Whether you are just beginning your retirement savings or quickly approaching your first withdrawal, you probably have the same question: how can I be sure I won’t outlive my money?
In 1994, an advisor named William Bengen published a paper in an attempt to answer this question. Bengen used actual market returns to analyze how high of an IWR (Initial Withdrawal Rate) a retiree could have while still ensuring his/her savings would last more than 30 years.* His findings resulted in what is now known as the 4% rule.
What is the 4% Rule?
The 4% rule implies that a retiree can withdraw 4% of their retirement savings during the first year of their retirement. For every year after, withdrawals are adjusted with the rate of inflation. According to this rule, an IWR of 4% should guarantee your retirement savings will last at least 30 years, even in the worst of markets.
Bengen analyzed how a retirement portfolio would perform starting every year from 1926 to 1976. It turns out, the absolute worst year to retire was 1966. Folks who retired in 1966 were out of luck if they had an IWR of over 4%; their accounts were depleted in less than 30 years. But, a 4% IWR would have kept them right on track for a 30-year retirement.
Later, when the analysis was extended all the way back to 1871, 1877 was crowned the “best year to retire.” If you were lucky enough to retire this year, you could have had an IWR of 10%.**
Four percent is the lucky number because even through the worst markets in history, including the Great Depression, WWII, and multiple stock market crashes, you could still have an IWR of 4% and not outlive your money.
Does the 4% Rule REALLY work?
Of course, it’s impossible to know if the year you retire will look more like 1926 or 1877. Chances are, it will be somewhere in the middle. So, sticking to the 4% rule is a pretty safe bet. In fact, people that abide by this rule sometimes end up with double or even triple the amount of money they started with.
However, we acknowledge that not every situation is the same. For this reason, we believe that the 4% rule provides a great starting point but does not guarantee a successful retirement plan. For example, you may need to plan for more or less than 30 years, and there may be years when your spending is higher than others. Additionally, this rule is for a specific portfolio type: 50% stocks and 50% bonds. Your portfolio composition may differ from this scenario, and you may also want to reduce exposure to stocks as you near retirement.
That’s why working side-by-side with a trusted fee-based financial planner in Salt Lake City and the surrounding areas, is essential to your retirement plan. Using the 4% rule as a starting point, your advisor can help you create a personalized spending plan that takes into account your personal risk tolerance, investments, and retirement goals. TrueNorth Wealth, a Salt Lake City firm housing some of the best retirement financial advisors, can help to ensure that your money outlives you, and not the other way around.