The most important and anxious questions I answer for my clients are: “How much money will I have at retirement and will that be enough to live on?
Of course, there are many variables in that calculation, one of the biggest is choosing an amount to withdraw from your investment nest egg every year.
Many people have depended on a study done 20 years ago that said people could safely withdraw 4% of their retirement investment accounts each year during retirement and not have to worry about outliving their money.
I don’t think this generic rule of thumb is a good way to go today. There are too many flaws in this old assumption to give it credibility for most people.
Here are some of the flaws of this strategy:
It’s not a customized figure. I hate “rules of thumb”. Everyone needs a plan for their unique situation. I have clients that live off pensions, annuity income, interest only from their investments and some retirees are still working part-time and hardly touch their investments while others that need to systematically spend some of their principal every year. Everybody’s situation is truly different.
In 1994 when this strategy was created, – CD’s were paying nearly 7%, so obviously you could lock up your principal at a higher rate than you were withdrawing and still grow your nest egg. That’s not true anymore. Today, you have to look hard to find 2-3% for fixed income returns, so in order to grow your account you need to find investments (stocks, real estate, international, etc.) that may earn a higher rate of return. This is where it can get dicey as to what is a prudent way to allocate your life savings to grow the money without taking more risk of principle than you are comfortable with.
Life expectancies are getting longer and so are our healthy, vibrant years, therefore, we want more money to spend and enjoy well into our seventies. You need to reevaluate the investments in your portfolio relative to your spending needs and your health and thus need to update your strategy every year.
How much money would you need assuming you only want to take out 4% of your investment money?
If you have $1,000,000 saved at retirement, than 4% is $40,000 per year before tax. That would give you less than $3,000 per month plus social security to live on in retirement.
I’m not sure what would be more challenging, creating a lifestyle based on the 4% rule or living your senior years with a large percentage of your life savings subject to stock market volatility.
What are you thoughts?
Did you know The average middle-class family has $20,000 saved for retirement?
Click here to read USA Today article.
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