34 Time March 16–23, 2020
benchmark, was much higher when the
study was conducted in the 1990s, at
around 5% to 6%. Following the Fed’s rate
cuts, it dropped below 1% for the first
time ever. Rates that low, plus lengthen-
ing U.S. life expectancies, mean that mod-
ern investors following the 4% rule have
a 1-in-3 chance of running out of money.
“It’s really tough right now,” says Wade
Pfau, a professor at the American Col-
lege of Financial Services. He says today’s
investors should expect to withdraw no
more than 3% a year in retirement. With
inflation running near 2.5%, that leaves
very little in real returns.Some expertS Say it’s wise to avoid
catchall retirement advice in the first
place. “These rules are simple and there-
fore popular, but perhaps overly sim-
plistic,” says Anil Suri, a
managing director at Bank
of America’s investment
solutions group. Instead,
investors should create a
personalized financial plan
and keep it updated as mar-
ket forces change.
For investors who find
they are falling behind, there
are several ways to catch up,
though none are easy. They
can choose to work longer,
which adds to earnings and
shortens retirement. They
can spend less. Or they can
seek out higher returns
through riskier assets. The
last option may seem appealing, but it car-
ries the risk of losing even more should
global stock markets plummet.
To guard against a potential down-
turn, McMillion says investors should
keep 12 to 18 months’ worth of expenses
in cash. Pfau also suggests supplement-
ing underperforming bonds with invest-
ments in annuities, which can guarantee
steady lifetime income but can involve
complex structures and fees.
The shocking effect that years of low
interest rates are having on retirement
portfolios may wind up being just the
wake-up call investors need. After a de-
cade of economic growth, many have
lapsed into a complacent “set it and for-
get it” mentality. But while on the road to
retirement, it’s never a good idea to fall
asleep at the wheel. •Low rates are changing
the rules of retirement
By Kevin Kelleher
TheView Business
‘These rules
are simple
and therefore
popular,
but perhaps
overly
simplistic.’
ANIL SURI,
Bank of Americamillions of invesTors have heard The same Two
pieces of retirement advice: your portfolio should be split
60/40 between stocks and bonds, and you should plan on
withdrawing no more than 4% of your savings annually after
leaving work.
Following those rules may have been wise in the past, but
experts say they don’t hold up in today’s world of staggeringly
low interest rates. And with the Federal Reserve’s March 3 an-
nouncement that it was cutting rates even further amid fears of
the coronavirus outbreak’s economic impact, it’s clear that the
situation isn’t likely to change anytime soon. It’s time, then, to
rethink these old guidelines.
First, there’s the 60/40 rule, which is meant to balance the
long-term growth of stocks with the relative safety of bonds.
But analysts warn that at
low or even negative rates,
bonds can’t offer steady
interest income that can
offset stock declines dur-
ing bear markets. Further-
more, this guideline came
about when stocks and
bonds were negatively
correlated— returns from
stocks went up as those
from bonds went down,
and vice versa. But lately
they tend to move in tan-
dem, so it makes less sense
to pair them. Morgan Stan-
ley recently gave a “sober-
ing” outlook for 60/40
port folios, predicting annual returns of 4.1% over the next de-
cade, only half the rule’s average performance. A Bank of Amer-
ica report said this asset mix “may have thrived in the 2000s
and 2010s but won’t survive the 2020s.”
Ditching the 60/40 rule doesn’t have to mean shifting
money into today’s volatile stock market. Alternatives include
investment-grade U.S. corporate bonds or emerging market
bonds, both of which can offer higher yields than U.S. Trea-
surys. “You can generate a greater level of yield if you diversify
your fixed-income investments,” says Tracie McMillion, head
of global asset allocation strategy at the Wells Fargo Investment
Institute. However, some experts say the 60/40 rule can still
hold up for investors with a decade or more before retirement.
Meanwhile, the 4% rule is meant to give investors a sense of
how much they need to save for retirement. A person following
it who has put away $1 million, for example, should anticipate
withdrawing no more than $40,000 a year, adjusting for infla-
tion. A landmark study found investors following this rule had
a 95% chance that their savings would last for 30 years.
But the 10-year U.S. Treasury yield, considered the global
1990 2020
SOURCE: FEDERAL RESERVE. NOTE: IN 2008, THE FEDERAL RESERVE ESTABLISHED A TARGET RANGE, RATHER THAN A TARGET RATE. THE THICKER LINE REPRESENTS THAT RANGE.8%6242000 2010COVID-19Economic
recession
Economic
recession