The 4% Rule Isn’t for Everyone – Here’s Another Type of Strategy to Consider
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The 4% rule has long provided guidance to retirees on how to maintain a safe withdrawal rate from retirement accounts. But with today’s low bond yields and stock market volatility, this once-steady rule of thumb looks increasingly open to change. An approach detailed by John Hancock Investment Management suggests using diversified multi-asset income portfolios. The idea is to provide more durable and ample income streams, while better protecting nest eggs through volatile markets.
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What Are Multi-Asset Income Portfolios?
Multi-asset income portfolios combine a variety of assets with the objective of generating steady cash flows. They typically hold an array of bonds, including government, investment-grade corporate and high-yield issues. They may also include dividend-paying stocks, real estate investment trusts (REITs), master limited partnerships (MLPs) and alternative income generators, like private equity and infrastructure securities.
Diversification across many income sources is the hallmark of multi-asset strategies. This aims to deliver higher yields for investors, while controlling for the risk of overexposure to any single asset class or market sector. Portfolios mix higher-risk, higher-yield securities with lower-risk securities to balance pursuing returns and managing risks.
Multi-asset income strategies offer ordinary investors, savers and retirees today the opportunity to develop greater resilience to market downturns compared to simply relying on the 4% rule over the long term. This rule of thumb suggests withdrawing 4% of retirement savings the first year of retirement and increasing the withdrawal amount annually by the inflation rate.
With long-term bond yields still depressed compared to historical norms, however, a traditional 60/40 stock/bond portfolio may produce overall returns insufficient to support a 4% withdrawal rate. Stock market volatility also adds uncertainty around the idea that 4% will be a safe withdrawal rate for decades into retirement.
In contrast, multi-asset income portfolios have delivered steadier payouts and lower volatility through three recent market downturns, according to John Hancock’s report. These include the 2008 financial crisis, the 2020 pandemic-driven selloff and the 2022 stock and bond correction. Investors in these portfolios enjoyed average annual payouts slightly exceeding 4% throughout most of this turbulence, according to an analysis by Manulife Investment Management referenced in the report.
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Who Should Consider This Approach?
Multi-asset income investing isn’t necessarily right for everyone facing retirement. The wide mix of assets across stocks, bonds and alternative investments increases portfolio costs and complexity versus holding just an index fund. It also requires active management of the asset allocation, as market risks shift over time. And yields will fluctuate, so income cannot be guaranteed the way a bond’s coupons promise fixed interest.
But for retirees seeking to generate durable cash flow to support their lifestyle, multi-asset income strategies merit consideration. For those uncomfortable with depending on dividend stocks or high-yield bonds alone to fund retirement, multi-asset diversity spreads risk. These portfolios have delivered steady payouts for years according to Manulife Investment Management’s aforementioned data, with likely lower levels of volatility than stocks. Consider talking to a financial advisor about your investment options and what may be appropriate for your goals.
Individual investors’ income needs, withdrawal rate requirements and risk tolerance all determine whether or not a multi-asset income portfolio would be a good fit. While past performance doesn’t guarantee future results, the record of resilience through recent stock and bond storms suggests multi-asset funds could be a viable option for many.
Limitations and Risks of Multi-Asset Income Portfolios
While multi-asset income portfolios contain risks better than relying on the 4% rule, limitations remain. Income isn’t guaranteed year-to-year, and future returns could fall short of historical averages. Additionally, the variety of securities involved leads to higher management fees than simple index funds, as investors pay for active oversight of these more complex strategies.
Finding the right mix of assets that aligns with your income goals and risk tolerance takes guidance. No standard portfolio allocation meets every investor’s needs, so it may be prudent to consult a financial advisor. And shifting some holdings like private equity or real estate into income-generating assets can take time and involve transactional costs.
Retirement Tips
If you have a questions about how to parse out your money in retirement, a financial advisor can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
SmartAsset’s investment and return calculator helps you project how large your portfolio will grow over time.
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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