Retirement is a time to relax and enjoy your hard-earned money. But it’s also a time to be careful not to outlive your savings. That’s where the 4% rule comes in.
The 4% rule is a simple guideline for how much money you can withdraw from your retirement savings each year without running out of money. It’s based on the idea that if you withdraw 4% of your retirement savings in the first year of retirement, and then adjust that amount for inflation each year, you have a good chance of not running out of money over a 30-year retirement.
How the 4% rule works:
The 4% rule is based on a study by William Bengen, a financial advisor. Bengen looked at historical stock and bond returns over a 50-year period and found that if you withdraw 4% of your retirement savings in the first year of retirement, and then adjust that amount for inflation each year, you have a 95% chance of not running out of money over a 30-year retirement.
For example, if you have $1 million saved for retirement, you could withdraw $40,000 in the first year of retirement. In the second year, you would adjust that amount for inflation. If inflation is 2%, you would withdraw $40,800 in the second year. And so on.
The 4% rule is not a guarantee:
The 4% rule is just a guideline. It’s not a guarantee that you won’t run out of money in retirement. There are a number of factors that could affect your retirement income, such as the performance of the stock market, the length of your retirement, and your health.
However, the 4% rule is a good starting point for planning your retirement withdrawals. If you follow the 4% rule, you’ll have a good chance of not running out of money in retirement.
Tips for following the 4% rule:
- Make sure you have a diversified portfolio. This means that your money is invested in a variety of assets, such as stocks, bonds, and cash. This will help to reduce your risk of losing money in the event of a market downturn.
- Start withdrawing money from your retirement savings gradually. This will give your portfolio time to adjust to the withdrawals.
- Be prepared to adjust your withdrawals if necessary. If the stock market takes a downturn, you may need to reduce your withdrawals.
The 4% rule is a simple guideline that can help you to plan your retirement withdrawals. By following the 4% rule, you can increase your chances of not running out of money in retirement.
Conclusion:
The 4% rule is a good starting point for planning your retirement withdrawals. However, it’s important to remember that it’s just a guideline. Your individual circumstances may require you to adjust the rule. So, it’s important to talk to a financial advisor to get personalized advice on how much you can safely withdraw from your retirement savings.
If you’re nearing retirement, or if you’re just starting to think about it, it’s a good idea to start planning your retirement withdrawals. The 4% rule is a good starting point, but it’s important to talk to a financial advisor to get personalized advice.