Retirees’ annual 4% withdrawal ‘rule’ doesn’t work for everyone in today’s low-rate environment
From: www.nydailynews.com
For decades, common knowledge among economists dictated retirees could remain financially stable throughout their golden years if they only withdrew 4% of their initial portfolio, annually, adjusted for inflation.
This “4% rule” was used as a way to encourage people to continue investing in the stock market at a time of high returns.
However, in today’s current low rate environment, many retirees have had to withdraw smaller percentages if they want to keep their principal intact.
Because the 4% rule is an easy, simple system to follow, it caught on quickly when Treasury yields were roughly 6% in the 1980s and 1990s.
Now, a three-month Treasury bond yield is below 1%, supporting the idea that retirement portfolio withdrawals should be updated to today’s market conditions, rather than a one-size-fits-all approach.
Sticking to a specific withdrawal rate today could drain retirement funds, resulting in seniors questioning whether they can live comfortably in later life, especially if they have yet to pay off their mortgage.
Additionally, it may be difficult to limit the withdrawals if there are unforeseen medical emergencies.
How much is enough?
New analysis suggests updating your portfolio and withdrawal rates each year depending on circumstances. The concern over how long money will last in retirement can be seen in a new survey from CBS News, which showed 64% of seniors are concerned about their lack of savings.
Furthermore, 78% of people making less than $50,000 a year are having trouble paying their bills while also putting aside money for retirement. Nearly 40% of retirees say they currently do not have the means to prepare for retirement and pay bills simultaneously.
To combat this issue, many people are hoping to work longer and retire later to generate extra retirement funds. In fact, over the past decade, the number of people who believe they will retire in their 70s has tripled to 28%, according to CBS News.
By prolonging retirement because of lack of funding, millions of people are missing out on the luxury of relaxation, while still maintaining financial confidence.
Seniors should be able to enjoy their later years without overworking themselves and missing out on the pleasures of their “golden years.”
