By Mike Gibbons, RICP®
Throughout your working life, you’ve put money aside for retirement. As retirement nears, you may have shifted focus; instead of doing what you can to save money, you may now be trying to determine the best retirement portfolio withdrawal rate.
The “4% rule” is a longstanding suggestion. But is it right for you? Here’s a closer look.
The Origins of the 4% Rule
In 1994, financial advisor Bill Bengen introduced the idea of the 4% rule. This rule held that in the first year of retirement, a retiree could withdraw 4% of their retirement savings. They could adjust the retirement portfolio withdrawal rate for inflation each year and have enough to support themselves through 30 years of retirement.
The 4% rule has been debated since its inception, but along the way, it became a kind of rule of thumb for those approaching retirement.
Is the 4% Rule Still Valid?
The market has changed significantly since Bill Bengen created the 4% rule. Life expectancy has also increased, and it’s not unusual for retirement to last longer than 30 years.
Despite these changes, many financial advisors still consider the 4% rule to be a good starting point when determining your retirement portfolio withdrawal rate. However, the 4% rule isn’t a one-size-fits-all strategy, and it was never meant to be. Your unique circumstances and your vision for your retirement determine how much you can safely withdraw.
Bill Bengen himself has revised the 4% rule to suit today’s market. He now suggests that retirees can withdraw 4.7% of their portfolio in the first year of retirement and still have sufficient savings to carry them through 30 years.
The Importance of an Individualized Savings Plan
The 4% rule can be a useful starting point for retirees trying to determine a sustainable retirement portfolio withdrawal rate. However, it’s generally unwise to create a strategy based on the 4% rule alone. Your expenses and financial obligations in retirement can dramatically change how much you can comfortably live on.
For example, if your home is paid off, your retirement portfolio withdrawal rate may be far less than if you’re still paying off your mortgage. If you have a medical condition that worsens with age, you may need to withdraw more funds later in life.
Figuring out how much to withdraw is a balancing act. If your retirement portfolio withdrawal rate is too high, you might find yourself running out of funds part of the way through your retirement. If you withdraw too little, you may be depriving yourself of the quality of life you’d hoped for.
It’s impossible to know exactly how your life (and the market) might change in the future. I have more than 25 years of experience working with retirees and pre-retirees, and I leverage that experience when working with each client. When we take the time to discuss your needs, preferences, and vision for the future, we can find the retirement portfolio withdrawal rate that works best for you.
Find the Right Retirement Portfolio Withdrawal Rate
When it comes to deciding your retirement portfolio withdrawal rate, we at Gibbons Financial Group don't believe in a cookie-cutter approach. We help you navigate your employment benefits and develop a strategy to give you the retirement you deserve.
If you’re nearing retirement and want to decide on an appropriate retirement portfolio withdrawal rate (or if you’re still building your retirement savings), my team is ready to help. Don’t hesitate to contact us with any questions you may have.
Call 224-419-5550 or email me at Mike@gibbonsfinancialgroup.com to schedule a complimentary consultation. And be sure to join our free webinar, Retiring Early From Pharma.
About Mike
Michael J. Gibbons is founder and president of Gibbons Financial Group, an independent advisory firm providing custom-tailored financial planning and investment management services to pharmaceutical and healthcare professionals and their families. Mike has over 25 years of experience and spends a significant portion of his day working with pre-retirees and retirees, focusing on asset management, Social Security and pension planning, as well as retirement income preparation.
Mike has degrees in both business and psychology from Lake Forest College and currently holds his Retirement Income Certified Professional (RICP®) designation from the American College. Mike was named a Five Star Wealth Manager for 2016 and 2018* Mike is heavily involved in his community, having served on the Village of Gurnee Police Pension Board as a Community Volunteer and the St. Patrick’s Parish Financial Board. When he’s not working or volunteering, Mike loves playing golf and spending his time with his wife and children. To learn more about Mike and how he can help you, connect with him on LinkedIn, visit his website, and register for his free webinar, Retiring Early From Pharma, created specifically for professionals retiring from the pharmaceutical, biotechnology, and healthcare industries.
*Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2016/2018 Five Star Wealth Managers.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.