One of the biggest fears shared by retirees across all income levels is running out of money in their lifetime. It doesn't matter if you're coming into retirement with a $250,000 nest egg or a $2 million IRA or 401(k). If you don't manage your savings in a savvy manner, you eventually risk running out.
Financial experts have long been aware of this danger, and they've developed guidelines around it. And perhaps the most famous piece of advice with regard to managing retirement savings is none other than the 4% rule.
Image source: Getty Images.
Introduced in the 1990s by William Bengen, the rule states that if you withdraw 4% of your savings balance your first year of retirement and then adjust subsequent withdrawals for inflation, there's a good chance you won't run out of money in your lifetime. It's certainly a good idea in theory -- or at least it was at the time.
The problem, though, is that the rule makes certain assumptions about the way savers have their money invested. And it was also introduced at a time when bonds, which retirees tend to be heavily invested in, were paying more generously.
As such, many financial experts no longer hold by the 4% rule and think it's too aggressive. And Bengen himself even agrees that at this point, his guidance may be a bit off.
But there's one scenario where the 4% rule could still very much make sense. And if it applies to you, then you may feel comfortable sticking to it.
When you're looking at a shorter retirement
There are different benefits to delaying retirement, such as being able to continue collecting a paycheck and boost savings for extra years. Delaying retirement also often means being able to delay Social Security, which can result in a much higher monthly benefit for life.
There can also be mental health benefits to a delayed retirement. Many people thrive on structure and struggle in the absence of a job. So working longer at least postpones those challenges.
Meanwhile, life expectancies have increased through the years, so working until age 70 or 75 might no longer mean having just a 10-year retirement to look forward to. At the same time, though, delaying retirement substantially generally means that your savings won't have to last as long. And so if you're looking at retiring much later than the typical American, then you may feel comfortable using the 4% rule.
The 4% rule may be too aggressive for someone looking at a 30-year retirement. But if you're looking at more like a 20-year retirement, it's a very different story.
You can come up with your own number, too
If you're retiring later in life, the 4% rule may be appropriate for you. But it's also not your only option. You may decide that you're comfortable withdrawing from your nest egg at a rate of 5% a year, or even more.
Even if you're retiring on time, under certain circumstances, the 4% rule may be suitable for you, too. So it's a good idea to play around with different numbers and see where it leads.
You may, however, want to do that with the help of a financial advisor. That way, you have an unbiased expert who can weigh in and help you strike a balance between preserving your savings and getting to enjoy your retirement without living more frugally than you need to.
