If you don’t know what the 4% rule is, allow me to briefly explain.
The 4% rule is a rule of thumb that says 4% of your retirement account is what you can safely spend each year with the likelihood that you will not run out of money in your lifetime.
In fact, the original expectation was that you should be able to draw out 4% of your retirement account each year and adjust that up each year by a fraction to account for the increasing cost of living and still be fairly certain that you won’t run out.
And if you would like to learn about the one often overlooked risk that completely lowers the chance of the 4% rule working please watch my FREE retirement Video HERE.
Example of 4% Rule:
So, let me give you an example. If you have $500,000 in your account you should be able to withdraw $20,000 (or 4%) out of your account in year one, and then $20,600 out in year two, and $21,218 in year 3, and so on.
This would assume that the cost of living is rising at 3% per year.
The original assumptions were made in 1994 and were based on using a portfolio of 50% Stocks and 50% bonds and living only 30 years into retirement. *
So, Does The 4% Rule Still Work?
A more recent study done in 2013 by Texas Tech, the American College, and Morningstar revealed that with today’s lower interest rates and more volatile stock markets even a 3% withdrawal rate has a more than 20% rate of failure.
And unfortunately, it gets worse…
- For conservative investors with less than 50% of their assets in stocks, the chance of running out of money is more than 50%!
- Many traditional financial advisors still cling to this rule even though times have changed.
- Many advisors only assume a life expectancy of age 90 when running these assumptions for clients, the failure rate goes up dramatically if you account for even a slightly higher life expectancy.
- Even though interest rates are way lower today then they were in 1994 many advisors falsely assume interest rates will return. There is not much evidence this will happen while the Government continues to rack up debt. This will continue to add to the failure rate.
Why is the failure of the 4% rule such a big problem?
Unfortunately, many retirees today are skating on that kind of thin ice because they are being advised by their Stockbroker to just put all of their assets into one big bucket and then draw out an income each month.
Then they just cross their fingers and hope for the best and they ignore the possibility of a market downturn. I would not call that a great retirement plan. I call that a hope and a prayer retirement plan.
I run into retirees every day who have been drawing down on their accounts by 5%, 6%, 7% or even 8% and their broker has never had a conversation about the risk of running out of money.
These people practically fall out of their chairs when I show them how much at risk, they are of running out of money and what can be done to fix it.
We use a customized Bucket planning approach that addresses all aspects of a client’s life including…
- Social Security
- Long Term Care
- Estate Planning and Management
To learn more about the risk of not having a properly segmented account to avoid the risk of running out of money and to better understand how a customized Bucket Plan can help please watch our Free 10-minute retirement Video HERE
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