In a recent study, the 4% rule was determined to have the highest probability of not running out of money based on historical market conditions. It showed that if a retiree used the 4% rule with a portfolio invested in 60% stocks and 40% bonds, they would end up with double the amount they started with after 30 years (source: Kitces, 2012). It is of course impossible to predict stock market returns, and past performance does not guarantee future results. Because of this, it’s critically important to develop a plan that regularly monitors your withdraw rate relative to your portfolio value. Remember that the 4% rule doesn’t guarantee you won’t run out of money or that your retirement savings will last. However, if you stick to a pre-determined withdrawal rate, it can provide a level of confidence that your portfolio will support you at least 30 years. Of course each client’s situation is unique, and many factors must be considered when determining a sustainable withdraw rate.
Other Retirement Income Considerations
Consider the timing of your Social Security benefits. Maximizing your benefits involves many factors beyond just your age.
Consider a tax plan to minimize taxes in retirement. Every dollar you can avoid in taxes is less money that needs to be withdrawn from your portfolio.
Invest in ways to reduce costs and minimize expenses. Saving money is often times more efficient than trying to earn more money.
Invest differently. Consider using alternatives to bonds in a portfolio to limit risk. There are many kinds of vehicles that generate income or damper market swings, with less drag on portfolio performance when markets appreciate.
Diversify your income sources. Consider alternative ways to increase your income in retirement; such as passive income opportunities, real estate rentals, even a hobby, farm or side business.
The most significant risk to your retirement is a financial emergency dictating that you withdraw funds at an inopportune time. The more prepared you are, the more likely your portfolio will last throughout your life.
Source: Kitces, Michael. What Returns Are Safe Withdrawal Rates Really Based Upon? (2012, August 15). In Nerd’s Eye View. Retrieved February 15, 2018 from www.kitces.com
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