Is the 4 Percent Rule Still Valid?

401k-horizonSince the 1990s, the 4 percent rule of retirement withdrawal has been a guiding light in estimating whether investors will have enough money to last the rest of their lives. This rule states that you should withdraw no more than 4 percent from your retirement savings every year during retirement. But economic conditions and market volatility in recent years have called this rule into question.

The 4 percent rule was created with a particular mix of stocks and bonds in mind — 60 percent large-cap stocks and 40 percent intermediate-term bonds.* But today’s market conditions, with historically low bond yields and a volatile stock market, may mean that this is not the optimal mix of stocks and bonds for all investors. Your asset allocation may differ, causing a rate of growth or amount of risk that is not consistent with a 4 percent rate of withdrawal.

These changing economic times have made it more imperative than ever to work with a qualified financial advisor to help understand your personal goals and risk tolerance to create a customized strategy. Our local Horizon Investment Advisors work diligently with their clients to aide them through this challenging process.

How much income do you need?

It’s also important to remember not everyone requires the same level of income in retirement. Required cash flow often depends on how expenses are managed in retirement. Goals of frequent travel or retiring in a city with a high cost of living will require a higher cash flow. Debts such as mortgage or car payments will also affect how much income you need in retirement.

To find the right rate of withdrawal you also must factor in the costs of taxes and inflation on your investments. For annual withdrawals of 4 percent you may need your retirement portfolio to earn returns closer to 7 percent or higher to cover these additional costs. Taxes can vary widely depending on many factors, including which state you retire in.

One key to success in this area is to be realistic and to talk through your goals with someone. It is no longer a safe assumption that you’ll be able to live on the same or less income than your working income. Current retirees often need assistance in creating appropriate budget adjustments to help create a more secure financial plan.

Boost retirement savings

The most important thing to remember, whether you follow the 4 percent rule or not, is that one of the best ways to ensure you don’t outlive your retirement savings is to save more. Starting retirement savings early, increasing retirement contributions to reach annual limits on 401(k)s and IRAs, and considering other taxable accounts as part of your retirement strategy will help ensure that you’re prepared. Ultimately how much money you have to take out during retirement will depend in part on how much you put in prior to retirement.

At Horizon we can help you evaluate if you’re utilizing all of the great tax saving tools available to your personal situation to maximize your retirement saving needs. Planning in advance is a large factor to having a comfortable financial retirement.

Look to Horizon Bank for sound direction toward achieving your retirement goals. Speak with one of our investment advisors by calling 888-873-2640. Together we can help you find a retirement plan that fits your retirement goals and lifestyle.