The Four Per Cent Rule has become an accepted rule of thumb in the retirement planning community. The basic premise is straightforward. By withdrawing four per cent of your retirement nest egg in your first year of retirement – and then adjusting that amount for inflation after that – you should have enough money to last you through your retirement years.
Recent instability in the economy, which caused interest rates to fall to near-record lows, persuaded some economists and financial planners to question the Rule. They began to debate whether retirees would use up their savings too quickly in an environment where returns on their investments weren’t able to keep up with the withdrawal pace established under the Rule.
Given that returns from mutual funds and the stock market are unpredictable, many experts suggest a more dynamic approach, whereby retirees adjust their withdrawals on an annual basis, based on market performance.
The Four Per Cent Rule is still often advocated as a good starting point, but other factors like your retirement age can also impact its applicability. For example, those who retire at 50 need to plan for many more years of retirement. This strategy may mean that withdrawing four per cent in the beginning is too high, and perhaps they should start at three per cent. Conversely, those who retire at 65 may be able to afford to withdraw closer to five per cent from the start.
If you’d like help with your retirement plan, our investment specialists would be happy to discuss it with you.