In 1994, researcher William P. Bengen found that a retiree can withdraw 4% of his retirement portfolio, adjust it annually for inflation, and still be reasonably sure to outlive his money. Since then, the 4% rule has been gaining popularity as a useful solution towards maintaining and increasing your income.
What Is a Safe Retirement Withdrawal Amount?
To be honest, there is no risk-free solution for a save withdrawal rate. More precisely, you may either spend too much too quickly or spend too little and then be disappointed that you didn’t use the money to enjoy your time as a retiree.
Therefore, the 4% rule is just a starting point to get a general idea of how things should work, but you are free to change it according to your income and preferences. Here are some of the main factors to take into consideration:
- Your health may decline in time. As you get older, you will most likely spend larger amounts of money to maintain your health. Whether it’s medication, sports memberships or beauty treatments, a considerable part of your income will go in that direction.
- The market will likely change after you retire. Remember what happened back in 2008, when things were going good and then every retiree had to rethink his income strategy? Well, chances are this is going to happen again sometime during your retirement. This is exactly why you should save part of your income for emergency situations such as this one.
- You may live longer than expected. It may sound a bit morbid to think about it, but many retirees are planning their income depending on their supposed life expectancy. Don’t spend your income all at once and avoid making risky, large investments just thinking that you won’t have enough time. Also, make sure to consider long term health care insurance because you may really need it.
As we’ve mentioned before, nothing in life is certain and economy is definitely not something you can count on to stay the same on the long run. Your best shot at a great retirement financially is to check your portfolio and spending constantly, always have a plan on hand and, of course, enjoy the ride!