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Rethinking the Four Percent Rule for Retirement Withdrawals

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Friday, December 3, 2021

For many years retirees have been advised to take a four percent withdrawal from their retirement savings.
What is this four percent rule? Simply put, you add all your investments and withdraw four percent of that total during your first year of retirement. Then, in the following years, you can adjust the amount for inflation. In the past, this formula has worked well to give retirees a high probability of not outliving their money during retirement. 
However, according to a recent Morningstar report, this rule is no longer a sure thing. Market conditions aren’t working in retirees’ favor. The projections for the next decade are that due to market conditions, the withdrawal rate should be closer to three percent (3.3) than four percent. 
That change makes a big difference to your annual income in retirement. If you have one million dollars in your retirement fund, using the four percent rule you would withdraw $40,000 in the first year and adjust upward each year for inflation.
But if you drop your percentage to 3.3 percent, as the report advises, you would have only $33,000 for your first year of retirement income. That, of course, does not include Social Security or any other sources of income.
You may find that this amount is not sufficient to maintain your lifestyle. If that’s the case, there are three options to remedy the problem:
How to Save More for Retirement
Use a retirement calculator to figure out how much you need to save so that you enter retirement with enough money to implement the four or 3.3 percent rule.
If you work for a company and they offer an employer-sponsored retirement plan that matches any portion of the money you contribute, put your first savings dollars into that account.  If you don’t have this option, start with an IRA. Speak to your financial advisor and decide which IRA is best for your circumstances. The annual IRA contribution limit is $6,000 in 2021 and 2022 ($7,000 if age 50 or older).
If you have a 401K, then contribute to both.
Investments that produce retirement income
If you worry that you won’t be able to save enough for retirement, consider low-risk income-producing investments. There are several investments that could supplement your savings and Social Security. Stick to the sensible middle ground of investing. Talk to your advisor and find a reliable investment that will give you a steady income stream once you retire.
Other sources of income
If you need even more income, a part-time or gig job that you enjoy can be a good way to supplement retirement income without sacrificing all your free time. Perhaps you have a talent or a hobby that you can leverage into income in retirement.  And it will keep you active and socially engaged, which is good for your health.
If you have not yet put a solid retirement plan in place, it’s essential to consult with your financial advisor and work out how you can maintain your standard of living through your golden years. 

 

 

 

IMPORTANT DISCLOSURES
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. 
Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable-- we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances. Member FINRA & SIPC.

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Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Lawrenceville, NJ; and White Plains, NY. For more information contact David Lerner Associates Call 800-367-3000 Visit our website: www.davidlerner.com

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