Have you ever heard of the 4% rule for retirement? You may have heard financial experts say that you should draw 4% of your total portfolio in your first year for retirement spending. After that, you can adjust withdrawals based on cost-of-living increases. If inflation increases living costs by 2%, the next year, you should withdraw 6% of your portfolio.
Theoretically, following this pattern would give you enough money for a 30-year retirement.
However, as people live longer, 30 years’ worth of savings may not be enough for a comfortable retirement. And, as you age, your costs for things like travel may go down, while healthcare costs will rise.
Following a rigid 4% rule doesn’t leave flexibility for lifestyle changes — or fluctuations in the market. Investment firm Schwab.com points out, in an article about the 4% rule, that the calculations are based on a very specific type of portfolio, one that is a mix of 50% stocks and 50% bonds and is based on historical market returns. Returns for stocks and bonds over the next decade are likely to fall below those long-term averages, according to the Charles Schwab Investment Advisory.
Instead, experts suggest customizing your retirement plan and spending. MSN.com recommends three new retirement rules to follow.
Follow the 2% Rule for a Long Retirement
If you are retiring early — or if you are living a healthy lifestyle and have a history of longevity in your family — you may want to make retirement withdrawals more conservatively. Experts recommend beginning your first year by withdrawing 2% of your portfolio to ensure your portfolio will last.
Schwab also suggests considering how much security and peace-of-mind is important to you. We save for retirement so that we don’t have to worry about being able to live comfortably in our later years. If you have other sources of income, besides social security, to draw from or if you are willing to reduce spending in retirement if necessary, you can spend more early on.
Schwab recommends targeting a 75% to 90% confidence level as a safe balance between overspending and underspending. Of course, how much you withdraw will depend on your total portfolio.
Follow the 3% Rule for an Average Retirement
If you are fairly confident you won’t run out of money, begin by withdrawing 3% of your portfolio annually. Adjust based on inflation but keep an eye on the market, as well.
Prepare to Adjust Withdrawals Based on Market Returns
The final rule isn’t a rule, at all, but a reminder to be flexible. The guidelines above can help give you a good idea of how much you’ll need to save for retirement. But, ultimately, how much you withdraw each year for retirement will be a balance between how much you need and how much you can afford.
You may need to withdraw less, some years, simply based on the market’s behavior and the stability of your portfolio. Experts recommend re-evaluating your withdrawals and living expenses annually, or after any significant life changes such as a move or a major illness, to help your retirement investments last as long as you do.
