Accumulating wealth during your saving years is crucial to having enough resources to live a comfortable retirement. However, developing a retirement that you really want is really a matter of using your savings to pay for your living expenses. You may have discovered some general, cookie-cutter strategies for providing yourself with enough income and cash to cover your expenses.
The Basics of the 4% Rule
The 4% Rule is a guideline for deciding how much to withdraw from your retirement savings each year. Its purpose is to maintain a steady income flow while preserving an adequate overall account balance for future years. Normally, interest and dividends will make up the bulk of the withdrawals.
With the rule as a guardrail, you can get an understanding of how much you’ll need in savings to cover your costs which can help you avoid running out of money.[1]
Does the 4% Rule Work?
Experts are divided on whether the 4% withdrawal rate is the best option. Many personal finance experts say that 5% is a better rule for all but the worst-case scenario. And some caution that 3% may be safer in current interest-rate conditions. However, the truth is that the 4% rule is simply not a comprehensive strategy. Whether you should use 3%, 4%, or 5% will likely depend on your unique financial situation. And even then, your income may not even be set to come from investment withdrawals in the first place!
What’s Wrong With the 4% Rule?
There are several assumptions built into the 4% withdrawal rule, so you may not want to use it as a comprehensive, actionable investment strategy. It fails to account for unique healthcare insurance coverage situations, tax planning blunders, or the location and liquidity of your wealth and savings.
However, the 4% Rule may be used as a conversation starter with your financial advisor on how to turn your savings into income. There are many moving parts to a retirement plan that must be considered if your goal is to make the most of your savings. Talk to us today to turn your retirement plan from a basic cookie-cutter plan – that doesn’t factor in your financial situation – into one that works to meet your unique needs and goals.
[1] https://www.investopedia.com/terms/f/four-percent-rule.asp
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Because investor situations and objectives vary this information is not intended to indicate suitability for any individual investor.
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