I Used to Think the 4% Rule Was Foolproof. Here's Why I'm Rethinking It Now.

When you work hard to build a retirement nest egg, the last thing you want is to see your savings run out in your lifetime. And with the right withdrawal strategy, you can minimize the chances of that happening.

For many years, financial experts swore by the famous 4% rule, which is meant to help your retirement savings last for 30 years. It has you withdrawing 4% of your nest egg your first year of retirement and adjusting future withdrawals for inflation.

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When I first read about the 4% rule, I was totally on board. But once I dug deeper, I realized it has some serious flaws. And now, I'm rethinking my approach to taking withdrawals from my retirement savings.

The 4% rule has some problems

I want to get one thing out of the way. I don't think the 4% rule is bogus, and it's a great jumping off point. But I also think it's important to understand that the 4% rule makes certain assumptions that may not apply to all retirees.

First, the 4% rule assumes you need to get 30 years out of your savings. If you're retiring early, 30 years of withdrawals may not cut it. If you're retiring later, you may not need your money to last as long. And if so, limiting yourself to 4% withdrawals could mean denying yourself income you could otherwise spend with minimal risk.

Also, the 4% rule assumes your portfolio is split fairly equally between stocks and bonds. If you're more bond-heavy, your investments may not produce enough income to support a 4% withdrawal rate. If you're more stock-heavy, you may be able to get more out of your portfolio because your assets are generating more income and gains.

The 4% rule also assumes that you can pretty seamlessly increase your withdrawal rate each year as needed to keep up with inflation. But if costs rise rapidly like they have in recent years, that could mean pulling more money out of savings and running the risk of depleting your nest egg prematurely.

Finally, the 4% rule assumes your spending in retirement will be fairly linear. But you may want to spend more of your savings early on to enjoy experiences that require good health.

I need a more flexible approach

While the 4% rule has plenty of merit, I don't think it's right for me. I need a withdrawal strategy that builds in more flexibility.

Also, because I hope to continue working in retirement (to stave off boredom more so than anything else), the amount of income I can earn should influence my approach to taking withdrawals. And since that income might vary, just as it varies now, I don't see the benefit of locking myself into a set withdrawal rate.

Finally, I'd like my approach to tapping savings to at least partially hinge on how the market and my portfolio are doing. I don't see the point in not taking advantage of strong returns, and I think it's risky to not scale back on withdrawals during market downturns. The 4% rule doesn't really have you doing either.

Before you land on the 4% rule for your retirement savings, understand the assumptions it makes and be certain they apply to you. And play around with other strategies so you can feel confident managing the savings you've worked hard to accumulate.

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