Q: Dear Julia: I always planned on being able to retire when my retirement accounts hit 1 million dollars, this past April they hit that goal but now I am wondering if I have saved enough. Someone told me about the four percent rule, what is it and is it still relevant in today’s low interest rate environment?
Sincerely,
Ready to Retire
Dear Ready to Retire: According to Investopedia.com the Four Percent Rule is “the rule of thumb used to determine the amount of funds to withdraw from a retirement account each year. The Four Percent Rule seeks to provide a steady stream of funds to the retiree while also keeping an account balance that will allow funds to be withdrawn for a number of years. The 4% rate is considered to be a “safe” rate, with the withdrawals consisting primarily of interest and dividends. The withdraw rate is kept constant, though it can be increased to keep pace with inflation.” The Four Percent Rule is merely a guideline that financial professionals and retirees have used as a rule of thumb to help make retirement withdrawal calculations. Your second question is a very good one! When interest rates were higher, this Four Percent Rule might have been a good starting point because it tried to keep withdrawal rates reasonable. It also took into account inflation will make things increase in cost as the years progress. Having a starting point can be healthy, but it is not a replacement for creating a specific plan for your success. In my next article I will address the main considerations for retirement income planning one must look at closely given the current low rate environment.
Julia M. Carlson
Email me your questions at financial.freedom@lpl.com or call 541-574-6464.
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