How Retirees Can Earn More Than 4% Extra Income

“The Father of the 4% Rule Has New Ideas About Retirement Income,” proclaims a recent article from the Daily Upside.

For those who may not be familiar, the 4% rule states that when someone retires, they can start drawing from their savings at a 4% rate, increasing the amount by inflation each year. The theory is that while the market has average gains of 9% per year, starting lower allows a retirement account to grow and support ever-larger payments. At an average 3% inflation rate, the withdrawal will triple compared to the starting amount in 30 years. Higher inflation will cause the annual withdrawal rate to increase even faster.

I have personally long viewed the 4% rule as a simplified way to retire poor and go broke before you run out of time on the planet, and now I may not be alone.

The article noted that Bill Bengen, who came up with the 4% rule, never intended it to be the go-to plan for retirement planning :

“It’s actually a rule that only applies for a very narrow segment of the population in practice,” Bengen recently told Retirement Upside. Ultra-risk-averse people living off a 401(k) account who want to make sure their retirement income plan would have worked out without adjustment during the worst period in the modern history of the stock market should follow it. Others who are accepting of more risk can afford to draw more income, especially if they’re willing to make adjustments along the way.

“I never intended it to be a panacea for ‘safe’ retirement income planning, but that’s kind of what it’s become,” Bengen said.    

 I have several issues with the 4% rule for planning retirement income. First, $5 means you start your retirement with less income than you may have expected. Four percent of $1,000,000 is $40,000, and I think someone with a million-dollar retirement account expects a better retirement lifestyle than what $40k would pay for.

The second, and bigger, issue is that I have seen analysis showing a distinct possibility of spending all your retirement money before you finish your retirement. I can imagine nothing worse than being in your 90s, with medical costs building up, and your retirement money running out.

With my Dividend Hunter service, I recommend a different approach to managing your retirement savings and paying yourself a great income in retirement.

The Dividend Hunter strategy revolves around a recommended portfolio of high-yield securities. The focus is on earning great yields and building a high-yield income stream. The recommended portfolio has a current average yield of a bit over 10%. Many investors don’t know you can earn 10% cash yields with a high level of account security.

The power of a cash income-focused strategy is that dividends are steady and grow quarter after quarter. When the stock market takes a tumble, the dividends keep paying. In the years before you retire, reinvesting dividends can grow portfolio income by at least 10% per year, compounding that yield year after year.

When you are ready to jump into retirement, you know exactly how much income your retirement account produces. You don’t have to worry about stock prices going down. You are earning 10% cash income, which is a lot better than 4%.

I recommend that a retiree following my recommendations set up their initial retirement income at 6% to 7% of the account value. That leaves 3% to 4% to reinvest, growing your income each year and helping it keep pace with or exceed inflation.    

When you hit your 90s, you still have a great income, and your account value will be greater than it was when you retired 30 years earlier.