What is the 4% rule when it comes to safe spending in retirement?
The 4% rule is considered a guideline retirees should use to estimate a safe withdrawal rate from retirement portfolios to avoid depleting funds before their death. First attributed to financial adviser Bill Bengen, who created it in the mid-1990s using historical data on stock and bond returns from 1926-1976, he concluded that during this time frame, a 4% annual withdrawal rate did not deplete the portfolio in less than 33 years.
Should this percentage be adjusted due to inflation and the current economic climate?
The 4% rule was intended to be the first year of retirement’s withdrawal rate and Bill Bengen’s analysis assumed an increase for inflation every year thereafter.
What are some other helpful ways, aside from the 4% rule, to cut back on retirement spending?
Having a clear understanding of your budget going into retirement is the key to success. You should know what your absolute minimum standard of living is and budget accordingly. Although that will allow you to better scale back when you need to be mindful of portfolio distributions during a down market, it is especially helpful to create a portfolio where most of your living needs can be met by guaranteed income sources, such as social security, pensions, and annuities. No one wants to work their whole life and have to worry about “cutting back” during the years when you’re supposed to be living life to its fullest. Proper financial planning well before and even during retirement will give you a better and much more controlled way of handling spending concerns.
Sathya Chey is a registered representative with, and securities and advisory services are offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.
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