Page 114 - Ready Set Retire

Stephen J. Kelley

require 42.9% more savings if the retiree
wanted to pull the same dollar value out of the
portfolio annually as he or she would get with
a 4% withdrawal rate from a smaller portfolio.6

So the 4% Rule is now the 2.8% Rule.

Why does this happen? It’s because of a phenomenon we call
“reverse dollar cost averaging.” To get an idea about how this
works, think back on how you were taught to save. Remember
you were told to put aside the same amount every week or
month and buy the same funds each time over a long period
of time. The idea was that you would buy some shares at a
lower price, some higher, and some in between. In the end it
would even out, and the amount you had saved would have
most efficiently leveraged the gains in the markets over time.
We call this “dollar cost averaging.”

6 Morningstar Investment Management, January 21, 2013, Low Bond
Yields and Safe Portfolio Withdrawal Rates, authored by David
Blanchett, CFA, CFP®, Head of Retirement Research, Morningstar
Investment Management; Michael Finke, Ph.D., CFP®, Professor and
Ph.D. Coordinator at the Department of Personal Financial Planning at
Texas Tech University; Wade D. Pfau, Ph.D., CFA, Professor of
Retirement Income at the American College

104