As you plan for retirement, you might come across something called the “4% Rule.” Its premise? If you take out four percent from your accounts in your first year of retirement (then adjust that amount each ensuing year for inflation), you would have enough money to last you 30 years. What a promise!
Over the years, the “4% Rule” has gained momentum. After all, who wouldn’t want an easy way to figure out how to make their money last longer and eliminate the fear of outliving their retirement savings?
But you want to be careful about relying too much on general retirement advice.
William P. Bengen, a retired financial advisor, created the rule for retirees in the early-to-mid 1990s. However, things have changed since then.
For example, when the concept was officially introduced in 1994, the 10-year Treasury rate was around seven percent - today, it’s about 2.95 percent. This translates into less income from government bonds. Additionally, the historical assumption that the stock market will return 10 percent every year is also outdated (you should expect less).
Likewise, there are a lot of “unknowns.” What will interest rates do? What about rising healthcare costs? What about taxes? How does Social Security fit in? What if you live longer than 30 years in retirement? Plus, your withdrawal strategy could be different every year in retirement, depending on your goals and sources of income.
The Simply Money Point
As you can see, the “4% Rule” is a flawed long-term strategy that has survived much past its prime. Furthermore, generalized advice is just that – generalized. You deserve better.
A trusted financial advisor can create a personalized financial plan that addresses all of these concerns, specific to your circumstance. He or she can work with you to reduce the probability of outliving your money, which is a much better tactic than blindly following an obsolete rule from almost 25 years ago.
And to learn more about retirement planning, visit our “Retirement Resources” library. You’ll find free online video tutorials, live events, and downloadable guides, such as “7 Simple Steps to Retirement Planning.”
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