06 Jun 2014 How Much Of Your Portfolio Will You Spend In Retirement?
When confronting the question of retirement spending, the most commonly used strategy is known as the 4% Rule. It is based on the premise that you can withdraw 4% from a well-diversified, balanced (60% equity/40% bond) portfolio and feel comfortable that your money will last as long as you do.
For example, if you determined that you needed $40k in addition to social security for retirement spending, the 4% Rule would suggest that you’d need to start with a $1M dollar portfolio. While this may be a decent rule of thumb and an easy way to plan for retirement on a cocktail napkin recent studies have shown that it may be too conservative. The 4% safe withdrawal rate is designed to ensure that you won’t run out of money even in the worst market scenario in US history but the reality of the 4% Rule is that it leaves you with a 96% probability of leaving over 100% of your starting principal and a 50% probability of quadrupling your nest egg.
Wow, a 50% probability of quadrupling your money. You might say that that sounds pretty good, but what if leaving a pile of money to go through probate wasn’t your priority? How much richer could your life have been if you’d had the confidence to do more of the things you enjoy and sooner?
Fortunately there is an alternative to the 4% Rule. If used correctly, it is possible to have the confidence that you will be able to generate an inflation adjusted income stream in retirement that lasts as long as you do while ensuring that you maximize your other priorities. If you are willing to maintain some flexibility in your withdrawal amount and have a method to statistically analyze the funded status of your retirement plan (which you should be doing anyway) you can enjoy opportunities that otherwise remain trapped by the 4% Rule. That opportunity may come in the form of an earlier retirement, more retirement income, or less worry to name a few possibilities. Are you using or do you plan to use the 4% Rule during your retirement?