"What is the 4% rule? Before addressing the concerns, it helps to understand what the 4 percent rule actually does. It is a simple guideline meant to help retirees avoid running out of money. The idea is to withdraw 4 percent in the first year and then increase that amount each year for inflation. This method has historically given retirees a high likelihood of their savings lasting three decades."
"The OP's friend has two big worries. First, he is not sure he can limit himself to just 4 percent each year. If unexpected expenses force him to withdraw more, he is afraid his savings will drain too quickly. His second concern is longevity. Even if he sticks to the rule perfectly, he worries it may not be enough. His parents lived well into their 90s, so he expects that he may need his money to last for a very long time."
"The OP's friend is right to worry about the 4% rule. Experts recently revised the amount you can safely withdraw, with the new estimate now coming in at 3.7%. As people live longer and future investment returns look less certain, a conservative approach becomes more important. This is especially true for someone like the OP's friend, who likely has a long life expectancy.It is also troubling that he is not confident he can stay within a 4 percent withdrawal rate."
The 4 percent rule advises withdrawing 4 percent of initial retirement savings in year one and adjusting withdrawals for inflation annually, historically sustaining portfolios for about thirty years. Recent analyses suggest a lower safe initial withdrawal rate near 3.7 percent due to increased longevity and uncertain future returns. Needing withdrawals above the target to meet basic expenses indicates inadequate savings. Longevity risk and unexpected expenses pose major threats to portfolio longevity. Safer strategies include reducing spending, delaying retirement, adjusting withdrawal plans dynamically, and considering guaranteed income products such as annuities.
Read at 24/7 Wall St.
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