The 4% Rule: A Guide to Retirement Planning

The 4% rule is a popular retirement planning tool that suggests retirees can withdraw 4% of their total investment portfolio in the first year of retirement, and then adjust their annual withdrawals according to the rate of inflation (or deflation). This rule is not meant to guarantee that this percentage is sufficient, nor does it suggest that if you earn more than 4%, you will declare bankruptcy when you die. Rather, it is an indicator based on past market performance that suggests there is a high probability of having enough for retirement. However, the 4% rule can be a problem, especially for those who are close to retirement.

In the past, the concern was that a reduction of 4% could be too conservative and, in many market scenarios, retirees would end up earning too little as retirement income. Rising inflation only makes things worse. As interest rates rise, the value of your current bonds decreases. In addition, the 4% rule is based on the U.

S. investment experience during the 20th century. As the 21st century introduces us to a globalized investment market, is it realistic to assume that markets will continue their inevitable upward march? Will bear markets always be short-lived and will recoveries always be rapid? One way to use the 4% rule is to add up your expected retirement savings and see if 4% of that figure will generate your target retirement income. If not, it's time to go back to the drawing board and figure out how to increase your retirement savings.

The 4% rule can get things started, but it's not the final solution. It's important to understand that the rule may not be as conservative a measure as it used to be. We may not see the optimistic conditions that drove the U. stock market in the second half of the 20th century.

Every investor is unique, so it's important to consider different scenarios and take stock of how your bonds are working and if an alternative could serve you better.To minimize taxes, protect assets and give you and your beneficiaries greater control, 7 states stand above the rest when it comes to trust laws. Missing an important step or making a mistake can cause all your careful planning to fail, leaving your heirs and beneficiaries to face a challenge that causes them headaches.As the United States ages, demand for housing and care for the elderly will increase, presenting some recession-resilient investment opportunities. Simply put, the 4% rule can help you guess how far your money can go after you stop working, but your entire retirement plan should be based on more than one rule.The best strategy is to review your situation with a financial planner, starting with how much you have saved, what your current investments are and when you plan to retire. Wade Pfau, an academic who focuses on retirement income, commented on the 4% rule on his blog Retirement Researcher.The same projected returns, updated annually, are used in Schwab's retirement savings and expense planning tools and calculators.

Again, these spending rates assume that you will follow that spending rule for the rest of your retirement and will not make future changes to your spending plan.If 4% gives you an adequate retirement income, roll up your sleeves and start looking at your particular plan. The 4% rule may still serve as a guide to help you guess how far your money can go after you stop working, but your entire retirement plan should be based on more than one rule.