Presented by Bob Brown
In Las Vegas, risk is a part of the culture—but when it comes to retirement, the stakes are too high to gamble. Managing retirement income now demands more than luck—it requires a strategy.
How the 4% rule works
The 4% rule is a simple, generic rule of thumb for calculating retirement withdrawals. It says you can withdraw 4% of your nest egg the first year of your retirement, then adjust that amount each year to account for inflation, with a high degree of confidence that your portfolio will last 30 years.
Here’s how it might work: Say you retire with a $1 million portfolio. In your first year of retirement, you would withdraw $40,000 ($1 million X .04). The next year, you’d withdraw $41,200 ($40,000 plus 3% for inflation), followed by $42,436 the year after that ($41,200 plus 3% for inflation). And so on.
Although investors and financial planners have used the 4% rule for decades, keep in mind it’s only a starting point. It relies on assumptions that may or may not apply to you or the environment in which you retire, including:
Return estimates: The projections assume future returns will be on par with past returns.
Portfolio allocation: The rule also assumes your portfolio will remain invested in 50% stocks and 50% bonds for the duration of your retirement, which is unrealistic—it’s likely to grow more conservative in your later years.
Withdrawals: The biggest “problem” with the 4% rule is that is assumes your withdrawal plan will never change. It doesn’t account for changes in your spending needs, market conditions, or inflation.
Flexibility is key
Rather than adhere rigidly to a 4% withdrawal rate, it’s better to view the rule as a starting point. Once you have a rough dollar figure in mind, you can personalize it depending on your investments, risk tolerance, and life expectancy, while also staying flexible as conditions change. Here are three dynamic ways to manage your spending in retirement:
1. Develop a plan. Online retirement calculators (such as the one available at schwab.com/retirement-savings-calculator) can help you determine a sustainable portfolio withdrawal rate based on your specific situation. Likewise, a professionally created retirement plan can give you an even more detailed analysis. But whether you do the math yourself or work with a pro, review the numbers regularly to ensure you remain on track.
2. Adjust as needed. A static withdrawal rate doesn’t factor in the market’s inevitable ups and downs, nor does it account for health or lifestyle changes that demand flexible cash flow management. Taking a more dynamic approach might mean withdrawing a bit less (perhaps by skipping the inflation increase) in years when the market is struggling and withdrawing a bit more in years when the markets are on a roll. These types of moves may mean your budget fluctuates year to year, but they’ll also help increase the probability that your savings will last throughout your lifetime.
3. Consider an annuity. Annuities are one of the only types of financial vehicles that can ensure you have guaranteed income for life. With an ongoing stream of payments coming to you, you can feel more comfortable that you’ll have the income needed to cover essential expenses in retirement—even if you outlive your investment portfolio. However, annuities are not for everyone—they can be complex and costly, vary in flexibility, and are dependent on the claims-paying ability of the insurer.
In a city that knows risk, your retirement shouldn’t be one of them. A one-size fits all approach may no longer cut it. Visit your local Charles Schwab Branch in Centennial Hills to create a retirement income strategy built for today’s realities.
Bob Brown is an Independent Branch Leader & Financial Consultant at Charles Schwab with over thirty years of experience helping clients achieve their financial goals. Some content provided here has been compiled from previously published articles authored by various parties at Schwab.
The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Data here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed.
Annuity guarantees are subject to financial strength and claims-paying ability of the issuing insurance company.
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