At this point in your life, you’ve heard a lot of retirement advice. Probably the most well-known from the retirement planning cannon is the 4% rule.
Start by withdrawing 4% of your savings during your first year of retirement, then adjust that amount for inflation year after year. That will make sure your nest egg is well distributed across your retirement, right?
The 4% rule used to be a nifty rule-of-thumb, but it’s not really relevant at all to today’s retiree.
Here are 3 reasons why:
- You’ll probably spend more early on
Let’s face it, downsizing your life is a serious process. It can take years before you get yourself to the point where you’re spending significantly less than you did pre-retirement. This is a pitfall that most retirees today fall in with the 4% rule — they simply can’t keep up with it during those first years. And unfortunately, that excess spending upsets the whole scenario for the rest of your retirement.
- Interest rates aren’t what they used to be
When William Bengen first thought up the 4% rule, he made some smart assumptions: Even though you’d be slightly increasing the amount you withdraw year-over-year, the returns on your investment portfolio will make up for it.
The problem is that the 4% rule was first developed back in 1994, when interest rates were more than 3x what they are today. So even if you do keep more of your money in investments throughout your retirement, it’s much less likely to keep up with inflation and your growing health needs year-after-year.
- Your retirement will be long
Another thing that’s very different between 1994 and 2017 is life expectancy. The 4% rule is based on a retirement of 30 years or less. If you retire at 65, then you’ll need to be dead by the time you’re 95, or just run out of money.
That could work out just fine, but how much are you willing to bet you won’t live beyond that age? Between low interest rates and extra spending early in retirement, it’s already likely you’ll run out of money well before 95 anyway.
The 4% rule really doesn’t make any sense for today’s pre-retiree.
If the 4% rule doesn’t work, then what’s your real retirement solution?