Time to Scrap the “4% Rule”

Since the 1990’s, retirement experts have been recommending an easy formula to figure out how much you can safely spend in retirement. Simply determine the value of your retirement portfolio at the end of each year, and then plan on spending 4% of that balance during the following year. This approach is called a “static” retirement strategy because it doesn’t change from year to year. There’s no doubt that it’s pretty simple. Unfortunately, research shows that a retiree following this “4% Rule” is unlikely to receive a sustainable retirement income.

Advances in the sophistication of retirement planning software have allowed us to come up with a new approach called a “dynamic” retirement strategy. A dynamic strategy is based on the fact that in the real world things are constantly changing. And when changes take place in your life, it will often cause changes in your financial situation. These may be positive changes, like the stock market more than doubling since 2009, or they could be negative changes, such as an unanticipated increase in medical expenses. In either case, what retirees really want to know is, how will this event affect my retirement spending?

When we create a retirement plan for our clients, we include information as it exists at the time – account balances, expenses, life expectancy, etc. Using this data, we can accurately determine how much they can safely spend each year without running out of money.

Now for the “dynamic” part. Since we retain all of our clients’ information in our software system, we are able to immediately determine the long-term impact of any possible changes in their financial situation; whether it’s a decline in the market, or a surprise inheritance from their long-lost Uncle Harry!

We typically meet with our clients once a year for an update, but it can be done at any time during the year if substantial changes occur. The great thing about this “dynamic” approach is that you always know exactly where you stand financially. This allows you to cut back spending if necessary, or have the knowledge and confidence you need to book that trip to the islands you’ve been dreaming about!

If you would like to explore how this dynamic approach to retirement planning may benefit you, please give me a call!

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