A lot of people who end up with decent retirement savings don't get there through high-paying jobs. Rather, they get there by saving diligently, socking away small amounts over time that accumulate through the years.
No matter how much savings you manage to amass by the time retirement rolls around, you don't want to run the risk of depleting your nest egg. And to that end, it helps to have a withdrawal strategy in place.
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For many years, financial experts were quick to tout the 4% rule, where you withdraw 4% of your retirement plan balance your first year of retirement. From there, you adjust future withdrawals for inflation.
If you follow the 4% rule, there's a good chance your savings will last 30 years, which is a good way to buy yourself peace of mind. But if you're retiring on the late side, it's time to throw the 4% rule out the window.
Why the 4% rule isn't right for late retirees
If you're retiring earlier than the average worker, then sticking to the 4% rule puts you at risk of depleting your savings prematurely. But if you're retiring later than the average worker, using the 4% rule could mean denying yourself more generous withdrawals that could lead to a better quality of life.
Remember, the 4% rule is designed to make your savings last 30 years. If you're retiring in your mid-70s, you may not need your nest egg to last that long.
This doesn't mean you should withdraw from your savings recklessly without a plan. But you may have the leeway to use a more generous withdrawal rate -- say 5% or 6%, depending on how your money is invested.
Of course, there's technically nothing wrong with sticking to the 4% rule if you're a late retiree. But if you're someone who plugged away at a job much longer than most of your peers, you deserve to be rewarded for that. You deserve to be able to take larger retirement plan withdrawals and use the money to travel, pursue hobbies, or do whatever it is you wish to do while your health is strong enough.
It's only a starting point
Even if you're retiring at a more traditional retirement age -- say, your mid-60s -- it's not a given that the 4% rule is right for you. You may have a reason to think your savings won't need to last 30 years. Or you may have relatives who are still alive in their late 90s, which might prompt you to withdraw from your savings more conservatively.
The point, therefore, is to use the 4% rule as loose guidance, but to come up with your own withdrawal strategy, based on factors that include your:
- Age
- Life expectancy
- Investment mix
- Risk tolerance
And if you're nervous to do that alone, get some help. A qualified financial advisor can help you land on a withdrawal rate you're comfortable with so you're able to access the money you need without denying yourself, and without stress.
