Because I know that Social Security won't pay me all that much money in retirement, and because I'm aware that benefit cuts may be on the table, I'm doing my best to build up a sizable nest egg. But I also know that accumulating savings for retirement isn't enough.
You can blow a $1 million nest egg fairly easily if you aren't careful in how you manage your money. That's why my goal isn't to just save for retirement , but also, come up with a strategy for making that money last.
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For years, financial experts have recommended the 4% rule for this purpose. The rule states that if you withdraw 4% of your savings balance your first year of retirement and adjust future withdrawals for inflation, your nest egg should last 30 years.
The latter part sounds nice to me, since running out of money is a scary thought. But while I like the idea of the 4% rule in theory, it just doesn't work for me. Here's why.
It's too restrictive
The 4% rule more or less has you sticking to a single withdrawal rate throughout retirement. My issue there is that retirement expenses don't always hold steady from year to year.
You may have a year when you have to make several large home repairs, and another year when things go swimmingly and you're spending minimally on maintenance. You may also have a year filled with family occasions that require you to travel, and a year when you'd rather largely stay close to home.
I need a withdrawal strategy with more flexibility than the 4% rule -- one that perhaps has me withdrawing 6% of my nest egg one year and 3% another year. And I'd rather my withdrawals be need-based rather than preset.
It makes too many assumptions
The 4% rule assumes that your nest egg is pretty evenly split between stocks and bonds. I happen to think that's an appropriate asset allocation for someone in retirement. But that's how I feel now, as a non-retiree. I don't know how comfortable I'll be with that allocation at a time when I'm not working. And since the 4% rule hinges on that allocation, I don't want to commit to it.
Also, the 4% rule assumes that you need your savings to last 30 years. A big part of me wants to never retire, but if I do, I hope to continue working in some capacity as long as possible. If that's the case, though, and I retire at age 75, I shouldn't be managing my withdrawals the same way as someone who retires at 62.
Make your own rule
There's nothing wrong with using the 4% rule as a starting point for managing your retirement nest egg. But rather than assume that it's the best withdrawal strategy for you, consider your needs, wants, and investment mix. And then, run some numbers to see what withdrawal rate works for you, keeping in mind that it's OK for that rate to change from one year to the next.
And if you need or want the help of a financial advisor to manage your retirement savings, that's completely fine, too. I write about this stuff day in, day out, and I still have an advisor who helps me manage a portion of my portfolio and talk through big financial decisions.
Working with an advisor could get you to a place where you're comfortable with the way you're managing your savings. And if you're working as hard as I am to build them, you deserve that peace of mind.
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