June 9, 2013
The rule of 4% is used when accessing money in retirement. Can you explain this idea and what is behind it?
The rule of 4% is used when accessing money in retirement. Can you explain this idea and what is behind it?
If you are a retiree and want to avoid outliving your money, you should use the rule of 4%. The rule is that if a retiree withdraws 4.5% of their savings every year (adjusted for inflation), their savings should last 30 years (the number of years generally used when planning for retirement).
Outstanding, Katherine! Let’s recap. 4% is the given rule used to identify how much money you can pull out of your retirement accounts without going broke in less than 30 years. Example: You have $500,00 in retirement funds. 4% of that number is $20,000. If you keep your payout at that number or below, your money will probably last 30 years or more (always focus on low cost investments like index funds or Target Date funds that contain index funds and remember to keep the right asset allocation that works for your particular situation). If you cannot live on that amount, you have options.
You can delay retirement until you have enough in the account where 4% will be enough to live on. You can pick up a part-time job to supplement your retirement income to cover your monthly expenses. You also could cut back on your expenses and eliminate debt (this should be done BEFORE retirement).
The 4% rule is important to understand as those retirement years start to approach. Make a plan, understand clearly how much you need to live on in any given month, and then create your future!