The theme this week on the Retirement Quick Tips Podcast is: The New 3.3% Rule For Retirement

Today, I’m talking about Why You Shouldn’t Fret Too Much About The 4% or 3.3% Rule.

If you like structure, rules, and you’re legalistic about things like I am, then the 4% rule or the 3.3% rule is comforting because you can determine an appropriate withdrawal rate for retirement based on well-documented research. 

But I urge you not to get too strict about adhering to a 4% or a 3.3% rule in retirement, because the real key to success in not running out of money in retirement is flexibility. 

You should hold more cash in retirement so you can stop your portfolio withdrawals during a stock market downturn, or you can pay cash to fix your leaky roof, rather than taking on debt. 

What are you going to do in 5 years when you need to buy a new car, but you’re not willing to spend more than 4% of your portfolio to buy the car, on top of your other withdrawals? It could drive you to finance the car instead, which may or may not be the best decision for you in retirement. 

You’re likely to have some big medical bills or need long-term care at some point later in life. What will you do then? For most people, this happens at the end of their life, and it could require a significant drawdown of assets to pay for that. Isn’t that why you built up your nest egg in the first place to pay for this unexpected thing that we call life? 

In my experience, I find that most of my clients who have passed on make it to the end of their life with plenty left over to pass on to their kids, because they didn’t spend as much as they could have in retirement. 

I have a client who will be 92 this year. She lives in assisted living and it’s expensive. She has had to increase her withdrawals over the last few years to pay for this expensive care. But guess what? She sold her house when she needed to move into assisted living, and that provided more than enough resources for her to pay for her increase in living expenses. She hardly spends money anymore because she’s not traveling and most of her other expenses are minimal. She’s in no danger of running out of money in retirement even if she quadrupled what she’s taking out in retirement. 

The research from Morningstar recognizes this stating: “While fixed withdrawal strategies produce stable and predictable cash flow, they do come with inherent risks. “If the starting withdrawal is too low and the portfolio outperforms expectations, the retiree will leave behind a large sum, which may not be a goal,”

“If the initial withdrawal is too high, the retiree will consume too much too early and risk running out prematurely and/or having to engage in dramatic belt-tightening later in life.”

Instead, flexible strategies whose withdrawal rates change on a yearly basis may be ideal for helping you reach your goals in retirement without outliving your money. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast. 

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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance