If you are planning for retirement, you may have heard of the “4% rule”. This guideline, which was created in the 1990s by a respected financial advisor by the name of William Bengen, states that retirees can withdraw 4% of their total savings each year, adjusted for inflation, and not run out of money in retirement. This suggestion is based on an extensive study using historical data on stock and bond performance over a 50-year period.
Here’s an example of how the 4% rule would work in a real-life scenario:
- Let’s say you have $1 million saved for retirement across your entire portfolio
- In your first year of retirement, you would withdraw $40,000 (4% of $1 million)
- In the second year, you would withdraw a larger amount based on inflation. You adjust your withdrawal by an inflation rate of your choosing – perhaps, 2%. You could also adjust withdrawals based on th actual inflation rate which may be more or less than 2% per year. This would make the withdrawals less predictable but likely more accurate based on the current cost of living.
The 4% rule is still a great starting point for developing an effective withdrawal strategy. However, this strategy assumes that the retiree will need the same income every year throughout their retirement. We know that this isn’t always the case. There will likely be years when your situation will change along with your expenses (think unexpected health care needs or making a large purchase).
If your portfolio contains higher-risk investments, you may want to be more conservative about withdrawing from your savings, especially at the beginning of your retirement. Because your money is at risk due to the possibility of a market downturn, 4% per year may turn out to be too much if the market goes down.
To ensure your strategy is working towards your goals, you should consider meeting with a qualified financial professional. At Absolute Retirement Solutions we help retirees develop retirement withdrawal strategies that help stretch out their savings and minimize taxes. We can help you decide what accounts to withdraw from and when in order to help meet your unique needs. Contact us today.
Absolute Retirement Solutions does not offer tax, legal or investment advice, nor do we offer retirement planning services.