64% of Americans worry about going broke in retirement more than they worry about death. That’s according to last year’s survey from Allianz Life.
This fear — while very real — is nothing new.
You’ve no doubt heard of “The 4% Rule” for retirement.
What is the 4% Rule in retirement planning?
Put simply, the 4% Rule says you can withdraw 4% of your net worth from your savings and investment accounts in your first year of retirement. Then increase your withdrawals for inflation each year. And there’s a high likelihood that by following this rule, your savings will be sustained through 30+ years of retirement.
You may find confidence in realizing the 4% Rule was developed specifically because of that fear of running out of money.
William Bengen, who developed the 4% Rule, was a retired financial advisor. And after a career spent helping clients address the fear of running out of money, he did the research.
In the 1990s, he published a groundbreaking piece in the Journal of Financial Planning. This is where he introduced the 4% Rule.
The 4% Rule was built for the worst-case scenario.
Bengen’s goal was to develop a rule that would give you a high likelihood of never running out of money, even in a “worst-case scenario.”
Of course, he realized not all markets are created equal. And while most of the 20th Century was very kind to investors, there were also some major rough patches.
In order to find a rule that would help retirees make it through even the worst of times, Bengen looked at the market going back to 1925, before The Great Depression.
What he found was that with the right diversified portfolio composition, 4% was the number. Even through the stagflation and sideways market of the 1970s. Even through The Great Depression.
In every single 30-year period going back to 1926, Bengen’s research found that an investor could start at the 4% withdrawal rate, adjust annually for inflation, and their portfolio did not run out of money.
The 4% Rule and your retirement plan.
Of course, there’s no guarantees for the future, and what markets will do. Other researchers have disagreed on what a “safe” number should be.
You may personally target a number that’s a little lower or a little higher than 4%.
But one thing is for sure: The 4% Rule is a great starting point for the conversation.
If you want your money to last, through boom times and bad times, you need a plan. And part of that plan is knowing what you can confidently draw from your portfolio year after year through retirement.
This article was written for financial advisory clients of Asset Strategies. If you’re not yet a client and you’d like to speak with a financial advisor about how they could help you be more ready for retirement, request a Ready for Retirement Review here.
