Is the 4% Rule right for you?

Four percent rulePlanning to retire? How much can you withdraw and still be OK? There’s nothing simple about figuring out what percentage of your nest egg you can safely withdraw each year in retirement. You don’t want to be frugal, but also don’t want to outlive their savings. The “4% rule” may be a possible starting point to a tough question.

Sure, there’s been plenty of criticism over this approach. Two common criticisms are: 1) Some suggest that this rule of thumb should be adjusted since average returns rates may be substantially lower that historical returns, and 2) others suggest that this approach unnecessarily forces retirees to reduce their equity exposure, even if they are down in value.

How can you put this in perspective?  First consider that the 4% Rule is based on worst case scenarios – that includes century old return data including the Great Depression. While we can’t predict the future, rule of thumbs serve a purpose – they create generalities, not custom tailored answers for any single person. People like to understand generalities in many facets of life, and using the 4% Rule as a starting point, is simply another generality. If you are 60 or 90 years old may impact your likelihood of success of a 4% withdrawal.

Selling stocks at the bottom?  Some critics of the 4% Rule suggest that it forces retirees to sell their stocks even after they’ve lost value. Not quite right.

Don’t forget, that with ongoing portfolio rebalancing, and the ability to determine where to withdraw funds, this challenge is diminished. In fact, if the stock portion of the portfolio is underweighted, it is possible that equities are bought to achieve a certain strategy.

Plan and adjust.  Life is not static, and there are variables that can throw off a safe withdrawal rate such as taxes or unexpected medical needs. Those people that are flexible with their lifestyle needs may be able to have an adaptable approach to withdrawals. For instance, if a retiree is willing to cut their expenses by 10% through a market downturn, they may be able to increase spending later.

How much retirement income will be fixed or variable?  We see fewer and fewer families that are relying on pension income and social security as a main component of their retirement income needs. Consider this, what if 100% of your retirement spending needs came from your savings. How would a market downturn impact you? Conversely, what if 75% of your retirement income was derived from pension, social security and other highly predicable income streams, how would a market downturn feel in that scenario? It’s obvious to see that the greater amount of predicable income you receive as a percentage of your overall needs, the more peace of mind you may have about dramatic portfolio movements.

A Plan for you is the best one.  Ultimately, the best withdrawal rate is the one designed for your individual circumstances, and it should be frequently reviewed to assure sustainability. We have great tools to help predict your retirement outcomes based on a stress-test scenario, and that can help you get more comfortable around a comfortable withdrawal from your saving. We do not view your situation as a generality, but the 4% Rule is one that creates a starting point.

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