The 4% rule has long been a popular guideline for retirement spending. It suggests withdrawing 4% of your savings in the first year of retirement, then adjusting for inflation each year after. However, personal finance expert Suze Orman cautions that this rule may be too risky for many retirees today.
Orman emphasizes that only one in four retirees feels very confident about how much to withdraw in retirement. She advises assessing several factors before deciding on a withdrawal rate. First, consider when you will start making withdrawals.
If you begin using your 401(k) or IRA funds in your early 60s, Orman suggests limiting withdrawals to 3% of the account value in the first year. You can withdraw more if you delay until around age 70. Next, think about how long you may live.
If you are 65 and in average health, plan for your money to last until at least age 95.
Orman questions retirement withdrawal strategies
Those in excellent health with long-lived relatives may want to prepare for their savings to last until age 100.
Your sources of guaranteed income also play a role. If Social Security, a pension, or an annuity cover your essential expenses, you may be able to withdraw a higher percentage of your savings each year. The 4% rule assumes you will need your savings to last for 30 years.
It was based on historical stock and bond data from 1926 to 1976. Recent studies have suggested a slightly lower withdrawal rate of around 3.3% to weather tough economic times. Ultimately, there is no one-size-fits-all rule for retirement withdrawals.
Factors like your health, lifestyle, and income sources all impact how much you can safely spend each year. Orman advises a cautious approach, especially for those who retire early. By carefully planning your withdrawals, you can feel more confident that your money will last throughout your retirement years.
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