Why new retirees may need to rethink the 4% rule
From CNBC: 2024-12-17 08:15:01
A new study suggests that the popular retirement strategy known as the 4% rule may need recalibration in 2025 due to market conditions, with the “safe” withdrawal rate declining to 3.7%. Morningstar analysts attribute this to declining long-term assumptions in financial markets for the next 30 years.
The 4% rule helps retirees determine how much money they can withdraw annually from their accounts without running out of money over a 30-year retirement period. Retirees tap 4% of their nest egg the first year and adjust for inflation in subsequent years, but expectations for returns have decreased.
While the 4% rule is a good starting point, retirees may need to be flexible with annual spending. Christine Benz of Morningstar advises reducing spending in down markets and warns against underspending due to overly conservative assumptions underlying the rule. She stresses the importance of not scaring people into saving too much.
Drawing down a retirement nest egg can be challenging, and the 4% rule aims to guide retirees to relative safety. With historical data showing a high probability of success over a three-decade retirement, the rule adjusts withdrawals for inflation each year. However, it has limitations, including not factoring in taxes, investment fees, and changing expenses.
Retirees can make adjustments to the 4% rule to suit their needs, such as spending less in later retirement years and accounting for potential long-term care costs. Delaying Social Security claiming to age 70 can also boost financial security, with the government adding 8% to benefit payments for each year of delay. Benz recommends living off job income rather than relying solely on investments.