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The 4 Percent Rule: The Secret to Not Outliving Your Money in Retirement

The 4% percent rule is a retirement investment strategy that establishes a steady and secured income stream.  Experts believe this rule is a common way to address the fear of many Americans of running out of money in retirement.

According to a recent survey, 65% expressed a justifiable fear of running out of money in retirement.

A projection model done in 2019 by EBRI, a non-partisan, tax-exempt organization devoted to independent, objective, fact-based research and education, also found that 40.6%of Americans ages 35–64 were projected to run short of funds in retirement.

Planning early

We’ve all heard the expression, “failing to plan is planning to fail.”  It’s especially true with retirement planning.

There are many factors to consider when planning for retirement.  Some can be quantified.  Others are unknown.

How long will you live?

If we knew when we would die, retirement planning could be simpler.  While this isn’t possible with precision, the Social Security Administration has a calculator that will show the average number of additional years you can expect to live based only on the sex and date of birth you enter.

A male aged 65 has an average life expectancy of 19.1 years.  Women tend to live longer than men.  A woman of the same age has a life expectancy of 21.8 years.  Keep in mind these are averages.  You may live considerably longer or die earlier.

To be conservative, consider the average as the minimum number of years you’ll need to fund your retirement.  If you’re married, you’ll need to consider funding the lifestyle of your spouse after you die.

Calculating or estimating the number of years you’ll live is not enough, though.  One should be aware of the different ways that can help ensure that your hard-earned money will be enough for retirement.

The 4% rule is a popular retirement investment strategy, along with other options.  You can learn more about it in this article.

What is the 4 percent rule?

A common withdrawal rule after retirement is known as the 4% rule.  You withdraw 4% of your principal during your first year of retirement.  After that, you increase or decrease that dollar amount to consider inflation.

The 4% rule has the benefit of simplicity, but it’s no guarantee that you won’t run out of money.

As this article from Charles Schwab notes, if your spending exceeds the inflation rate, your outcome could be seriously impacted.

Another issue is the underlying assumption that historical market returns will continue.  Some experts predict market returns over the next decade will be less than long-term historical averages.

The 4% rule may also be risky if your portfolio suffers major losses early in retirement.

Because of these issues, the 4% rule is controversial, with some experts concluding that it’s too risky and that “any retiree that adopts the 4% rule pays a high price.” 

A better approach might be to work with a financial advisor and calculate a withdrawal strategy customized to your situation.  

It would consider your projected lifespan, the amount of risk you can tolerate and need to take in your portfolio (which will determine the allocation of your assets between stocks, bonds, and cash), the level of confidence required to give you peace of mind, and the ability to adjust your spending habits.

The holy grail of retirement planning is to have enough funds so you can live off the income they generate and never have to touch the principal.  If you’re not in that fortunate position, you need to adopt a strategy for withdrawing your money to ensure it doesn’t run out.

Alternative retirement investment strategy

If the 4% rule is not the best option for you, another retirement investment strategy is considering immediate or deferred annuities to fund part of the income you’ll need in retirement.

With an immediate annuity, you make one payment to the insurance company in exchange for guaranteed payments that commence shortly after paying.  

You can elect options that will guarantee you receive designated minimum payouts in the event of premature death or increase payments by the rate of inflation, but these options will reduce your monthly payment.

A deferred fixed income annuity is similar to an immediate annuity, except the start date for payments is deferred to a future date when you reach a designated age.  Similar options are available for these annuities.

There’s evidence that using immediate and deferred fixed-income annuities is an effective way to protect you from longevity risk.

There are many psychological and emotional hurdles to purchasing these annuities, which is why only a few investors incorporate them into their financial planning.

If you are concerned about outliving your money, ask your financial advisor to review low-cost immediate or deferred annuities from providers like Vanguard.

Strategizing for the future

If you share the concern of outliving your retirement fund, financial advisors believe that the often ignored 4% rule can make a difference.  However, if such a move is too bold or too conservative for you, there are always other options, like using immediate or deferred annuities.

Remember that confronting longevity risk and adopting an appropriate withdrawal strategy will go a long way toward minimizing the risk of outliving your funds in retirement. 

No matter what you choose, consult with your trusted financial advisor.  Know more about the secret to not outliving your retirement fund with Allied Integrated Wealth

Let us help you create a comprehensive, customized financial plan.

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