How much do I need for retirement?
How can I make sure that I do not run out of money?
These are common retirement questions most of us consider. For some, they are questions that cause stress and insecurity. For those who feel like these questions are unanswerable, they cause financial paralysis. Action and decision-making comes to a halt.
In the early 1990s, William Bengen investigated how much a person could annually withdraw from their retirement savings and not run out of money. He found that, historically, a person could withdraw 4% of their retirement every year and, at a very minimum, make the savings last for 33 years. Most of the time, a 4% withdrawal allowed funds to last beyond 33 years.
Thus, we have the 4% Rule.
And here are four important things you need to know about it:
- The 4% Rule is easy to understand. Don’t be intimated by it. You really can understand how the rule works. For example, a person with $1,000,000 set aside for retirement should plan on withdrawing $40,000 (or 4%) each year for living expenses. If a person has $800,000 in retirement, they should plan on withdrawing $32,000 (0r 4%) each year.
- The 4% Rule helps you determine how much you need for retirement. Reversing the math can help you figure out your retirement fund target amount. For example, if you feel that you will need $50,000 each year from the fund, the target amount would be $1,250,000.
- The 4% Rule allows for adjustments. More than likely, the cost of living will go up during your retirement years. The 4% Rule does allow for a 2% inflation adjustment each year. This does not mean that you go from 4% to 6% of the retirement fund after the first year. Instead, you increase the need by 2%. If you have a $1,000,000 fund, the withdrawal would increase by $800 ($40,000 x .02) after the first year. So the second year amount would be $40,800.
- The 4% Rule is not perfect, but it is a pretty good guide. There is no way to predict how the market will perform during your retirement years. This means that the 4% Rule should be considered a guide and not a silver bullet.
So how much do you need to save for retirement? What strategy can help you avoid running out of money? The 4% Rule helps answer these questions.
Plan well for retirement. If you are not doing so, try to set aside 15% of your gross (before tax) pay into a retirement account.
Plan well for retirement so that the last quarter of your life can be dedicated to advancing God’s Kingdom in your community and around the world without hindrance. Plan well for retirement so that the last quarter of your life is characterized by open-handed, generous living, and not stress-filled penny-pinching.