An Alternative to the 4% Rule

By the time someone is ready to hang up their hat — and swap it for a palapa somewhere — we believe they should have a certain amount of savings to get them through their retirement years and supplement other common sources of income like Social Security and pensions. The exact amount varies for everyone and depends on how long they expect to be retired, the lifestyle they want in retirement, and their anticipated health expenses.

When it comes time for the fun part — spending the money one has been busy squirreling away their whole life — there are several strategies for doing so. One of the most common is the 4% Rule. It suggests that a retiree should withdraw 4% of their savings in their first year of retirement, followed by the same amount, adjusted for inflation, every subsequent year for 30 years.1

However, this rule comes with several baked-in assumptions that many experts believe to be too strict or even unrealistic. First, the 4% Rule assumes a 50/50 stock and bond portfolio allocation even though many advisors recommend a 60/40 portfolio, reducing stock exposure in retirement, or putting some investments in cash, among myriad other strategies.1

The 4% Rule only works if it is followed consistently every single year,1 which is not how most people spend their money in retirement. It also may be losing relevance. The 4% Rule is based on historical data on stock and bond market returns from 1926 to 1976.1 Historical data does not guarantee future returns. In fact, Charles Schwab estimates that future returns will be significantly lower than the historical average.2

Some critics of the 4% Rule argue that it may be too conservative.3 A retiree following the 4% Rule may very well not be able to live the retired life they envisioned and end up being outlived by their unspent savings.

Given its flaws, investors may want another option for their retirement savings. Some retirees may actually need an alternative: Roughly two-thirds of Americans who will reach retirement age between now and 2030 will struggle to meet their financial needs in retirement.4 They will have less than $500,000 saved by the time they turn 65.4

The TrueShares Active Yield ETF (ERNZ) aims to protect the investment principal. Instead of expecting retirees to dwindle their savings, ERNZ is designed for the returns to become a retiree’s income by targeting an above-average dividend yield relative to the broader market.

With ERNZ, an investor in the hypothetical example above could start with half the amount of savings as they would need for the 4% Rule and might still be allowed the same potential annual spending allocation. Or, in theory, they could start with the same amount of savings and potentially double their annual budget. We believe that much more may be possible in retirement once investors ditch the 4% Rule and start investing for true income.

https://www.investopedia.com/terms/f/four-percent-rule.asp

https://www.schwab.com/learn/story/schwabs-2022-long-term-capital-market-expectations

https://www.schwab.com/learn/story/beyond-4-rule-how-much-can-you-spend-retirement

https://www.protectedincome.org/peak65-economic-impact-forum/

ERNZ

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