Is the 4% Rule for Estimating Retirement Income Still Valid?

What is the 4% Rule?

Conventional wisdom says it’s safe to rely on a blend of income from your IRA/401(k) or other qualified or non-qualified account plus your social security during retirement. In fact, many advisers will tell you that you can withdraw 4% per year from your retirement accounts and your money will last for at least 30 years. The “Four Percent Rule,” as it is called, has been standard in retirement income planning for years1.

Thanks to record breaking returns and higher interest rates in decades past, retirees had only a 2% chance of running out of money if they followed the 4% rule. Sounds acceptable, right?

Not so fast!

A recent study says today’s retirees have a whopping 57% percent chance of running out of money if they follow the 4% withdrawal strategy2.

Why?  What’s changed?

There’s a perfect storm at play and the 4% rule no longer makes sense, in fact, if you use it to estimate the income you’ll need when you retire or determine your withdrawals, you are extremely likely to either run out of money or never have enough to live comfortably during your retirement.

What’s creating the perfect storm?

The market crashes in 2001 and 2008, today’s low interest rate environment, and the fact that people are living longer than ever are all causing the 4% rule to be highly questionable.

Once you are aware that there are problems with the old 4% rule, you might decide to be conservative by only taking out 2.5%. But you can’t. Uncle Sam won’t let you!  Once you turn 70½ you must start withdrawing from your IRA or 401(k) per the governments schedule.

The government mandates “Required Minimum Distributions “also known as RMDs and they have a complicated set of schedules that determine the percentage you must withdraw3. If you don’t make the required minimum withdrawals, you will have to pay the tax on that minimum income plus a 50% penalty!

Let’s put that in perspective.

Let’s assume you retired in 2000 at 70 ½ with $500,000 in your 401(k) you want to pull out only 2.5% or $12,500. But the RMD rules require you withdraw $18,248 that first year. That means if you retired in 2000 with $500,000 and just pulled out the required RMDs at the end of 2014 you would only have $257,546 in your 401(K).

That projection assumes that your 401(K) mirrored the S & P 500 in terms of interest rates over that 14-year period which is not likely. It’s more likely that you would not have kept up for all 14 years with the S&P 500 and therefore, your account balance would be even lower.

If one half of your $500,000 was consumed in the first 15 years what is going to happen in the next 10-15 years, even if the market doesn’t drop 20% or more?

What’s the alternative?

Where can retirees turn for reliable lifetime income that offers a safe alternative to the 4% withdrawal strategy? Not in an annuity! The best way to avoid RMDs, Taxes on Social Security and avoid

market losses is by avoiding retirement savings plans and strategies that result in taxable income. You can follow the recommended approach outlined in The Better Money Method TM.

Learn more and get started today!

1 http://money.cnn.com/2018/01/18/retirement/4-rule/index.html

The 4 Percent Rule is Not Safe in a Low-Yield World

3 https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions

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