A lot of people work really hard to save money for retirement, but then struggle to actually start spending their savings. And a big reason boils down to a fear of running out.
The last thing you want to do is put your IRA or 401(k) at risk of getting depleted. So it's important to implement a smart withdrawal strategy. And you may want to consider the popular 4% rule.
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The 4% rule has you withdrawing 4% of your savings balance your first year of retirement, and adjusting future withdrawals to account for inflation. It's a rule a lot of financial experts advocate, but it's not automatically right for you.
If you're not sure whether you should follow the 4% rule, ask these three questions to find out.
1. What's my investment mix?
The 4% rule assumes that you have a relatively even mix of stocks and bonds in your portfolio. So if you have 50% stocks and 50% bonds, or even 60% bonds and 40% stocks, it generally works.
But if you have 80% of your portfolio in bonds and only 20% in stocks, your savings may not generate a high-enough return to support a 4% withdrawal rate. And if you have the opposite allocation -- 80% stocks and 20% bonds -- you may be able to withdraw considerably more than 4% each year.
2. What age am I retiring at?
The 4% rule is designed to make your retirement savings last for 30 years. If you're retiring in your 60s, you may find that it's a good rule of thumb to follow.
But if you're retiring in your 50s, you may need your nest egg to last more than 30 years. And if you're not retiring until well into your 70s, you may not need 30 years out of your savings.
3. Do I anticipate big spending early on in retirement?
The 4% rule assumes relatively even spending during retirement. But that may not align with your plans.
You may be anticipating higher levels of spending early on in retirement -- say, some international travel or more money allocated to hobbies. If that's the case, you may need the leeway to take larger withdrawals from savings your first few years of retirement. The 4% rule may not give you that flexibility.
While the 4% rule may work for many retirees, it's not guaranteed to work for you. Ask yourself these questions to see if it's an appropriate withdrawal rate for you.
