We’ve all heard the old rule of thumb for retirement spending, the 4% rule. Retirement experts have been saying for years that if you withdraw 4% of your nest egg each year, accounting for inflation, that you’ll be set financially for the next 30 years. But is it accurate? And if so, does it apply to you?
The theory itself was developed in the 1990s, and the financial landscape has changed drastically since. Additionally, life expectancies are longer now than they were in the 90s, meaning retirees need their savings to last even longer. In recent years, new experts have been coming into the fray to debunk the 4% rule, yet many people are still following it. Even if it’s not perfect, many retirees like the security of knowing they have a plan of some kind. Retirement comes with so many variables, from length of life to inflation to unexpected expenses, that it’s difficult to really know if your nest egg will be enough.
Whether or not you can use the 4% rule as an accurate yardstick probably depends on your socioeconomic status, among other factors. The wealthy may be more able to depend on this kind of estimate as they are more likely to have savings to fall back on. But for the middle class, it’s potentially risky to put all of their eggs in the 4% basket.
So is there a better way? Many experts recommend consulting with a retirement advisor personally rather than going with a one-size-fits-all rule. An advisor can look at you and your family’s financial situation and factor in things like your health, your lifestyle, and any extraneous expenses that may occur due to children or home maintenance. We’re no longer living in a semi-predictable retirement world, so it’s no longer feasible to bet on 4% being enough.
Additionally, throughout retirement, it is a good idea to periodically look at whatever plan you have put in place. Every few years you can take a look at your own finances in addition to the financial landscape ahead and make any needed adjustments to your withdrawal rate.
It’s also important to take investments into account when planning. If you’ve invested in high-risk stocks, it’s hard to accurately estimate where that money will get you. That’s another reason it’s so important to consult experts rather than going it alone. You may save some money in the short-term trying to do the research yourself, but you run the risk of losing a lot more in the long run if your plan is disrupted.
All in all, the 4% rule isn’t necessarily a bad starting point, but that’s what it should be viewed as - a starting point, not a hard and fast rule that will gain you complete retirement security. Be smart about your savings decisions, consult an expert where you can, and approach any financial rules with a grain of salt and a lot of information.