The 4% Rule Is Not For Everyone – Here’s another type of strategy to consider

SmartAsset and Yahoo Finance LLC may earn commission or revenue through links in the content below.

The 4% rule has long provided guidance to retirees on how to maintain a safe withdrawal rate from their retirement accounts. But given today’s low bond yields and stock market volatility, this once-constant rule of thumb seems increasingly open to change. A detailed approach by John Hancock Investment Management suggests using diversified income portfolios with multiple assets. The idea is to provide more sustainable and broader income streams while better protecting nest eggs in volatile markets.

Want help building a retirement plan for the future? Talk to a financial advisor today.

What are Multi-Asset Income Portfolios?

Multi-asset income portfolios combine a variety of assets with the goal of generating steady cash flows. They typically hold a range 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 such as private equity and infrastructure securities.

Diversification from multiple sources of income is the hallmark of multi-asset strategies. This aims to deliver higher returns for investors while controlling the risk of overexposure to any asset class or market sector. Portfolios combine riskier, higher yielding securities with lower risk securities to balance the pursuit of return and risk management.

Multi-asset income strategies offer today’s ordinary investors, savers and retirees the opportunity to build 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 your retirement savings in the first year of retirement and increasing your withdrawal amount annually by the rate of inflation.

However, with long-term bond yields still low compared to historical norms, a traditional 60/40 stock/bond portfolio may produce insufficient overall returns 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 more stable payouts and lower volatility through three recent market downturns, according to John Hancock’s report. These include the financial crisis of 2008, the pandemic sell-off of 2020 and the stock and bond correction of 2022. Investors in these portfolios have enjoyed average annual payouts of slightly more than 4% during most of this turmoil, according to an analysis of Manulife Investment Management referred to in the report.

The story continues

Who should consider this approach?

Multiple income investments are not necessarily right for everyone facing retirement. The broad mix of assets in stocks, bonds and alternative investments increases portfolio costs and complexity over holding just an index fund. It also requires active asset allocation management as market risks change over time. And yields will fluctuate, so income can’t be guaranteed the way a bond’s coupons promise fixed interest.

But for retirees looking to generate sustainable cash flow to support their lifestyle, multi-asset income strategies are worth considering. For those who aren’t comfortable depending solely on dividend stocks or high-yield bonds to fund retirement, multi-asset diversification spreads the risk. These portfolios have delivered steady payouts for years, according to Manulife Investment Management data mentioned above, with arguably lower levels of volatility than stocks. Consider talking to a financial advisor about your investment options and what might be right for your goals.

Individual investors’ income needs, withdrawal rate requirements and risk tolerance all determine whether a multi-asset income portfolio would be suitable or not. While past performance is no guarantee of future results, the track record of resilience in recent stock and bond storms suggests that multi-asset funds could be a viable option for many.

Limitations and Risks of Multi-Asset Income Portfolios

While multi-asset income portfolios contain risk better than relying on the 4% rule, limitations remain. Income is not guaranteed from year to year and future returns may be below historical averages. In addition, 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 asset mix that aligns with your income goals and risk tolerance requires guidance. No standard portfolio allocation meets the needs of every investor, so it may be prudent to consult a financial advisor. And transferring holdings such as private equity or real estate into income-generating assets can take time and involve transaction costs.

Tips for retirement

• If you have questions about how to analyze your money in retirement, a financial advisor can help. Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool matches you with up to three verified financial advisors serving your area, and you can have a free introductory call with your matched advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help reach your financial goals, get started now.

• The SmartAsset investment and return calculator helps you project how much your portfolio will grow over time.

• Keep an emergency fund handy in case you face unexpected expenses. An emergency fund should be liquid — in an account that isn’t exposed to significant fluctuations, such as the stock market. The trade-off 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.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with prospects and offers marketing automation solutions so you can spend more time converting. Learn more about SmartAsset AMP.

Photo credit: ©iStock.com/kate_sept2004, ©iStock.com/Paperkites

The post Are you following the 4% rule for retirement income? You may want to consider this portfolio style appeared first on SmartReads by SmartAsset.