Many older adults worry about depleting their savings. In fact, a recent Allianz Life retirement study found that more than 60% of Americans worry more about running out of money than death.
While stashing away funds in a 401(k) or IRA is a smart move, it doesn't guarantee your money will last as long as you need it to. However, there's one simple rule that can boost your chances of enjoying your retirement without the stress of pinching pennies to make sure your money stretches: The 4% rule.
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The 4% rule is still a good starting point
The 4% rule is a popular retirement strategy that helps you figure out how much you can withdraw from your savings every year without depleting it down the line. Essentially, the rule suggests that you:
- Maintain a balanced portfolio of stocks and bonds
- Withdraw up to 4% of your nest egg during the first year of retirement
- Adjust your withdrawals to account for inflation beginning in year two
Let's say you have $2 million saved for retirement. According to the 4% rule, you could withdraw $80,000 in the first year of retirement. Each subsequent year, you'd adjust this amount for inflation. For example, if inflation is 2% in year two, you'd withdraw $81,600.
By following the 4% rule, your savings could potentially support you for at at least 30 years. This is because the diversification of your investments positions you to live off your nest egg without needing to dip into your principal. But if there are downturns in the stock or bond markets, things could shift.
Your personal circumstances will ultimately determine the best retirement spending plan for you. So you may need to tweak the 4% rule depending on your withdrawal goals, market conditions, and other factors. Nonetheless, the 4% rule is an excellent starting point for assessing your savings needs and expected expenses so you can position yourself for the retirement you've always dreamed of.
