Most people believe that if they only withdraw about 4% of their retirement funds each year, their money will last throughout the rest of their lives. In some cases this may be true, but the 4% rule will depend upon how much money you’ve actually saved when you start making withdrawals.
For example, if you were to have one million dollars saved and earning an annual return of 4% on that money, you could safely withdraw that much each year with no problem, at least before you factor in inflation. If there is a 3% inflation increase, that same rate of withdraw will not give you the same purchasing power you had the year before.
Those that want to maintain the same purchasing power that 4% would give them today, will have to continually increase their withdraw percentage which will begin to dip into their principle and reduce the amount they have available to them.
If you do have some great investments and savings, the 4% rule may leave you with a lot of money left over at the end of your life. If this is your plan of course, then you’re on the right track but many discover that they pinched and scrimped throughout retirement when in fact, they didn’t have to.
The best way to handle the annual withdraw rate is not to get stuck on the 4% rule; instead remain flexible. There may be times that you will have to withdraw less money, but there is also the chance that you can withdraw more. The fact is there are a number of factors that will determine how much you can withdraw safely. Aside from how much you have invested and how those investments are doing, other considerations include your health, how much you will travel after you retire, if your mortgage is paid, etc.
Flexibility is one of the best ways of ensuring that your money lasts you throughout your life, but another important element is solid retirement planning. A good retirement plan will ensure that you have enough money available to you for retirement, plus it will help you to decide how much money you can spend each year, without fear of running out of money too soon.
Financial security is as easy as knowing how to plan and budget for a happy and lucrative retirement.