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Why This Popular Retirement Rule Is Wrong for You

By Dan Caplinger – Feb 15, 2014 at 12:12PM

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Simple rules are always attractive, but they can lead you astray. Find a better way here.

Many people use what's called the 4% rule in planning for retirement. But even though the rule is easy to use, it doesn't always meet your retirement-income needs.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at the 4% rule, noting that the danger with the rule is that a lot depends on the first few years after you retire. If the market suffers a big drawdown right after you retire, then the 4% rule can leave you dangerously overextended. But if the market starts a bull run, then the 4% rule might leave you short-changed. Dan suggests instead using a combination of asset allocation strategies and growth dividend stocks, citing Lockheed Martin (LMT -0.05%), AT&T (T -1.57%), and ConocoPhillips (COP -2.34%) as examples of stocks with track records of boosting income. The regular growth in dividends can let your portfolio income keep up with inflation while also providing growth prospects that can make you more flexible in choosing how much to withdraw based on market conditions.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of Lockheed Martin. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

AT&T Stock Quote
AT&T
T
$18.82 (-1.57%) $0.30
Lockheed Martin Stock Quote
Lockheed Martin
LMT
$483.21 (-0.05%) $0.25
ConocoPhillips Stock Quote
ConocoPhillips
COP
$123.84 (-2.34%) $-2.97

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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