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The 4% Rule has been used as a rule of thumb to help a retiree figure out how much to withdraw each year to avoid running out of money in his/her retirement years. By withdrawing only 4% of the value each year (and adding the rate of inflation to the income from the 2nd year onward), the remaining investments can continue to earn income and gains going forward.
It is based on having a balanced portfolio of 50% bonds and 50% stocks.
It’s a simple theory, and based on historical data analysis a retiree has a 95% chance of sustaining a portfolio for at least 30 years. However, with recent extremely low interest rate of closer to 1/2%, it is now doubtful this theory will work in the future for a portfolio with 50% fixed income.
Financial experts are now suggesting the 3% Rule instead. The recommended portfolio mix is to invest equally in large-cap stocks and 5-year treasuries. They believe, based on analysis, the retiree will now have a 90% probability of not running out of money using this strategy.
In today’s low interest environment, retirees need to re-think and re-balance his/her investments. The last thing one in retirement wants is to run of money!
It’s time to have a talk with your financial advisor, if you haven’t done so already.