One thing I do on a regular basis is save money for retirement. I'm not always happy about it, though.
Trust me when I say that I'd rather take my extra money and put it toward a vacation, or even a few extra nights of takeout each month to save me the time it takes to shop for groceries and cook food my kids won't even eat. But I know that I have to save for retirement to reduce my reliance on Social Security in retirement -- especially in light of potential benefit cuts.
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These days, I automate contributions to a 401(k) plan. And I also have an IRA that I've committed not to touch.
Since I'm working so hard to save for retirement, I really want my money to last. So I know that it's important to manage my nest egg strategically.
A lot of retirees use the famous 4% rule to manage their savings. I, however, don't think the 4% rule will work for me, so I'm planning to take a different approach.
My biggest issue with the 4% rule
The 4% rule is a strategy that was introduced decades ago, and its goal is to preserve retirement savings. The 4% rule has you withdrawing 4% of your savings your first year of retirement and adjusting subsequent withdrawals for inflation. Following this plan is said to allow the typical portfolio to last for 30 years.
I have some issues with the 4% rule, though. For one thing, it assumes that your nest egg has a fairly equal mix of stocks and bonds. Secondly, it assumes that you want or need to get 30 years out of your savings. If you're retiring early or late, that may not be the case.
My biggest problem with the 4% rule, though, is that it's rigid. It basically locks you into the same withdrawals year after year, not accounting for inflation.
I don't know exactly what I want to do with myself in retirement. But I suspect I may want to spend more money early on and scale back later. The 4% rule doesn't really offer that flexibility.
If I'm supposed to start out withdrawing 4% of my savings balance and then make adjustments for inflation only, that doesn't seem to give me the option to take a very large withdrawal my first year or two, and then scale back substantially. So I need a strategy that allows for more fluctuation in spending.
What I think the 4% rule is good for
I'm not sure exactly how I'll approach retirement plan withdrawals. But I do know that I want the leeway for my withdrawals to look very different from one year to the next.
For this reason, I don't think I'll use the 4% rule to manage my savings. But I do think the 4% rule is a good starting point. And its message is clear -- you need to have some sort of plan rather than tap your savings at random.
If you're nearing retirement and aren't sure how to manage your nest egg, it pays to take a look at the 4% rule. That doesn't mean you have to use it, though. A much better bet may be to sit down with a financial advisor, review your portfolio composition and income needs, and devise a custom strategy that lends to your retirement goals.
Of course, after running the numbers, you may find that a 4% withdrawal rate actually is suitable for you. And that's OK. The key is to come up with a strategy that's customized for you instead of following a strategy designed for the masses.
