This week I’m talking about the 4% rule. 

The 4% Rule is a short-hand rule of thumb that helps you calculate how much of your portfolio you can safely withdraw in retirement without running out of money. 

Today I’m answering the most important question you should be asking if you’re going to use the 4% rule to plan your withdrawals in retirement: Can you rely on the 4% rule? 

Is this actually a reliable rule of thumb for planning for your retirement? 

The short answer is that it does work well...sometimes. The long answer is that retirement is too  complex to rely on a rule of thumb - taxes, inflation, your returns in retirement vary widely from year to year, and you may be unlucky enough to retire in the midst of a big stock market downturn - these are all circumstances that will make the 4% rule less useful or blow it out of the water all together. 

You can rely on the 4% rule in the years leading up to retirement to help you calculate how much you’ll need to save based on your lifestyle and income needs, but that’s where it’s reliability ends. I don’t recommend using it as a planning tool once you enter retirement. 

So for example, let’s say that after accounting for social security and other income sources you’re going to have in retirement, you calculate you’re going to need another $3,000/month from your investment portfolio. 

That’s $36,000 in year one of retirement. Using the 4% rule, you’ll need to save about $900,000 by the time you reach retirement, to generate income of $3000/mo or $36,000/year, because 4% X $900,000 = $36,000.

So it’s useful to help you plan for how much you’re going to need at retirement, but when you’re 2-5 years out from retirement, it’s time to leave the 4% rule behind and opt for a more sophisticated calculation that takes into account the thousands of different scenarios and circumstances you could face in retirement. I’ll talk about that a bit later in the week. 

That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip. 

----------

>>> Subscribe on iTunes: https://apple.co/2DI2LSP

>>> Subscribe on Amazon Alexa: https://amzn.to/2xRKrCs

>>> Check out our blog: https://truenorthretirementadvisors.com/blog/

----------

Tags: retirement, investing, money, finance, finances, financial planning, retirement planning, saving money, personal finance, wealth management, money tips, fee only financial advisor, financial planner, financial podcast, retirement podcast, financial independence podcast