Michael Baum, CFP® RICP®
Vice President & Associate Financial Advisor
One of the biggest challenges of planning for retirement is figuring out how much you can spend during your golden years. Retirement income planning requires careful preparation, and budgeting.
A popular retirement income planning guideline is the 4% rule, which suggests that you live off 4% of your total investments during the first year of retirement. Then, you readjust every year in retirement based on your changing needs and inflation.
But does this rule still hold up? Is the 4% rule a good strategy for you as you plan for living in retirement? Let's dive into this rule a little deeper and consider whether it's right for you.
What Is the 4% Rule?
The 4% rule is a guideline for managing your retirement income that suggests you should only withdraw up to 4% of your savings each year of retirement. For example, if you have $1,000,000 saved for retirement, you will withdraw $40,000 the first year.
The idea behind this rule is that it's easy to calculate and provides a benchmark for how much you can safely spend to ensure your retirement savings last throughout your lifetime.
Economists came up with that 4% figure by considering both average returns on investments, and potential market corrections. They also considered the average life expectancy of retirees. In 1990, when the rule was established, the average American man was expected to live 15 years after age 65, and the average woman just under 20 years. Using the 4% rule, retirees could expect to have about 35 years of living expenses.
So, the question remains: Does the famed 4% rule hold up today? Let's take a deeper look.
Does the 4% Rule Hold Up Today?
The short answer: maybe. Every retirement is different, so it's impossible to have one “rule” that works for everyone. While the 4% rule offers good insight into retirement income planning, it's more helpful to look at it as a guideline than a rule.1
Today’s retirees face so many factors that everyone can't subscribe to a concrete “rule,” even if it is popular. When planning out your retirement income, some things to consider include your investments, expenses, health, longevity, and goals.
Your Investment Portfolio
According to Prudential, the 4% rule assumes that “you have about 60% of your investments in equities and 40% in fixed income assets,” and it's based on a tax-deferred portfolio like a traditional IRA or 401(k) and “assumes that you'll owe tax on withdrawals.” If you're spending from a Roth, where withdrawals aren't taxed if you meet essential criteria, “your calculations may be different.”2
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Everyone's expenses will look a little different in retirement, depending on where you live, how much money you have saved for retirement, your health care expenses, your hobbies, and whether you work part-time.
Your Healthcare Expenses
It's no surprise that healthcare costs have gotten more expensive since the 4% rule was established in the 1990s. Today, the average 65-year-old couple can expect to spend over $300,000 on doctor's appointments and medical bills in retirement. Healthcare expenses are a significant part of your retirement income planning.3
Your Life Expectancy
In addition to having increased healthcare expenses, today's retirees live longer than they did 30 years ago. The average life expectancy in 1990 was 75.19 years; in 2022, it was 79.05 years.4
As you can see, many factors go into your retirement income planning, and properly preparing for retirement requires much more consideration than just sticking to a blanket guideline like the 4% rule. Every retirement is going to look a bit different.
As a Retirement Income Certified Professional (RICP®), I help clients craft a strategic retirement income plan that meets their specific goals, along with the rest of my team at Weiss, Hale & Zahansky through our Plan Well, Invest Well, Live Well™ process. If you’d like help planning your strategy so you can Live Well in retirement, you can request a complimentary consultation on our website or call us at (860) 928-2341.
Presented by Vice President, Associate Financial Advisor, Michael Baum, CFP® RICP®. Securities and advisory services are offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259 and 392-A Merrow Road, Tolland, CT 06084. 860-928-2341. www.whzwealth.com.