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03/19/2013

4% Retirement Spending Rule - is it Outdated?

Is the “4% Rule” meaningless for retirement planning today?  Many financial planning experts say a combination of extreme marketplace fluctuations, unpredictable inflation, decreasing income growth and increasing taxes prove the spending rule for retirement is antiquated.

Retired couple 1In a recent survey by The Conference Board, thousands of 45 to 60 year old Americans were asked
about their retirement plans.  Nearly two-thirds of the respondents expect they will have to work well into their retirement years in order to afford to pay basic expenses. The majority said this is because their ability to save is too low and the general living expenses that their savings will have to cover are too high.  They also expect to live longer and endure higher health costs.

Many of tomorrow’s pending retirees say they wouldn’t be able to afford to be sick, make a repair or upgrade to their home, nor be able to make a purchase like an updated vehicle, without making a major dent in their retirement savings.

In the past, the conventional wisdom said you can take 4% from your savings the first year of retirement, and then that amount plus more to account for inflation each year.  This practice was supposed to keep you from running out of money for at least 30 years.

In a recent online Wall Street Journal article, Say Goodbye to the 4% Rule, financial reporter Kelly Greene wrote the 4% rule was conceived by a financial planner in the 1990s who, quoting from the article, “analyzed historical returns of stocks and bonds and found that portfolios with 60% of their holdings in large-company stocks and 40% in intermediate-term U.S. bonds could sustain withdrawal rates starting at 4.15%, and adjusted each year for inflation, for every 30-year span going back to 1926-55.”

But the article shows had you retired with the above portfolio and then endured the actual market drops of the past decade, your accounts would have declined by a third and you would have less than a 30% chance of having enough money.

So, what is the answer?  Most experts agree that today, more than ever before, a customized approach is best.  You must determine realistic retirement goals and develop a spending plan that matches your lifestyle expectations with your ability to earn and save.

Because there are so many unknowns and changes, planning for how taxes will affect your savings and your retirement income has become an annual ‘must do’.  No matter how close you are to retirement, consider these common-sense tips offered through Investopedia as you schedule your retirement investment planning session with McRuer CPAs:

  • Avoid too much risk.
  • Avoid too little risk.
  • Don’t retire too soon.
  • Try not to retire all at once.
  • Buy long-term care insurance.
  • Do live within your means.

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