Today, retirement is much different from previous generations. The life expectancy of people aged 65 and up has risen, while their labor participation rate continues to drop. That is very different compared to previous generations, when people worked into their 70s.
In today’s climate, many people rely on other sources of income to help them enjoy a comfortable lifestyle as they age. That’s why retirement has become so important. Many people are carefully considering how much money to pull from their retirement each year. One financial strategy that many people are starting to use is the safe withdrawal rate. The safe withdrawal rate is the percentage of savings that you can withdraw every year without running out of money. Here is an overview of the safe withdrawal rate, and how it can help you enjoy a successful retirement.
The Safe Withdrawal Rate Explained
The safe withdrawal rate informs you of how much money you can pull from your savings in a year of retirement. After the initial year, you can adjust the rate each year in the event of inflation. Be aware that the appropriate rate varies according to a person’s financial circumstances. Everyone is different.
The 4% Rule
Many people rely on the 4% Rule to assist with their retirement. Try to save 4% of your first year retirement savings and then try to increase that amount the following year according to inflation. Keep in mind that you may need to make cost of living adjustments every year, as the inflation rates vary.
The 4% Rule was developed by financial adviser William Bengen. Bengen says that based on his research, withdrawing 4% of your retirement portfolio in your first year of retirement is the safest option. Bengen says that the 4% Rule should allow most people to live comfortably for well over 30 years. Bengen believes that people should invest in stocks, as they often provide higher returns than bonds. It’s important to think about the long term picture.
Try to incorporate low fee exchange traded funds and treasury notes into your portfolio. Avoid becoming conservative if the stock market starts to decline. Selling your stocks and buying more bonds can cause more problems. Bengen points out that every time that the stock market experiences a decline, it eventually rises to even higher levels than before. If you experience a bad loss in your portfolio during the first couple of years, cut back on the amount of money that you take out until your portfolio begins to turn around.
Taxes are an important part of any retirement plans. There are multiple ways that your tax situation can impact your safe withdrawal rate. Speak with a tax consultant. They will help you figure out how much money you’ll pay in taxes and the best way to cover those expenses.
By using the 4% Rule, you’ll likely give yourself the best chance to have a great life after you stop working.