The idea behind the 4% Rule is straightforward: Withdraw 4% of your nest egg the first year of your retirement, then increase that amount each year by enough to account for inflation. This way, your money will likely last for at least 30 years (assuming you stay invested half in stocks and half in bonds).
Although investors and financial planners have used the 4% Rule for decades, there’s talk that it may be outdated.
Rather than adhere rigidly to a 4% withdrawal rate, consider using the rule as a starting point while also staying flexible by taking advantage of new developments as conditions change. Here are three dynamic ways to manage your spending in retirement:
1. Develop a retirement plan and update it regularly. Online retirement calculators (such as the one here) can help you determine a sustainable portfolio withdrawal rate based on your specific situation. Likewise, a professionally created retirement plan can give you an even more detailed analysis. But whether you do the math yourself or work with a pro, review the numbers regularly to ensure you remain on track.
2. Adjust your withdrawals based on the market’s performance or your own personal changes. A static withdrawal rate doesn’t factor in the market’s inevitable ups and downs, or changes that may occur in your health and lifestyle that demand flexible cash flow management. Therefore, you might withdraw a bit less when financial asset prices are down and increase your withdrawals when the markets are on a roll. Or you might skip making inflation adjustments to your withdrawal rate during those years when your portfolio experiences losses. These types of moves may mean your budget fluctuates each year, but they’ll also help increase the probability that your savings will last throughout your lifetime.
3. Consider an annuity. Annuities are not for everyone—they can be complex and costly—but annuity contract are one of the only types of financial vehicles that can ensure you have guaranteed income for life. With an ongoing stream of payments coming to you, you can feel more comfortable that you’ll have the income needed to cover essential expenses in retirement—even if you outlive your investment portfolio.
Don Daigle is a Financial Consultant at Charles Schwab with over 30 years of experience helping clients achieve their financial goals. Some content provided here has been compiled from previously published articles authored by various parties at Schwab.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. Annuity guarantees are subject to the financial strength and claims‐paying ability of the issuing insurance company.
Don Daigle
Branch Leader
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Millville, NJ 08332
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