Let’s look at where the 4% retirement rule came from, what it means in today’s markets and what you can do to ensure your retirement investments last as long as you do.
The rule likely came from historical returns on fixed-income investments. Bonds have returned an annualized 4.3% over the last 20 years.
The 4% rule for withdrawals didn’t just affect how much you took out each year but many used it for an estimate on how much you needed to save for retirement.
With yields low and equity returns uncertain, some retirement experts now argue that the 4% rule as an initial rate of withdrawal for a 30-year retirement is too high.
There are a few things to remember if you are going to follow the 4% rule of retirement planning:
Start with creating an investor policy statement around your goals and investing needs. This is going to give you a customized idea and help you pinpoint exactly how much you need.
Spend a little less if the market is down, and allow yourself to feel more comfortable spending a bit more if the market does better than expected.