The Pros and Cons of Following These Popular Retirement Spending Guidelines
A common error made by many retirees is to underestimate the spending needed to ensure a comfortable lifestyle in retirement.Here are some practical suggestions for you to consider as you prepare for your golden years.
There are a few rules of thumb that may offer some guidance as you prepare for retirement. While they can be useful starting points, none are satisfactory substitutes for careful planning.
The 4% rule.This is a well-known retirement planning aid that is meant to keep you from outliving your money. It states that you can withdraw 4% of your savings annually when you retire and then adjust for inflation. On the plus side, the rule is easy to follow, provides steady income, and in theory should provide 30 years of funding. However, it doesn’t dynamically account for individual needs, is unresponsive to market conditions, and cannot guarantee that your money will last.
The 25x rule.This rule, popular among folks in the FIRE (financial independence, retire early) community, states that you should save 25 times your expected annual retirement spending, without regard to Social Security and pensions. The value is in encouraging workers to aggressively save before retirement. But it assumes a 7% annual return on stock investments, ignores inflation, and doesn’t estimate how much to withdraw during retirement.
Retirement calculators.You can find many online calculators that can help you estimate how much to save annually to fund your desired retirement lifestyle. These calculators can have many inputs, including your current savings, projected spending, expected post-retirement income, and assumptions about your retirement age, life expectancy, inflation, and more. While these can be handy “what-if” tools, they are complicated and rely on estimates that may be incorrect.
The financial plan.No rule of thumb can substitute for a holistic financial plan that encompasses all the important factors impacting your wealth. A financial plan not only takes into account all your income and spending projections, but also includes investment, tax, estate, insurance, and charitable planning. A financial professional can be instrumental in helping you prepare a plan that will help you set goals now while evolving over time to accommodate changes.
Retirement planning isn’t simple.You put your retirement at risk if you rely on simplistic rules of thumb to influence your planning. A well-conceived and integrated financial plan will give you the guidance you need to address your retirement goals.
Call us today to create or review your financial plans. We can work together to develop a plan that will help you work toward the retirement you desire.