How the 4% Rule can Help You
Updated: Aug 11, 2020
This is an article “How the 4% Rule can Help You” by Marc Primo
For most retirees, one formula has proven to be helpful in the way they save money yet still be able to have purchasing power. Though not for everyone, the 4% rule can be a bit of a chore to keep up with, given how unpredictable the economy can be over time. However, sticking to the rule can ensure that you don’t run out of retirement money and that you stay dry on rainy days.
As a rule of thumb, the 4% rule simply represents the safest withdrawal rate you can make at a time so you don’t exhaust your entire retirement savings. Retirees often find it challenging to balance spending on needs and saving up ample money for the years to come, which usually boils down to choosing between present comfort and legacy. But there’s no reason why you shouldn’t enjoy your money and still be able to spare a substantial amount in the later years.
In order to help you stick to the 4% rule, here are a few insights that can help make the formula work for you.
Project and estimate
Having good foresight on the ups and downs of the economy and inflation will enable you to adjust according to how strong the dollar is. Try projecting prices of your basic grocery items year per year based on how the economy is going. Will a dozen eggs still cost the same when you turn 70? Your pre-retirement income multiplied by 20 should be your starting retirement savings to be considered financially independent. Of course, that’s depending on how you spend your money. Applying the 4% rule for your annual withdrawal rate keeps things in check, but you must still review the economic rollercoaster regularly and make the right adjustments as necessary.
Choose your investments wisely
One good way to appreciate your retirement money is by investing in stocks and assets. On average, you’ll be able to enjoy around 7% in appreciated price per year before inflation and along with it, your 4% safety withdrawal rate will also increase. But don’t take the 4% rule at face value as it only presents the most ideal value you can allot for spending. Stocks fluctuate rapidly and over time and things like the current pandemic can greatly affect how the economy goes so be ready for those as well. Pick a time when purchasing stocks are good and reasonable by seeking retirement advice and keeping yourself informed. There are plenty of sources online that cut out most of the work for you, like www.marketwatch.com or www.robinhood.com. All it takes is some research and keeping tabs on how the stock market behaves to secure your investments.
Plan ahead (even after retirement)
The 4% rule is highly recommended by academic experts and backed by historical research and age-old testimonials. However, the formula does not tell us how to adjust our spending behavior and the discipline to make the strategy successful depends on how we approach it. It does work, but only if the economy remains at manageable levels and when we experience a global crisis like COVID-19, only then will we realize that we have to go back to the drawing board and tweak a few of our spending habits.
According to Forbes, people are taking a more profound examination of their retirement planning since the crisis has already rendered 36.5 million people unemployed. Five percent say they have adjusted their assets allocation since the crisis began, and 4% of survey respondents said they have started taking out 401(k) loans. Eleven percent also said they would have to work longer to enjoy the benefits of retirement.
Given all these insights, the 4% rule does not mean its fool-proof in any way but can serve as a worthy guide on how you should handle your retirement savings. It’s a conservative estimate and does not consider additional income over the years from social security or pensions. Learning how to adjust your money via the 4% rule is the key to making a successful retirement plan without cheating yourself of life’s joys, while still ensuring that you have enough for the years to come.