Us­ing the 4 Per­cent Rule

The Saratogian (Saratoga, NY) - - BUSINESS -

If you’re ap­proach­ing re­tire­ment, a crit­i­cal ques­tion is how much of your nest egg you can with­draw each year with­out run­ning out of money. There’s no one-size-fits-all an­swer, but a com­mon rule is to with­draw 4 per­cent in your first year of re­tire­ment, ad­just­ing for in­fla­tion in sub­se­quent years. It’s meant to al­low your nest egg to last 30 years.

The rule has some prob­lems, though, and isn’t guar­an­teed to work as ex­pected. For one thing, it might not pro­vide as much in­come as you need. Four per­cent of, say, a $300,000 nest egg is just $12,000. The rule’s ef­fec­tive­ness is also de­pen­dent on a co­op­er­a­tive stock mar­ket. If the mar­ket drops 30 per­cent right be­fore you re­tire, you’ll sud­denly be col­lect­ing much less.

To play it safer, con­sider with­draw­ing less than 4 per­cent an­nu­ally. If you’re re­tir­ing late and ex­pect your re­tire­ment to be shorter than most, you might with­draw more than 4 per­cent an­nu­ally. In a year when the mar­ket drops, you might with­draw less, tak­ing more in years when it booms.

An­other way to lengthen the life of your nest egg is to avoid ad­just­ing your with­drawals for in­fla­tion, on the as­sump­tion that you’ll spend less each year, grow­ing less ac­tive as you age. Mean­while, if you find you’re with­draw­ing more than your ex­penses re­quire, cut back on your with­drawals. You might also skip the in­fla­tion ad­just­ment if the mar­ket is down.

Be sure to re-eval­u­ate your with­drawals and the size of your nest egg as you progress through re­tire­ment — es­pe­cially in the early years. You want to re­main on course to hav­ing your money out­last you. Don’t be afraid to seek pro­fes­sional ad­vice, ei­ther — ide­ally, fa­vor­ing fee-only ad­vis­ers over those with pos­si­ble con­flicts of in­ter­est.

Re­mem­ber, too, that you might well live a long time, and need your money to last more than 30 years. Con­sider be­ing ag­gres­sive in your sav­ings and con­ser­va­tive in your with­drawals, if pos­si­ble. For clear and con­cise re­tire­ment ad­vice, try our “Rule Your Re­tire­ment” ser­vice at­vices.

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