Investment Updates
Is The 4% Solution Right For Your Retirement Plan?
Published Wednesday, February 20, 2008 at: 7:00 AM EST
Most financial planning is about accumulation. You work, you save, you invest, and if you do everything right, you win. But what will you do with that retirement account full of assets? And what will you truly be able to afford? When you start spending your nest egg, you’ll need to decide on a withdrawal plan that will fund your big plans without jeopardizing your future. Perhaps the most common approach is to pull out 4% of your savings each year. In most situations, that will keep you solvent no matter how long you live. But it may not always be the best approach.
Earlier generations didn’t have to deal with this question. People often spent an entire career working for one company and received a generous pension in return. Add Social Security and they had enough guaranteed retirement income to see them through their decade or so of life after work. But now company pensions are disappearing, and today’s near-retirees have to worry not only about whether they’ve saved enough in their 401(k)s and IRAs, but also whether their savings will support them through as many as 30 years or more of active retirement. “We have this huge wave of baby boomers about to retire, and their overriding concern is whether their portfolios are adequate,” says R. Gene Stout, a finance professor at Central Michigan University.
Calculating what is adequate is complicated by the fact that spending during retirement inevitably varies from year to year and decade to decade. In a recent survey of 2,000 pre-retirees by Sun Life Financial, most said they expected the income they needed to fund their lifestyles would fluctuate, particularly during the early years of retirement. But taking too much too soon could do outsized harm to a portfolio, draining assets that otherwise could have grown to help finance later years. Ill-timed market downturns and inflation can also be crippling.
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