Like many people, I worry about the future of Social Security and the impact it might have on my retirement. I'm well aware that the program is not in danger of going away. But I also know that benefit cuts are a distinct possibility.
And so, between that and the fact that Social Security will only replace so much of my income to begin with, I'm doing my best to build a strong retirement nest egg. That way, I won't have to rely on Social Security as much as some seniors do today.
But I also know that building a decent-sized nest egg isn't enough. I'll also have to manage my money wisely if I don't want it to run out on me. And in that regard, I plan to shun a once-popular rule for retirement account withdrawals.
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The 4% rule is way too aggressive for me
If you're not familiar with the 4% rule, it basically tells you to withdraw 4% of your retirement savings balance your first year of tapping your nest egg and to then adjust subsequent withdrawals to account for inflation. Doing so should, in theory, help your savings last 30 years.
The rule made more sense when it was first introduced decades ago. But at this point, it has some serious flaws.
For one thing, it assumes a pretty even stock-bond split with regard to your investments. Some people maintain a far more conservative retirement portfolio than that.
Now I hope and plan to retain a large percentage of stocks in my portfolio for retirement. But even so, bonds are no longer paying what they were back when the 4% rule was established. So even with a decent concentration of stocks, I worry that this formula may not be suitable for me.
Also, I have no idea how long my money will need to last. While a 30-year window seems reasonable, I don't want to wish for my own premature demise simply to avoid a financial crunch.
That's why I don't intend to follow the 4% rule when managing my retirement savings. Rather, I think a more conservative withdrawal rate might be more appropriate for me. Whether that means going with a 2.5% rate, 2.75% rate, or 3% rate is yet to be determined. And because I'm not close to retirement, I'll also need to see what bond interest rates look like at the time of my retirement to make that determination.
But all told, a 4% annual withdrawal rate sounds a bit aggressive to me. And so as of now, my plan is to stick to a lower rate, all the while compensating by (ideally) growing a larger nest egg and also continuing to work in retirement in some capacity.
In fact, that's another reason I intend to stick to a lower withdrawal rate; I'm hoping that between some Social Security income and earnings from a job, I won't need to lean on my savings quite so heavily.
I know that working part-time isn't a given. We don't know what the labor market will look like and whether my skills will be in demand. But if I'm capable of working, then I hope to continue.
Not only might working help alleviate certain financial concerns, but frankly, the way I see it, it'll give me something to do that doesn't actually cost me money. And there's a definite value in that.
