Why 4 Percent Annual Withdrawals are Still Safe

US News

Due to the lower expected returns of stocks and bonds going forward, retirement planners have been preparing savers to accept a lower safe withdrawal rate for a few years now. But with the original 4 percent annual withdrawal rate already too low for many people to sustain a comfortable lifestyle, what's a future retiree to do?

Luckily, chances are high that you don't need to change anything with your savings and spending habits to adjust to these lower forecasts. Here are a few reasons a 4 percent withdrawal rate could still work for you:

Safe withdrawal rates are based on the absolute worst case scenario. This calculated withdrawal rate is actually very conservative, because the idea is not to run out of spending power even if you encounter the worst possible combination of withdrawals and market performance.

What are the chances you will live to 95? If you are unlucky enough to be 65 when it's the worst possible moment to retire, you will still have money to live on for years, perhaps even decades. In order to run out of money, you still have to outlive your money.

You can adjust your spending. Even if you retire at the worst possible time and live until 100, you probably won't blindly spend the same inflation-adjusted amount year after year without regard to market performance. I remember the financial crisis a few years ago, because it was close to Christmas time and there were absolutely no cars in the parking lot when we went to the mall. People do adjust when times are bad. And even small adjustments will help make your retirement nest egg last much longer.

Look at your budget closely, and there are many things that can be cut. Eliminating your expenses is never easy when you can seemingly afford a lot of luxuries. But if you are running out of money, you can bet that many of those "necessities" won't be so necessary anymore. Try alternatives for cable TV or even cutting your smartphone plan all together. The good news is that you likely won't miss many of the cutbacks that you thought would destroy your lifestyle.

Social Security will still serve as a solid foundation. Social Security could be reduced down the road one way or another, but those monthly checks will still pay for a solid chunk of your expenses. And no matter how inflation increases are calculated in the future, your Social Security benefit will greatly reduce what you need from your investments. With a portion of your expenses covered by an inflation-adjusted income stream, there is quite a bit of room for you to adjust your finances on the portfolio withdrawal side.

Every metric is interrelated. Inflation can wreak havoc on your retirement portfolio, but inflation will also boost revenue for companies, which will eventually trickle into earnings and asset prices. Buying power will slow down in the bond and stock markets when the Fed slows down their money printing policies, but the yields on future bonds will be higher.

Low expected returns won't last forever. You might be 5, 10, or even 25 years away from the start of your retirement. It's true that expected returns going forward are low, but everything can change in a decade. Your time horizon is much longer than that, so don't let recent events affect your long-term plans.

If you happen to live a very long time, retire at the absolute worst possible time, and refuse to adjust your spending and make cuts when necessary, then you may need to switch to a more conservative withdrawal strategy. Otherwise, the 4 percent rule could be even too conservative for your circumstances.

David Ning runs MoneyNing, a personal finance site that shares money moves you can make to significantly increase your chances of having a comfortable retirement. He likes to share simple changes that anyone can make, such as picking the best online savings account and figuring out whether a 0 percent balance transfer credit card makes sense.



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