4% Spending Rule Still Feasible

A 4% spending goal may still be a reasonable starting point for investors who follow a total-return spending approach, a research paper concludes.

Vanguard’s “Revisiting the ‘4% Spending Rule’” explains that a total-return spending approach is an approach in which investors remain properly balanced between stocks and bonds, and diversified within asset classes, so that their portfolios can potentially benefit from both dividends and capital appreciation. As an example the paper states, instead of attempting to alter their portfolios by overweighting bonds, increasing bond duration, or overweighting income-yielding stocks, investors using the total-return approach allow for spending both from portfolio cash flows and from the potential increase in their portfolios’ value. 

According to the report, the current low-yield environment that retirees are facing is much different from the investment climate of 30 years ago, which has important implications for the amount that a retiree can safely expect to spend annually from a portfolio without jeopardizing its durability.    

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Vanguard believes it is important for investors to consider real-return expectations when constructing portfolios, because today’s low stock dividend yields and U.S. Treasury bond yields are, in part, associated with lower expected inflation today than 20 or 30 years ago. Specifically, Vanguard’s market and economic outlook indicates that the average annualized returns on a balanced 50% equity/50% bond portfolio for the decade ending 2021 are expected to center in the 3% to 4.5% real-return range.

(Cont’d…)

Although this level is moderately below the actual average real return of 5% for the same portfolio since 1926, it potentially offers support for the continued feasibility of a 4% inflation-adjusted withdrawal program as a starting point for balanced investors, the researchers contend.  

Keeping in mind the relationships among key variables such as time horizon, asset allocation and portfolio success rates, an investor can develop a customized spending rate that provides the highest probability of meeting his or her long-term goals. The analyses in the paper illustrate sustainable withdrawal rates can range from 3% of a portfolio (for conservative investors with long time horizons) to more than 9% (for more aggressive investors with shorter time horizons)—all with a high probability of not depleting assets during the specified time horizons.   

The researchers note that each investor’s situation includes unique circumstances that can affect portfolio spending and sustainability.  

The report can be downloaded here.

ExpertPlan, Ascensus in Merger Agreement

Ascensus has agreed to acquire ExpertPlan, headquartered in East Windsor, New Jersey.

Ascensus’ interest in ExpertPlan stems from the complementary open-architecture investment platform and the additional solutions offered in some key areas including micro plan Web-based  services, defined benefit, including cash balance plan services and non-traditional asset defined contribution plan recordkeeping and  administration. The ExpertPlan team also distributes through a broad network of intermediary partners, which is very similar to the Ascensus approach. The acquisition is expected to close by the end of 2012.  

The transaction addresses the key attributes Ascensus looks for in an opportunity: expanding market share in growing markets, entering new growth markets and delivering solid margins, said Bob Guillocheau, president and chief executive, Ascensus. “Being able to offer these new services to our existing relationships is something that will help our clients meet their business goals and that is one of our primary focuses as a high-quality service provider,” Guillocheau said.

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“ExpertPlan is very proud and excited to join the family of Ascensus companies,” said Julian Onorato, CEO and chairman of the board, ExpertPlan. “The combination of two complimentary national firms will provide our clients, Private Label Partners and prospects with industry-leading creative solutions.”

Ascensus, in Dresher, Pennsylvania, is a retirement plan solutions provider.

ExpertPlan is a provider of micro and small plan recordkeeping and administrative services for approximately 16,000 plans with a focus on providing Web-enabled technology services.     

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