“Roaring inflation and rising interest rates aren’t great news for retirees and near-retirees. But there is less to worry about in today’s economy than they might think.” That’s how Ian McGugan, a respected financial writer with The Globe and Mail, opened his column recently.
He went on to point out, reassuringly, that compared with what hit us in the 1970s – a period of double-digit inflation compounded by a monumental energy crisis – we’re in nothing like the same slippery shape we were in then.
But – and it’s a big ‘but’ – you’ve got to follow the rules.
In support, Mr. McGugan quotes the view of Wade Pfau, the legendary professor of retirement income at the American College of Financial Services in Philadelphia, who observed: “I was much more concerned a couple of years ago, when the pandemic hit, than I am now.”
Professor Pfau’s view is that today’s inflation readings are unlikely to become permanent for the simple reason that central bankers can manipulate interest rates (they will rise) to block excessive price pressures. In recent weeks, we’ve already seen this in action.
Remember to Follow the 4% Rule
Do you know about the 4-per-cent rule? Although slightly modified, it continues to hold true: a retiree planning for a 30-year retirement can safely withdraw an inflation-adjusted 4% of their starting portfolio each year without fear of running out of money.
Increasing numbers of financial experts are advocating that a 3.3% withdrawal rate might be more prudent, together with a rigorous approach to spending – essentially, cut it back.
Citing the work of Karsten Jeske, an economist who retired in his early 40s after a career as a Federal Reserve researcher and who now writes a blog called Early Retirement Now, Mr. McGugan concludes that there is no strong relationship between prevailing levels of inflation and future safe withdrawal rates. Instead, what matters are stock valuations. High valuations – as they are now – are usually a sign of lower stock-market returns to come.
The bottom line is that, as Professor Pfau contends, “a commitment to cut your spending by 15 per cent during market downturns can substantially increase the sustainability of your retirement portfolio and allow for a slightly higher withdrawal rate during good times.”
It’s good reading, and likely good advice. For personalized retirement planning guidance, please contact your advisor. Our partners at Interior Savings, Coastal Community Credit Union and Coastal Community Private Wealth Group can help.