What is the four percent rule?

What's your retirement spending strategy?

Everyone’s retirement spending plan will be a little different, but we probably all have one goal in common: Don’t run out of money. 

Have you thought about how much you want to withdraw each year after retirement? Having a solid plan in place will not only help you stay secure, but it will also save you a good amount of stress. 

One well-known strategy for managing retirement withdrawals is called the 4 percent rule. Is this (or something like it) the right approach for you?

How the 4 Percent Rule Works

This strategy is predicted to give retirees a 90 percent chance of a sustainable retirement for 30 years. It divides a portfolio equally between stock and bonds.

Suppose your nest egg is $1 million. In year one of retirement, you’d withdraw 4 percent: $40,000. In year two, you’d increase $40,000 by 2 percent (for inflation) and withdraw $40,800. Repeat this process every year.

Other Approaches

You might be thinking, “I don’t want to be in that 10 percent that runs out of money!” You certainly don’t. Ideally, everyone should work closely with their advisor to tweak the rule based on risk tolerance and circumstances -- or employ a different strategy altogether.

For example, some retirees might withdraw only 2 to 3 percent per year to be conservative. They might anticipate living longer than 30 years or want to be extra careful in case the market underperforms.

Many people will need to withdraw more in some years for big expenses like a vacation or surgery. It may also make sense to withdraw more when the market overperforms and less when it underperforms. 

Wondering about the right approach for you? Reach out anytime to discuss your options.

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Silvia EvansComment