Living by the 4% Rule in Retirement

If you're looking for a formula to manage your savings in retirement, consider the 4% rule.

Story by Gerald McLeod, retired TCDRS Communications Manager

 

Outliving your savings and investments is one of the greatest fears of retirement.

Of course, you can never outlive your TCDRS benefit, but if you need to withdraw supplemental funds, you may encounter questions and concerns. One frequently used rule of thumb for planning retirement spending is known as the “4% rule”.

Simply put, the 4% rule has you tallying all your investments and savings, and withdrawing 4% of the total during your first year of retirement. In subsequent years, you adjust the dollar amount you withdraw to account for inflation. According to this formula, you should have a good probability of your money lasting 30 years.

Use the formula to begin your planning and then tweak it to meet your individual circumstances and needs. Consider seeking assistance at this step from a trusted professional financial advisor.

Like most rules of thumb, the 4% rule is a good place to start, but it comes with several caveats. The biggest of which are no two retirements are the same, and there are no one-size-fits-all rules.

Keep these other stipulations in mind when applying the 4% rule:

• Depending on your age and health, planning for a 30-year retirement may not be feasible. Be optimistic but realistic when deciding how long your money needs to last.

• The 4% rule sets a rigid withdrawal schedule, but there might be years where you need less or more money. Stay flexible and revisit your spending rate annually.

• The type of investments you have made will also influence your rate of withdrawal.

• The rule uses historical market returns, but the old saying that “past performance is no guarantee of future results” should be considered.

• Taxes and investment fees must also be figured into the withdrawal.

The 4% rule can be used as a helpful basic guideline on how much you can afford to withdraw from savings and investments. You should adopt a personalized spending rate based on your situation, investments and risk tolerance, and then update it regularly.

Personal Finance