About That 4% – HumbleDollar

Richard Quinn  |  August 5, 2020 IT’S SCARY TO RETIRE with a pool of money, knowing how you handle it determines your financial security for the next 25 years or so. It must seem even scarier to everyday Americans who don’t think they can count on Social Security.

A recent Tweet caught my eye. It linked to an article about the problems with the so-called 4% rule. As you might recall, the 4% rule states that, if you withdraw 4% of your portfolio’s value in the first year of retirement and thereafter step up the dollar amount withdrawn with inflation, you have a good shot at making your money last 30 years.

What’s the problem with the 4% rule? The article mentioned that people don’t spend the same amount each year, past investment results may not predict future returns and people’s finances could be upended by major life changes. Meanwhile, others have argued that the rule is outdated. What’s the problem? Interest rates aren’t what they used to be, plus individuals may not feel comfortable with the assumed investment mix.

Getting worried?

Yet other critics say the 4% rule results in retirees not spending enough, thereby leaving an unnecessarily large estate. I’m guessing that isn’t a problem for most. Still, it seems we have critics saying that the 4% rule leads to both too little spending and too much. Neat trick, wouldn’t you say? I was particularly puzzled by the criticism that people don’t spend the same amount each year.

If you’re living on a pension or Social Security, your spending will also vary from year to year. So why is this criticism directed at the 4% withdrawal rate? If you’re managing your own income flow, at least you have flexibility not found with a fixed monthly pension. For many people, the key retirement planning question is, “How much income can I count on for the rest of my life?”

Let’s assume you were earning $50,000 a year before you quit the workforce and you want that same income in retirement. First, subtract your Social Security benefit from the $50,000. That might leave you needing to generate $32,000 a year from savings. To that end, you could buy an immediate fixed annuity that’ll pay $32,000 a year for life. Today, that annuity would cost a 65-year-old man around $550,000.

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Source: About That 4% – HumbleDollar

3 comments

  1. The percentage rule means nothing to me.

    My most important rule is to be totally out of debt [including house] before retirement.

    I early retired over a decade ago and my nest egg is still growing.

    Like

      1. Because I have zero debt, my nest egg income grows much faster than my outgo so most of my income is automatically reinvested and my nest egg keeps growing.

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        Like

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