The Four Per Cent Rule — is this common retirement benchmark right for you?
First coined 20 years ago, the Four Per Cent Rule has
become an accepted rule of thumb in the retirement planning community.
The basic premise is this: If you withdraw four per cent
of your retirement nest egg in your first year of retirement and then adjust
that amount for inflation thereafter, you should have enough money to last you
through your retirement years.
However in recent years, as the recession kept
interest rates at near-record lows, the Four Per Cent Rule began to get called
into question. Economists and financial planners started to question whether
retirees would use up their savings too quickly in an environment where returns
on their investments weren’t able to keep up with the withdrawal pace
established under the Four Per Cent Rule.
Given that returns from mutual funds and the stock
market are unpredictable, many retirement planning experts are beginning to
suggest a more dynamic approach whereby retirees adjust their withdrawals on an
annual basis, based on the performance of the markets.
And while the Four Per Cent Rule is still often
advocated as a good starting point, other factors like your retirement age also
impact its applicability. For example, those who retire at 50 need to plan for
many more years of retirement, which may mean that withdrawing four per cent in
the beginning is too high and perhaps they should start at three per cent.
Conversely, those who retire at 65 may be able to afford to withdraw closer to
five per cent right from the start.
The right retirement plan for you will depend on your
own financial situation, your retirement goals and the steps you can take to
get there. If you’d like help with your retirement plan, we’d be happy to discuss
it with you. Call us at (204) 954-7450 or stop by one of our branches.