3 Serious Problems With the 4% Retirement Rule
We are all told to save as much money as possible for retirement, but how much is really enough? For years, experts have relied on the 4% rule to help determine how much savings is truly adequate.
The rule states that if you begin by withdrawing 4% of your nest egg's value during your first year of retirement, and then adjust subsequent withdrawals for inflation, you will avoid running out of money for 30 years. Not only is the 4% rule a nice idea in theory, but it's been tested and proven successful time and time again.
That said, the 4% rule is far from perfect, so you will need to be cautious about adopting it. Here are three specific problems to watch out for.
1. It makes assumptions about your investment mix
The 4% rule is designed for portfolios with a relatively equal mix of stocks and bonds -- specifically, 60% stocks and 40% bonds. And while there is a little wiggle room in that formula, if your risk tolerance is such that your investments are heavily skewed toward one option over the other, it could throw everything off.