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Does the 4% Retirement Rule Still Work?

Retirement Road Sign with blue sky and clouds.According to MotleyFool.com, a financial planner developed the 4% retirement rule in the 1990s, a time when interest rates were much higher. According to this rule, “By starting with a withdrawal of 4% of your retirement account balance, and then increasing that amount by inflation each year, the average retiree should be able to count on sustainable income for decades…” if they had a mix of fixed-income investments and long-term growth assets.

If you’ve never heard of the 4% retirement rule, you may think this is no big deal because you don’t need to know about a rule that might not work anyway. This is true, however, unless your retirement plans are already in place, you may need to put some thought into your retirement savings and how long these resources are likely to last.

First, the changes that have resulted in lower interest rates mean that people are not getting the same results from investments that they would have two decades ago when the 4% retirement rule was created.

Another issue is that many of us are living longer and may be in need of long-term care. The danger is not simply that a relatively healthy retiree may run out of money; it’s that someone who needs a high level of care may not be able to afford it.

If retirement is a long way off for you, you can work with a Fee-Only financial planner to ensure that you are on track to have enough money to retire. Even if you are well into your retirement years, you can still seek financial planning advice to see that your later retirement years.

Those who are close to retirement or in the early part of their retirement years can also work with a financial planner to examine what else they could do to generate income and use less of their retirement nest egg in those beginning years.