After decades of work, deciding to leave the working world behind is a somewhat relieving one. You write the letter, get everything arranged, and step outside the door for the final time is like one giant sigh of relief. It’s like fifty years of Friday evening relief sighs all rolled into one.
Despite the positives that come with retiring, there’s still one stressful decision to make – choosing how much to spend and withdraw in retirement. For those without experience in this area, some initial research will bring up the notorious ‘4% rule.’ But if there’s an example of ‘rules are made to be broken,’ this is surely it.
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When it comes to retirement spending, we all need a crystal ball. We need to skip ahead briefly to the end – if there’s too much sitting in your accounts, you’ll know to be less cautious earlier in retirement. However, this is impossible, and making spending decisions is just as hard.
For the next twenty years and beyond, people will judge the way that you spend in retirement. What’s more, you’ll find people who support your method and people who disagree with it. This being said, there is growing evidence that ignoring the 4% rule is a strong retirement move.
Problems with the 4% Rule
While the rule may have made sense many years ago, it no longer applies in an environment where bond yields are low and high stock prices. Back in the mid-1990s, William Bengen created ‘Safemax’ as a system for retirees to withdraw without worrying about draining their savings.
Why was the system important? Because retirees towards the end of the 1960s were just around the corner from a decade and a half of bear markets. Simultaneously, inflation rose significantly, and bond investments and other savings were rendered useless as purchasing power crumbled.
Economists and other experts worked on solutions for retirees so that this worst-case scenario didn’t happen again. Eventually, Bengen decided that 4% was the limit for those who wanted to live thirty years in retirement. Even through unlucky circumstances, they would have survived with funds until death.
However, people often forget (or don’t know) that Bengen himself readjusted his formula to 4.5% back in 2006. Furthermore, he has been saying for over ten years that 5% is now more accurate (and that even this doesn’t work for some retirees). Despite these changes and revelations, people only tend to remember the 4% rule.
The 4% rule causes problems because it doesn’t consider the individual circumstances of the retiree. Although it was designed to be a blanket rule, retirees need to consider numerous factors before choosing how to spend in retirement.
Important Factors When Withdrawing in Retirement
When looking at the 4% rule, it’s important to remember that all Bengen’s research was based on the conditions in 1968. Compare this to somebody retiring in the 2020s and you find very different circumstances. Therefore, the moment at which you retire is one of the most critical components of your decision.
If you retire when the market is up, your money is likely to last longer. Spending in the early years is taken from interest rather than savings. If you retire when the market is down, not only are you taking directly from your savings, but these savings are also steadily draining.
Elsewhere, you also need to consider your retirement age, existing and planned standard of living, and health (life expectancy). Only when you consider all these factors can you decide whether the safest withdrawal rate is 4%, 5%, 6%, or 7%.
Sadly, the decision for retirees is also made harder by the fact that the people managing their accounts often have a stake in the decision. Financial advisors earning commission will steer retirees into one direction over another.
As an older worker, you need to remember that the goal is to make the funds last until the last day. Though you might want to pass some money to loved ones, the primary goal is to pay for yourself. If the funeral expenses use the last of the savings, this equates to a perfect retirement.
If you currently have $1 million saved, let’s say that you follow the 4% rule. Also, you’ll receive Social Security and want to live on $50,000 per year. Listen to the studies, and you’ll learn that you’ll have close to $1 million left at the end. While this is good news for financial advisors and loved ones, it doesn’t help you. You could have lived some more and ticked lots of things off the bucket list. Instead, you were scared to spend money and had $1 million left in the bank.
Unfortunately, no universal rule exists that fits every American retiree (sorry!). Instead, you need to consider your circumstances and decide from here. Don’t be afraid to break the 4% rule because even the creator of the system has admitted its shortcomings in today’s market.
Withdrawing in retirement isn’t a precise exercise; it’s about adjusting to the changing environment, considering your health, and making money last until the very last day (not using it all before or having lots left after!).
Contact Information:
Email: [email protected]
Phone: 8139269909
Bio:
For over 30-years Flavio “Joe” Carreno of The Retirement Advantage has been a Federal Employee Retirement System specialist (FERS) as well as a Florida Retirement System specialist (FRS) independent advocate. An affiliate of PSRE (Public Sector Retirement Educators), a Federal Contractor & Registered Vendor to the Federal Government, also an affiliate of TSP Withdrawal Consultants. We will help you understand your FERS & FRS Benefits, TSP & Florida D.R.O.P. withdrawal options in detail while recognizing & maximizing all concurrent alternatives available.Our primary goal is to guide you into retirement with no regrets; safe, predictable, stable, for life. We look forward to visiting with you.
Disclosure:
Not affiliated with the U.S. Federal Government, the State of Florida, or any government agency. The firm is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Although we make great efforts to ensure the accuracy of the information contained herein we cannot guarantee all information is correct. Any comments regarding guarantees, safe and secure investments & guaranteed income streams or similar refer only to fixed insurance and annuity products. Fixed insurance and annuity product guarantees are subject to the claimsâ€paying ability of the issuing company. Annuities are long-term products of the insurance industry designed for retirement income. They contain some limitations, including possible withdrawal charges and a market value adjustment that could affect contract values. Annuities are not FDIC insured.
