(Maurie Backmann)
The income you will receive from Social Security in retirement will probably not be enough to cover all your expenses and allow you to lead a comfortable life. Rather, you’ll need outside income to maintain a decent standard of living, and that’s where your savings come in.
It’s a good idea to start investing money in an IRA or 401(k) plan at an early age and then invest that money aggressively so that it grows into a substantial sum over time. . In fact, if you play your cards right, you could end up with a much higher savings balance than expected.
Real-world example: Saving $500 per month over 40 years will leave you with an ending balance of approximately $1.5 million if your investments generate an average annual return of 8%. Since it’s a bit below the stock market average, it’s certainly doable.
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But once you retire, you’ll need to exercise caution when making withdrawals from your retirement plan. You don’t want to withdraw money too aggressively because if you do, you risk depleting your nest egg in your lifetime. On the other hand, you don’t want to withdraw too conservatively, because you might miss out on some opportunities or make life unnecessarily stressful.
For years, finance gurus have championed the 4% rule, which states that if you start by withdrawing 4% of your savings to balance your first year of retirement, then adjust subsequent withdrawals to account for inflation. , your savings should last a good 30 years. . But while this rule worked well years ago, you might want to take a different approach now.
Why you don’t need to stick to the 4% rule
To be clear, there’s nothing wrong with using the 4% rule as a starting point for managing your nest egg. But you might want to err on the side of withdrawing your savings more conservatively for several reasons.
First, when the 4% rule was introduced, bonds offered much higher yields than they do today. And since your portfolio could be largely composed of bonds during retirement (since they are less volatile than stocks and a safer bet for this stage of life), you will have to adjust to these lower yields by reducing your withdrawal rate.
Moreover, Americans are living longer today than years ago. If you retire early, you may need your nest egg to last more than three decades. A good way to stretch that money is to stick with a lower withdrawal rate.
That said, if you retire later in life — say, in your mid-70s — chances are you won’t need your nest egg to last 30 years. In this case, you can safely withdraw more than 4% of your savings balance each year.
It’s just advice
You may decide that a 4% annual withdrawal rate is a good choice for your retirement. And it’s perfectly OK to make that call. But don’t stick to this withdrawal rate just because financial experts have been pushing it for a long time.
Although the 4% rule may be easy to follow and may have worked well for seniors in different market conditions, it does not guarantee that you will not exhaust your nest egg prematurely. To be fair, even sticking to a lower withdrawal rate doesn’t give you that guarantee. But the thing is, a 4% withdrawal rate is one of many options you can play with, so it’s important to consider your own big picture when making this call.
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