By Steve Crifasi, CFP®
The 4% rule has been a foundation of retirement planning for decades, providing a seemingly straightforward path to sustainable withdrawals. But in today’s economic landscape, characterized by fluctuating markets and evolving life expectancies, the question emerges:
Is this rule still a trustworthy guide for your retirement journey?
Taking into account variables like inflation, lifespan, and individual risk tolerance, this article investigates whether your existing retirement plan is actually optimal. I explain how to use the 4% rule to decide when to retire, how to create a savings plan that aligns with your retirement date, and the importance of adjusting your plan when necessary.
The 4% Rule Explained
The 4% rule states that retirees can take out 4% of their initial retirement portfolio each year, adjusted for inflation, and still have enough money saved for a 30-year retirement.
Based on historical market data, the rule seeks to offer a sustainable withdrawal plan that allows retirees to maintain their lifestyle while preserving their nest egg. Its role in optimizing retirement planning lies in offering a tangible benchmark for calculating annual withdrawals and simplifying the complex task of managing retirement income.
By giving retirees a place to start, the 4% rule helps them evaluate their savings in relation to anticipated spending, which promotes control and predictability in their post-employment years.
However, it’s crucial to keep in mind that optimizing retirement planning calls for a nuanced approach that includes customized evaluations of financial needs and a flexible withdrawal plan.
How to Decide When to Retire
The 4% rule can be a valuable tool in determining when to retire, though it requires careful consideration. To use it effectively, you must first project your yearly retirement expenses. To determine the required total size of the portfolio, multiply that number by 25 (the inverse of 4%).
For example, if you anticipate needing $50,000 a year, you would need a $1.25 million portfolio. Once your savings reach or surpass this calculated amount, the 4% rule suggests you may be able to retire and sustainably withdraw that $50,000, adjusted for inflation, annually for 30 years.
By matching your retirement date with a specific financial milestone, this calculation gives you a concrete goal.
How to Create a Savings Plan
Younger adults can utilize the 4% rule to develop a savings plan that helps them pursue their retirement goals. It’s critical to have a retirement fund target in mind, to keep track of progress and stay on course through the years.
To determine your retirement savings goal, start by estimating your anticipated yearly living expenses in retirement. Let’s say you decide on $50,000. Subtract $16,000 for the amount you’d receive annually from Social Security (assuming it still exists when you retire), and you’re left with $34,000/year to be financed by your retirement savings.
Now, use your impressive math skills and the 4% rule to calculate how much money you’ll need to save for retirement. (Hint: Take $34,000 and multiply it by 25.) This adds up to $850,000 in total. Determine how much you need to save each year (and each month) to reach your goal by working backward from there.
Make Adjustments As Needed
While it’s a good place to start, the 4% rule needs to be adjusted frequently to remain relevant during retirement. Changes in personal circumstances, unforeseen costs, and market volatility can all have a big impact on how long a fixed withdrawal rate lasts.
Retirees should therefore periodically assess their investments and modify their withdrawals as necessary. To safeguard capital during market downturns, consider lowering withdrawals or delaying inflation adjustments.
On the other hand, a small increase in withdrawals might be appropriate if the portfolio performs better than anticipated. Additionally, be ready to adapt to changes in lifestyle, tax regulations, or unexpected healthcare expenses.
Reach Out for Help
As mentioned, the 4% rule has been an industry standard for decades. However, keep in mind that the most challenging part of using the 4% rule for retirement planning is actually building up your savings in the first place. That’s where we come in.
Remember, designing your life without a financial plan is like building a house without blueprints. At Westover Capital Advisors, our experienced team of financial professionals can help you design a personalized retirement plan, incorporating all the critical elements, so you can make informed decisions and pursue your ideal retirement with confidence and excitement.
To get in touch, call (302) 427-9600 or email [email protected]. We look forward to hearing from you.
About Steve
Steve Crifasi serves as Associate Director of Wealth Management and Business Development at Westover Capital Advisors, an independent, fee-only, and privately owned investment and wealth management firm founded in 1999 and based in Wilmington, Delaware. Steve provides tailored guidance and works in partnership with his investment, tax, and planning colleagues to understand clients’ wealth management goals and objectives and help fulfill them. Steve thrives off developing personal relationships with clients, serving as their reliable and trusted financial partner; and as a fiduciary, he provides advice that is always in their best interests.
An advisor since 2008, Steve has over 15 years of experience in the financial services industry. He began his career as a research analyst at Penn Square Capital focusing on the equity and private real estate markets and spent over 13 years at Glenmede and Wilmington Trust as a relationship manager for high-net-worth clients. Steve received a BBA in Finance from Villanova University and holds the CERTIFIED FINANCIAL PLANNER® certification. In addition to his role at Westover, Steve is a member of the Delaware Estate Planning Council and Wilmington Tax Group. He has also served on committees for several local charitable and nonprofit organizations in and around Wilmington. To learn more about Steve, connect with him on LinkedIn.
