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4% Rule to Retirement

By madhu on August 19, 2016
Rethinking the 4 Percent Rule The biggest fear for people facing retirement, is the possibility of outliving their savings and having to depend on their children. According to the  “4 percent rule” a person must withdraw no more than 4 percent from their retirement savings each year, and they’ll have enough money to last the rest of […]

Rethinking the 4 Percent Rule

A happy senior couple sitting on the front of a sail boat on a calm blue sea

A happy senior couple enjoying their retirement

The biggest fear for people facing retirement, is the possibility of outliving their savings and having to depend on their children.

According to the  “4 percent rule” a person must withdraw no more than 4 percent from their retirement savings each year, and they’ll have enough money to last the rest of your life. This idea was calculated back in the 1990s and was based on a model portfolio that contained a certain mix of stocks and bonds—60 percent large-cap stocks and 40 percent intermediate-term government bonds.

But times have changed. With historically low bond yields and a volatile stock market, the “4 percent rule” may no longer be as safe.

To make sure retirees don’t outlive their savings get a handle on their cash flow managing income and expenses in retirement is more important than relying on any rule. The bottom line—knowing what you’ll be spending is the best way to determine what you’ll be able to withdraw.

Considering inflation and taxes, an investor who wants to be able to draw 4 percent has to be able to make at least a 7 percent return on average to be able to get that 4 percent in their pocket. That can be challenging at times.

The most important factor in being able to follow the “4 percent rule”—and not outlive your nest egg—is to try to save more. Increasing your retirement contributions to reach the maximum annual limit for Super Contribution but that may still not be enough, but there is no limit on investments, you may have to add more money to taxable accounts earmarked for retirement as well.

In the end, how much money you put in will ultimately determine how much you can take out. The soon you start saving the more time it has to grow. So, save more and save early. Make sure you add a buffer for a vacation, a wedding or a medical emergency.

Call Madhu on +61425341086 to talk about where you are and how to get where you want to be.

Article written by madhu

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