If you read about retirement, you will probably be familiar with the 4 percent rule.
The rule was created in the mid-1990s by a now-retired financial planner to keep people from outliving their retirement nest eggs. Here’s how it works: If you have a nest egg of $1 million, you should draw down no more than 4 percent, or $40,000 a year.
So here’s the question. Should you still be adhering to a rule created more than 20 years ago when the economy and interest rates were so different?
Well, it depends. Many planners still use it as a rule of thumb, but if anything, many recommend that you withdraw less — more like 2 or 3 percent. The reason is longevity. We are living longer. In fact, you can now live in retirement longer than you did in your career.
David Blackston of Blackston Financial Advisory Group in The Villages, Fla., says you can’t apply the rule to everyone. “Everybody’s situation is different,” he says. “You can’t put everybody in a box and say everybody is the same.”
He says he worries less about the rule if someone has adequate Social Security or pension income. But if someone relies on a nest egg for retirement income, the 4 percent rule may come into play.
“Today, four percent needs to be the highest level they are pulling,” he says. “No more than that. So is it still effective? Yes. It’s on the high side, but it depends on what the client is trying to accomplish.”
Question of the week: Have you consulted a financial planner to help plan your retirement? Or did you go it alone? Send comments to email@example.com. Please include your name, city and state. In the subject line put “Planning for retirement.”
Jim Pflugrath of the Woodlands, Tex. wrote:
We have not consulted a financial planner, but have used the very helpful people and free resources at www.bogleheads.org, which I am sure you have heard of. Bogleheads.org is probably the best place on the Internet to get free financial advice and personalized retirement planning.
Garry Powell wrote:
I have been retired for about 2 years. Went to a lot of meetings (all with a free meal!) but all wanted to manage all my money for a fee or pushing annuity products. The one I started with was Vanguard, where I have had money for years. This was done over the phone with the adviser displayed on my computer screen.
They created a plan (which they had done also in the past) and executed the plan. It was built around their funds. They are all index stock and bond funds, low-cost and built to your risk tolerance. For a fee they would rebalance quarterly. I decided to do that myself. Really can’t think of a better or cheaper way to manage your retirement funds. I might have them manage my payment from the funds when I need to take required distributions.
Scott Fossum of Houston wrote:
Go it alone. I am 56 with a few more working years left. My career has included forecasting, budgeting and planning. So I feel comfortable with my DIY retirement planning.
I feel I can make more reasonable assumptions about myself in retirement than a planner (i.e. life expectancy, budget, inflation, SS strategy, taxes, risk tolerance and hurdle rate). I do check my planning versus free online resources (i.e. Fidelity retirement tool).
My bias against planners is that they make your retirement seem impossible unless you use them to generate the astronomical returns they say are needed to avoid living in a cardboard box while eating Alpo. Because this is what their model says.
Their models are based upon the average person or maybe a hypothetical person created to bring in increased sales. Well this average person isn’t going to require 80 percent of pre-retirement income, live to 101, experience 3 percent inflation, put the majority of my assets in the stock market or fail to adjust spending lower if required.
A powerful tool is a sheet of paper with a calculator. The math required is only addition, subtraction, multiplication and division which, I learned in grade school. Create an initial plan and add sophistication as you become more aware of items that will effect YOU.
Esther Murphy wrote:
Yes, one time we did have the opportunity to get free retirement planning through my place of work. It turned out that it was worth what we paid for it. After crunching all the numbers, the planner was able to tell us that if I died early, my husband would have a million dollars to spend. If he died early, I was doomed to near poverty. My husband, not a credulous person, asked a simple question: “Where did the money go?” The planner was flummoxed as well, as we have no children, so there were no inheritance issues. So he took his numbers back and started over, and this time the outlook made sense, as it was roughly equal for both of us.
But then he tried to get us to move our IRAs from T Rowe Price, and into stuff that of course his company was selling.
You get what you pay for. Since then we’ve done just fine with TRP and our own judgment.
Responses to questions from previous weeks: Do you expect you will enter retirement with debt (including a mortgage)?
Diane Hall of Oakton, Va.:
My husband and I have been married for 44 years. He is a CPA with his own practice (still working at 70) and I’m a retired Fairfax County teacher (retired for 9 years). We have not a penny of debt. We own two houses, one in NOVA and the other in Lewes, Del. Neither has a mortgage. No credit card debt. Even though we have enough money to retire, neither of us feels good about stopping work. I now substitute teach in the county. First of all, in my opinion, retirement is not all that it’s cracked up to be. I belong to a book club, a women’s political group and babysit sometimes for our grandchildren. None of that is enough for me. 24/7 is a lot of time to fill. So we travel at least four trips a year, in fact, we’re going to Europe on Saturday. We didn’t always live like this. When we were young, we always saved. Sometimes we couldn’t save a lot, but we always did. We never lived beyond our means. Now I know that we have the advantage of my husband being a CPA and being financial savvy. So that our retirement story.
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