Is the 4% Rule Still Valid for Recent Retirees?
Many of us look forward to spending our retirement years doing all the things we’ve always wanted to do. But how do we know if we’ve saved enough money to make our dream retirement a reality?
Thinking about money and how to manage it, no matter what stage in life you’re at, can be daunting. Today, we join Margaret Manning as she speaks with financial expert Pam Krueger and professor of business Josh Escalante Troesh about the 4% Rule and what we need to consider when managing our finances during retirement.
Understanding the 4% Rule
The 4% Rule acts as a guide for retirees as to how much you can withdraw from your portfolio, adjusting your subsequent withdrawals for inflation, so that you will not run out of money for a good 30 years. It serves as a baseline, but it’s not without contentions and inherent issues.
The Problem with the 4% Rule
Josh notes that there are two “retirement sins.” One is running out of money before you reach the end of your life. The other is reaching the end of your life with a lot of money, but no memorable moments.
Keeping these in mind, the 4% Rule might cause more retirees to underspend in their retirement for fear of running out of money in the future.
It’s not likely that you will run out of money, even with the 4% Rule in place. In fact, it’s the opposite in some cases – you might actually end up having more money than what you started with.
The public is divided regarding this rule. One camp is for using the 4% that can be taken out every year to make the most out of their retirement. The other camp is more apprehensive about making this financial move.
The Dangers of Sticking to the 4% Rule
Numbers and figures can be limiting, and we know that life doesn’t always go according to plan. Sticking to the 4% Rule might keep you from doing what you’ve always wanted.
You don’t always spend the same amount every year, and the economy is constantly changing.
This is why sticking to the 4% Rule can be potentially limiting. There is a need for constant re-evaluation every year or every time there is a change in your life.
Careful Financial Planning Is the Key
You don’t have to deprive yourself of life’s little joys for fear of eventually running out of money.
As long as you have thought about it well and you have come up with a sound financial plan for the succeeding years, it’s acceptable to take out a certain percentage from your portfolio for the first few years of your retirement and then spending smaller amounts for the succeeding years, keeping in mind possible future expenses on health care, housing, and food.
When it comes to the 4% Rule, there is no right or wrong answer. Instead, what we can do is to look at the 4% Rule as a useful guideline.
What do you think about the 4% Rule? How are you planning to make the most out of your retirement? Share your thoughts in the comments below!