Will the 4% Rule Work for Your Retirement?

by 

You’ve probably heard about the 4% rule of thumb. It holds that your retirement nest egg should be large enough for you to withdraw about 4% a year. In theory, you could do this strictly by drawing down the principal – which would leave you flat broke in exactly 25 years.4% rule
But most investors are more prudent and would feel better if their nest egg generated income somewhere in the area of 4% so that they could preserve their hard-earned savings for their own rainy days, or for their families.
Time was that plain old interest rates could get you there. But those times are today a distant memory. Even with the specter of higher interest rates, it’s going to take a long time before get to a point that we are earning that much from cash savings.
That’s why so many retirees and retirement planners see investments as the best way to apply the 4% rule. And those investors are facing disappointment as the year 2015 draws to a close and major stock indices are falling significantly short of 4% growth. The S&P 500 is up less than 2% year-to-date. The Dow Jones Industrial Average is about flat. The Nasdaq Composite Index, on the other hand, has risen 8% this year. But it’s had bad years, too.

Make the Most of the 4% Rule

Turbulent times in the stock market are always good times to reevaluate longstanding market theories and this year’s ups and downs should remind anyone heading into retirement that the 4% rule is only a rule of thumb.
Here are some tips for making the 4% rule work better for you.

  1. Try to consider the 4% rule on a multi-year basis. Retirement lasts a lot longer than one year and if you look at most long-term stock charts you’ll see that, over time, most investors probably have 4% a year and then some . . . provided, that is, that they sat tight. The key to growing your assets over time is to not liquidate when things are moving in the wrong direction. And that brings me to the next point.
  2. Give yourself a cushion. Say you retire in a bear market. Your stock holdings fall 5% the first year and look to be headed further south in year two. If you believe in the long-term growth of the stock market … and if you believe that you have many good years ahead … then you are still in relatively good shape, provided you are not letting those early losses chip away at your principal. If you have called your retirement so close that you cannot get by a single year without withdrawing 4%, then you’ll be challenged to recover from bear markets.
  3. Diversify your stock holdings. Many investors who have a diverse asset class of cash, bonds, real estate and stocks still invest their stock holdings too narrowly around certain individual equities or sectors. It’s better to take a broad view. Consider how the Nasdaq Composite has performed so much better than the Dow or the S&P this year. If your goal for retirement is steady growth of at least 4%, you’re best off investing in a diverse group of stocks.
  4. Consider whether you have room to be more aggressive. Retirement is the time to be conservative with your investments, isn’t it? Well, that really depends. It depends on the age at which you retire and the amount of money you are bringing into retirement. It’s never advisable to gamble with your last dollar, but if you are in a position to be facing a long, comfortable retirement, it may make sense to invest more aggressively in the early years. If you are able to achieve more than 4% growth for a period of years, you’ll be better positioned down the road.

The 4% rule is a pretty good rule, even these days. But it’s not a magic number. Shoot for 4%, hope for more, but prepare for less.

Just sit back and watch it grow…and grow…and grow

Imagine owning something so stable…so secure…so reliable…you can just sit back and let it make you rich—no matter what the economy is doing. Sound impossible? It’s not. In fact, this is the exact same strategy Warren Buffett used to make his billions. And it’s working for many other Americans too. Take Grace Groner from Lake Forest, IL. For decades she scrimped by as a humble secretary…but by using this one simple strategy, she amassed a $7 million fortune. Find out how it’s done right here.

To top