Retirement Income – Why the 4 Percent Rule Is Obsolete

Retirement Income – Why the 4 Percent Rule Is ObsoleteIn years past, financial advisors had a rule of thumb: It was generally thought safe for retirees to draw down about 4 percent of their retirement income from nest eggs each year – consisting generally of a mixture of stocks, bonds and cash – and still have an acceptably low risk of exhausting their retirement accounts during their lives.

This rule of thumb was easy to understand, and at one time, it was even conservative enough to provide for a significantly younger surviving spouse with a lot of years left on her life after the passing of her husband.

This was even sufficient for past generations of retirees to leave a substantial financial legacy for their children and grandchildren.

Those days are likely over for a long time. Here’s why:

Historically, investors have owed about 90 percent of the entire increase of the S&P 500 to reinvested dividends, on a total return basis. That’s according to a recent interview by Lowell Miller, President of Miller/Howard Investments and author of a number of books on dividend growth investing in the stock market.

But the long-term average dividend yield of the S&P 500 is historically close to 4.4 percent. That meant something important: A portfolio of blue-chip stocks used to cover a 4 percent annual withdrawal rate with cash dividends alone. Now the annual dividend yield of the S&P 500 index is around 1.9 percent. That’s less than half of what it was during the heyday of “4-percent” planning.

Meanwhile, returns available on all kinds of publicly-traded debt securities have collapsed as well. At one point in 1983, you could get over 15 percent on an investment in 10-year treasuries. Just 10 years ago, you could between 4 and 5 percent. As of this writing, mid-October, 2014, The 10-year treasury is bouncing around 2 percent.

That means the cash dividend and interest yields available from both publicly traded large-cap stock portfolios and from bond portfolios are no longer enough to sustain a 4 percent retirement income drawdown rate.

Not even close.

In order for a 4 percent retirement income withdrawal rate to become viable, something has got to give: Either multiples on stock earnings must continue to increase, despite the meager cash dividends available – a chain of events that you cannot control – or the investor must substantially increase the cash flow return on invested capital compared to the broad stock and bond indexes.

A self-directed IRA provides the means to do just that.

Here’s the problem: Liquidity is a good thing, in its place. But investors are paying a savage price for the luxury of being able to sell investments quickly over the major exchanges. If an investor is willing to give on the liquidity front, and consider some asset classes that are not commonly bought and sold over the stock exchanges or the Chicago pits, then there are still investments that offer some superior cash-on-cash returns compared to a conventional stock, bond and CD/money market portfolio.

This is why self-directed accounts are quickly gaining in popularity: You aren’t restricted to the mediocre cash yields available in publicly traded securities, whether stocks or bonds.

Self-direction allows you to explore real estate, tax liens and dividends, your own privately held business or consulting firm, private placements, venture capital, mezzanine financing, private or hard-money lending, precious metals and much more.

Ok, we don’t count on much in the way of dividends from the precious metal part of your portfolio. But gold, silver and platinum have always been stabilizing elements in a time of crisis. Self-direction also enables you to hold certain forms of coins and bullion, as well.

If this concept is new to you, or if you’d like to learn more, visit us at, or call us at 866-7500-472(IRA). You will be able to download one or more of our exclusive guides to self-directed IRA investing. We also offer solutions for solo 401(k), SEP, SIMPLE and other tax-advantaged retirement plans.

Thank you for your consideration, and we look forward to serving you.




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