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The 4 Percent Safe Withdrawal Rule Declines to 3 Percent

David Ning

As if saving enough money to withdraw only 4 percent of your portfolio to fund retirement isn't hard enough, some experts are now claiming that retirees can safely withdraw just 3 percent of their savings each year. But before you hunker down and try to save even more than you already do because you fear running out of money too quickly, consider that this disastrous scenario is unlikely to play out. Here are a few reasons most investors will do fine by sticking with a flexible version of the original 4 percent retirement withdrawal rule:

Your finances were fine during the working years when you didn't get a raise. The safe withdrawal percentage assumes you are going to increase spending to cope with inflation each year no matter what the market does. By simply pausing the inflation adjustment when markets decline, you'll give your portfolio much more breathing room. And who is actually going to keep spending away when the markets crash anyway? Those with some common sense will probably find areas to reduce their spending and withdraw less when their portfolio values go down faster than they expect, which will, in turn, allow them a higher initial withdrawal rate to begin with.

Still having trouble believing you can reduce your expenses in retirement? Here's a suggestion. One of the easiest ways to reduce spending is to delay certain big purchases. I'm not telling you that everything can wait. Go to the dentist immediately if your teeth ache, obviously. But other expenses, like a big trip or replacing an older car, can definitely be delayed until the portfolio recovers a bit.

Surprises in expenses go both ways. There are plenty of unexpected expenses that will pop up in retirement, but there are also expenses that will be lower as time goes on. Spending on technology will probably continue to go down in the future, and other market-disrupting services will be made available that will eliminate the need to pay more. An inflation-adjusted amount may not even be necessary to enjoy the same standard of living.

You could start tapping into other assets. If there ever comes a day when you are low on funds, you still have plenty of assets that can be sold. The proceeds from all the stuff in your house, or even your home equity can be used to fund retirement. You could downsize, move to a location where house prices are lower or look into reverse mortgages. These options may not be ideal, but it's much better than the devastating scenario of running out of money you are worried about.

Those who can accumulate enough for the 4 percent rule to work will know how to make due. You spent decades saving and plotting your way to a large nest egg, making necessary cutbacks whenever life throws you a curve ball. Job loss and emergency expenses didn't derail you. I'm confident you will be able to adjust if the markets behave worse than at any other point in history (the only scenario where the 4 percent rule will fail).

Seniors in general are doing fine. Look around you. The vast majority of people haven't saved as much as experts say we should, but are managing to get by in retirement. And it's not because all current elders have pensions either. Not everybody had pensions in the past, and even fewer people had inflation-adjusted payouts. Our country has millions of retirees, and many of them are living just fine.

You can be just as happy living on less. No matter the spending level, it's extremely difficult for many people to imagine spending less than they currently do. Yet, there are always others living life happily with fewer resources. Learn from them. Money isn't the answer to all your problems. Don't fear not being able to spend at an inflation-adjusted level year after year in your retirement, because you may be able to get by with only occasional inflation adjustments.

The experts may have plenty of reasons to be concerned, but don't fret about reducing your retirement withdrawal rate. Spend sensibly in retirement, and you'll do just fine.

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