategy
    • Retirement Investing
    • Stocks
    • The Efficient Frontier
  • Investment Counsel
  • Retirement Compounders®
  • Free Email Signup

Cost of Retirement Income Soars

November 15, 2021 By Jeremy Jones, CFA

By Monkey Business Images @Shutterstock

The cost of retirement income, also known as the amount of money you need to retire, is soaring. According to Morningstar, people who are retiring today and want “a high degree of certainty their money will last” should take no more than a 3.3% draw on their portfolio. Compared to the 4% draw that is commonly used as a benchmark to gauge retirement readiness, a 3.3% draw means that in order to generate $80,000 in retirement income, you must have $2.42 million instead of the $2 million required under the 4% rule. That’s a 21% increase.

A decade of misguided zero percent interest rate policy which has killed interest income and inflated stock market valuations to near records is to blame.

The WSJ has more.

Conventional wisdom recommends spending no more than 4% of savings in the first year of retirement and adjusting that amount annually to keep pace with inflation. The math behind that rule is changing as market forecasters predict lower returns ahead, potentially shifting the way that millions save and spend for their later years.

People retiring now who want a high degree of certainty their money will last should spend no more than 3.3% of their savings in the first year of a three-decade retirement, and adjust for inflation after that, according to a report released Thursday by investment research firm Morningstar Inc. So someone with a $1 million portfolio would spend $33,000 in the first year of retirement. Assuming 4% inflation, the investor would increase annual income to $34,320 in year two and $35,690 in year three, regardless of the market’s performance.

The 4% rule emerged as the wealth-management industry’s standard in the 1990s. In the subsequent decades, millions of Americans came to rely on that figure to guide their retirement spending, and with good reason. The 4% strategy would have enabled investors holding 50% in stocks and 50% in bonds to make their money last over the vast majority of 30-year retirements from 1926 to 2020.

That, however, is no longer as likely because future returns are expected to be lower following an extended period of above-average gains. Morningstar researchers simulated future returns over a 30-year period and found that in a quarter of the simulations a half-stock, half-bond portfolio would run out of money if withdrawals stayed at 4%.

One indication the current market may be overvalued is the S&P 500’s price/earnings ratio, which measures the price investors pay for a dollar of corporate earnings. It is 23.88 when calculated using recently reported earnings, according to FactSet. That is significantly higher than the 17.35 average over the past 20 years.

Share this:

  • Email
  • Twitter
  • Facebook

You Might Also Like:

  • The Cost of Retirement Income is Going Up
  • The Cost of Retirement Income Has Never Been So Expensive
  • The Task of Investing for Your Retirement Security
  • Author
  • Recent Posts
Jeremy Jones, CFA
Jeremy Jones, CFA, CFP® is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. CNBC has ranked Richard C. Young & Co., Ltd. as one of the Top 100 Financial Advisors in the nation (2019-2022) Disclosure. Jeremy is also a contributing editor of youngresearch.com.
Latest posts by Jeremy Jones, CFA (see all)
  • Money Market Assets Hit Record High: $5.4 Trillion - May 26, 2023
  • The Mania in AI Stocks Has Arrived - May 25, 2023
  • The Wisdom of Sam Zell - May 24, 2023

Search Young Research

Most Popular

  • Wellington and Wellesley Funds Not Managed by Vanguard
  • The Single Worst Market Timing Event in History
  • “No Way I’m Spending That Much on Those”
  • Should America Move Closer to the Saudis, or Push them Away?
  • The War Machine's Manpower Problem
  • Vanguard Wellesley (VWINX) vs. Wellington (VWELX): Which Fund is Best?
  • The Power of a Compound Interest Table
  • Will the Fed Hold Up Its End of the Bargain?
  • “You Didn’t Eat That Again, Did You?”
  • Profits Becoming Elusive in China

Don’t Miss

Default Risk Among the Many Concerns with Annuities

Risk and Reward: An Efficient Frontier

How to be a Billionaire: Proven Strategies from the Titans of Wealth

Cryptocosm and Life After Google

Warning: Avoid Mutual Fund Year End Distributions

Is Gold a Good Long-term Investment?

How to Invest in Gold

Vanguard Wellington (VWELX): The Original Balanced Fund

What is the Best Gold ETF for Investing and Trading?

Procter & Gamble (PG) Stock: The Only True Dividend King

The Dividend King of the North

You’ll Love This if You’re Dreaming of an Active Retirement Life

The Importance of a Balanced Portfolio

Invest with Peace of Mind and Comfort

What Kind of Life Are You Investing For?

RSS The Latest at Richardcyoung.com

  • Bidenomics: Distrust of Public Officials and Institutions
  • Investing Habits of the Fairly Wealthy: #10 Powerball
  • “The Goal Is to Break Down the Individual”
  • Blackwater Founder Erik Prince a Hillsdale College Graduate
  • The Point to the GOP Debates
  • “The Economy Is Buried Under Trillions in Debt”
  • Will Desperate Democrats Replace Biden with Michelle or Hillary?
  • Your Survival Guy: “Life on Main Street Hasn’t Been This Hard in a While”
  • A Government of Control Freaks
  • The Elephant in the Room

RSS The Latest at Yoursurvivalguy.com

  • Investing Habits of the Fairly Wealthy: #10 Powerball
  • Your Survival Guy: “Life on Main Street Hasn’t Been This Hard in a While”
  • Your Retirement Life: Striped Bass Fishing off Block Island
  • “Then One Day the Grandfather was Gone”
  • How Joe Biden Raised Oil Prices
  • Is the Philadelphia Looting Spree the Wake-up Call America Needs?
  • “No Way I’m Spending That Much on Those”
  • What Trade Policy Serves America’s National Interest Best?
  • California Wants to Make the 2nd Amendment Unaffordable
  • “You Didn’t Eat That Again, Did You?”

About Us

  • About Young Research
  • Archives
  • Contributors

Our Partners

  • Richard C. Young & Co.
  • Richardcyoung.com

Copyright © 2023 | Terms & Conditions

 

Loading Comments...
 

    loading Cancel
    Post was not sent - check your email addresses!
    Email check failed, please try again
    Sorry, your blog cannot share posts by email.