Suze Orman Says This Popular Financial Rule Doesn't Work Anymore. Is She Right?

Having enough money for retirement is important, but it can be hard to figure out how much is enough. To make it easier, many retirees go by the 4% rule. It says you can safely withdraw 4% of your retirement portfolio in the first year, and then adjust it slightly from year to year based on inflation.

Based on that withdrawal rate, you'd need to save 25 times the annual income you want in retirement. For example, if you want to have $50,000 per year in retirement income, you'd aim for $1.25 million.

Not everyone is in agreement with the 4% rule. One vocal critic is financial advisor Suze Orman, who says it "doesn't work anymore" and even called it "very dangerous." Here's why she isn't a fan and if it's a good idea to follow this retirement planning rule.

Why Suze Orman doesn't recommend the 4% rule

Orman gave her thoughts on the 4% rule in an interview with Moneywise. She believes it should be lowered to at least 3%, and she says retirees should try to "take the least amount possible out of a retirement account, not what everybody says will work."

There's nothing wrong with that advice, but Orman's criticism of the 4% rule itself doesn't make much sense. The rule doesn't say you need to withdraw 4% of your retirement savings. It only recommends that as a safe withdrawal rate.

Orman may not think that 4% is a safe withdrawal rate, and she goes over some doomsday scenarios where it could fail. What if there's an extended bear market? Or what if you need long-term care and don't have any insurance to cover it?

However, she doesn't explain what makes 4% "very dangerous," or why she feels that it should be lowered to at least 3%. Instead, her advice is that you forget about retiring at 60 and taking Social Security at 62. Work until "at least 70 or longer" to give your assets more time to grow.

Is Orman right about retirement planning?

Truth be told, Orman's retirement advice sounds like a nightmare. Work until you're at least 70. By the way, the average U.S. life expectancy is now 76.1 years, according to the CDC. If the average American does it the Orman way, they get to work about 50 years, have five or six years of retirement, and then die.

There's debate on the effectiveness of the 4% rule, but it at least gives you a target. Orman only suggests grinding away so you can build as much retirement savings as possible, but waiting to retire just so you can save more is bad advice. You don't need to have as much money as possible. You just need to have enough.

Orman's opinion aside, will you have enough if you follow the 4% rule? There's no clear consensus here. William Bengen, who came up with the rule, says it was based on a worst-case scenario. He has since updated his guidance and says that retirees can safely withdraw 4.7% for at least a 30-year retirement.

Personally, I think the 4% rule is great as a rule of thumb because of how simple it is. Multiply your target income by 25, and you have your retirement savings goal.

It may not work for everyone, especially those who want to retire early. But it will get you in the neighborhood of how much you should save, and you can always save more or be more conservative about your spending in retirement.

How to maximize your retirement savings

In an ideal world, no one would need to work until 70. The good news is that you have quite a bit of control over when you retire. If you save well, you can retire at a much younger age. Here are a few tips that can help you build your retirement savings:

• Open a workplace retirement plan if you have that option. If your employer offers 401(k) plans, set one up. This makes it easy to save for retirement, because contributions come right out of your paycheck. Many employers also offer a 401(k) match on your contributions.
• Use retirement accounts to save on taxes. In addition to 401(k)s, individual retirement accounts (IRAs) also have tax benefits. Traditional IRAs let you deduct contributions from your taxes. There are also Roth IRAs, where contributions aren't tax-deductible, but withdrawals are tax free.
• Go with a stock-heavy portfolio for most of your career. One of the most effective ways to build wealth is investing in stocks, as the average stock market return is about 10% per year over the long term. When you're about 10 to 15 years from retirement, you can start shifting more of your money to bonds to reduce volatility in your portfolio.
• Be consistent. Whether you can put $100 or $1,000 per month into your retirement savings, make it a habit. Many online stock brokers let you automate investments, which can help you stay consistent.

As you get closer to retirement, you can start thinking about exactly how much money you want to save. The 4% rule gives you an excellent starting point, and you can adjust it from there as needed.