Why does retirement planning feel so hard? Honestly, it can feel like you need a degree in finance to even have a chance at saving for retirement. That’s largely in part to how expensive retirement is and how we save for it. There is no one answer to how to save for retirement, which can make it easy to get frustrated. Tips and tricks like the 4 Percent Rule can sometimes help, but might not be right for every situation.
What is the 4 Percent Rule
Strategies like the 4 Percent Rule are tools that help you find your financial footing in retirement, but by no means is it a universal rule. Christy Bieber from the Motley Fool helps us define the 4 Percent Rule and how it works.
The 4 Percent Rule states that you should withdraw no more than 4 percent of your savings a year, adjusting for inflation in the economy. By doing so, your retirement savings should last approximately 30 years. Unfortunately, that thinking is a little antiquated. Although that approach still applies in certain instances, it isn’t as widely regarded today as it once was.
What Works Today
The reason it doesn’t work as well today is that it only considers your investment portfolio and inflation. It does not take Social Security benefits, monthly income, or pensions into account.
The 4 Percent Rule operates under the assumption that an investment portfolio is 60 percent stocks to 40 percent bonds. Understanding your own financial needs and how much you can tolerate withdrawing is most likely a better option. If the economy is in a recession, or your income has stalled, then withdrawing less than 4 percent is a perfectly fine option.
As with any strategy there are pros and cons. The 4 Percent Rule is simple, but also outdated. Roth IRAs and 401ks are more prevalent retirement saving strategies, as they have required minimum distributions, so you can’t over withdraw.
The takeaway is that saving for retirement needs to be dynamic and adaptable. Parts of the 4 Percent Rule can be helpful when investing, but it most likely shouldn’t be the only strategy we have to pay for our retirement. Doing what we can to increase our benefits, diversifying our sources of income, and being prepared for change all make for a good way to save for retirement.