Could a commonly used retirement “rule of thumb” unnecessarily restrict your retirement income?
Over the years, the “4% rule” has gained traction as the safest measurement to ensure retirees do not spend too much of their nest egg. Since the wonderful research in 1996 by William Bengen that popularized this idea, numerous studies (including ones by Bengen) have built upon the original premise. And though the research is much more sophisticated now, somehow this simple idea is still used to answer one of retirement’s most important questions.
If you or someone you know utilizes this concept, here are three influences that could increase your safe withdrawal rate:
- How much of your income is guaranteed? Does it make sense for the Johnson’s, who have $80,000 a year in pensions and Social Security benefits, use the same withdrawal percentage as the Clark’s, who have $30,000 in similar benefits? If it takes $100,000 a year for each family to meet expenses, the Johnson family has a much larger margin for error and can afford to withdraw more. The Clark family cannot afford to risk their primary source of income.
- How willing are you to adjust your spending? The 4% rule assumes you calculate a withdrawal amount once at the beginning of retirement and then mindlessly follow that for the rest of your life. Do you want your airplane pilot to set the autopilot, wish you luck, and hop off before takeoff? Studies show that proper adjustments throughout retirement (based on several factors) could increase the initial percentage to 5.2% or more!
- Do you enlist experts for assistance? Many other factors impact how much you withdraw each year in retirement…your asset allocation, tax situation, life expectancy, the relative value of the market, and interest rates (just to name a few)! An adviser specializing in retirement income should understand these concepts and help you apply them to your unique situation.
Many couples, especially those with $1,000,000+ in savings, could find that working (on a flat annual retainer) with an adviser that understands these concepts could pay for itself with the higher monthly income!
Wishing you health and happiness in retirement –