Back in the mid-90’s the rule of thumb for retirement planning was the Four Percent Rule.

This rule was authored in 1994 by a financial advisor, basically stating that retirees should plan to withdraw about four percent from their retirement funds per year to live on with an inflation adjustment each year. This was projected to create a livable retirement income for 30 years.  Since 1994 many people have used this rule as a good standard for retirement planning and living. Now that we are over twenty years past when the Four Percent Rule was written, financial experts have recognized that this simple go-to rule needs some tweaking to continue to help retirees live comfortably in the new decade and decades to come. 

More Things to Consider Today

There are many more unanswered pieces to the retirement puzzle today than there were in the not-so-distant past. Things like: How long will you live? How will financial markets be performing? What about interest rates and inflation? What are your personal expected retirement expenses and how will they change with time? What do you foresee in healthcare needs? How will your retirement income impact your tax requirements? How about Medicare surcharges? All of these take a significant impact on a financial retirement plan. 

Let’s Look at Characteristics of the Four Percent Rule to Discover Why it May Not Entirely Helpful Today

  • The Projections of the Stocks and Bonds Market Returns: The author of the Four Percent Rule, William Bengen, tested a long-range of market return rates from 1926 to the mid-90s. Back then he found that the average return rate was about 5%, but this is much below what can be expected today. There is much more uncertainty in the markets today and taking a much more current look and understanding into these markets will do more to help in the longevity and success of an investment portfolio. 
  • The Favor of Portfolio Longevity: The primary objective of the Four Percent Rule favors longevity instead of current income needs. This is not a helpful plan should you need to take out more money at the beginning of retirement or if the market takes a downturn at the beginning of retirement. Due to this, a few strategies have been devised since the rule like the bucket strategy ( segmenting funds into buckets for certain time periods), the floor and ceiling method( not withdrawing more than a set ceiling or less than a set floor), and using lines of credit to help protect your portfolio longevity. Most people will need to adjust their income withdrawal depending upon their current life circumstances.
  • Approach to Yesteryear’s Taxes: The rule took on a simple approach to tax responsibility management that no longer helps with today’s complex requirements. The tax code is so much more complex than it used to be and plans need to be adjusted to account for it. Especially if your income should grow beyond needing the help of Social Security benefits.

Updating Plans from the Four Percent Rule

The Four Percent Rule does use some measures that were meant for a previous era in time, but it can still serve as a good launching point in financial retirement plans. It is not a bad idea to begin with its concepts, just hold it loosely and know your personal plans may have to be adjusted a little to meet your current personal retirement needs.  For more help and advice about the way to go about financial retirement planning or how to better adjust your current financial retirement needs please contact us anytime. We are dedicated to your financial health and independence.  The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.