Save, save, save. This is what we’re told as we make our way through our working years—in preparation for the time in our lives when our regular paychecks stop showing up in our bank accounts. Saving is certainly solid advice, but some of the “tried and true” historically-accepted ideas about retirement saving are no longer as tried and true as we once thought them to be. Take the 4 percent rule, for example. This rule states that you should take out 4 percent of your retirement savings to live on annually in retirement. If your total retirement savings is $1 million, then 4 percent of that would be $40,000 to live on each year. For many, $40,000 a year sounds adequate enough, right? However, there is a case for living beyond the 4 percent rule in retirement
The 4 percent rule may not be enough to cover your expenses.
Depending on the way you live your life, taking 4 percent of your nest egg annually may simply not be enough to support your lifestyle. If you anticipate this being the case, then you should plan to have extra padding in your nest egg to account for the additional percentage you plan to take out of your savings each year. Inflation is another factor to keep in mind.
The 4 percent rule may limit the quality of your retirement.
Here’s where living beyond the 4 percent rule in retirement comes into play. Let’s say your assets continue to increase in retirement (or you just have a sizable nest egg saved), but you still continue to only take out 4 percent. What happens to all of the money you accumulate but never spend? Many people leave it to their beneficiaries, and that’s great. However, why not use any extra money to make your retirement more enriching? We’re not saying you should spend just to spend, but if you have the money, use it to plan more time to spend with family via vacations and quick trips, to travel with your spouse or to fund the hobby that you’ve always looked forward to picking up. You can still leave money to your beneficiaries and live beyond the 4 percent rule in retirement provided that you make smart decisions about your spending and saving.
The 4 percent rule doesn’t take into account additional sources of income.
Making a retirement plan for yourself according to your life at age 25 is a great first step, but it is not viable if you do not continue to adjust it throughout your lifetime. The 4 percent rule is not only conservative, but it neglects to consider other sources of income you may acquire along the way, and particularly when those sources of income will start. For example, some people may think they need to live on 4 percent of their income while waiting for Social Security to start. However, when you have Social Security as a source of income, you can actually use less of your own savings. Therefore it makes sense to use more of your savings to make yourself comfortable prior to that time.
Another additional source of income in retirement could be freelance work or a part-time job. With this added income, living on just 4 percent of your savings may be too conservative.
Unless another recession happens, you don’t have to live like you are in one so long as you have the money saved to do so. Another way to avoid having to sacrifice aspects of your lifestyle in retirement is to put at least a portion of your money in a place where it is 100 percent guaranteed safe from stock market loss. If you want your money in risk-protected investments, but you still want to enjoy stock market gains, the Ty J. Young Inc. team can help. Call us today at 877-912-1919, and continue to follow Ty J. Young Inc.’s Retirement You Earned blog!