Retirement: Will the 4 percent rule work for you?
“You may be closer to having enough money to retire than you think,” said Peter Finch in The New York Times. A popular rule of thumb says that if you have $1 million saved up when you retire—and you’ve invested in about 60 percent stocks and 40 percent bonds—you can take out $40,000 a year (adjusted for inflation) until you’re 95. More generally: Live on 4 percent of your nest egg annually and you can survive for about 30 years without working. But “do retirees really spend a fixed amount each year for the rest of their lives?” The reality is that people spend more in early retirement years, and less as they get older. So some advisers recommend planning for a Go-Go years, Slow-Go years, and No-Go years spending pattern. Travel, entertainment, and helping children and aging parents can cost more early in your retirement, while you may be able to live more frugally as you age. “Traditional financial planning tools—ones that expect spending to keep pace with inflation for 30 years—could overstate spending in late retirement by 30 percent or more.”
Actually, living on that 4 percent rule with $1 million is not nearly enough to retire in comfort, said Catey Hill in MarketWatch.com. Certified financial planner Kimberly Foss says that “$2 million is a better number for many of us to aim for.” Bottom line, Foss says, is that “when treatment for a single catastrophic illness or an extended nursing home stay can absorb funds in chunks of $250,000, that nest egg looks a little less secure.” You can factor some Social Security or other income into your retirement, but as for that $1 million, “many of us may need double, triple, or more than that to live the life we want in retirement.”
Typically, “Americans expect to have a quarter of a million dollars saved by retirement,” said Kathleen Elkins in CNBC.com. That’s not enough—nor is the $610,000 figure that Americans say they want to have. According to a new report, you could “blow through even $1 million as a retiree in as little as 12 years.” How much you need in retirement “depends on your lifestyle and spending habits.” But there are some general rules of thumb. Saving at least 10 percent of your income is good, but more is better. “If you want to retire ‘rich,’ save 15 to 20 percent, and if you want to retire early, save 20 percent or more.” There’s one solid, simple piece of retirement advice everyone can use, said Christy Bieber in TheMotleyFool.com. “The short answer to the question of how much you should save is: as much as possible.” ■