The 4% Rule, Is It enough for retirement? ~ SunCoast Financial

As a financial planner I get asked this question a lot: How much money can I take out of my IRA during retirement and not outlive my money?

This is a loaded question and there are a lot of variables to consider; however, the rule of thumb that most financial planners have used for decades is 4% per year. This is called "the 4% rule" and can be Googled if you need more information.

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to provide a steady stream of funds to the retiree, while also keeping an account balance that will allow funds to be withdrawn for a number of years.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.

Some of the variables that I mentioned are:

When do you start withdrawing
Rate of return on investment (market gains and losses)
Taxes
Inflation
Medical expenses
Emergency needs

However, one of the questions needing answered first is, "How much money do I need during retirement?"

I usually sit down with a customer and find out their monthly needs and the many different streams of income they'll have during retirement. For example:

Social Security Benefits and if they are maximizing these benefits
IRAs
Other Investments
Savings
Pensions
etc.

It's ingrained into our heads that we should retire at age 65. Did you know that Social Security's Full Retirement Age is actually 66 if you were born between 1943 and 1953? They calculate your benefits using your full retirement age and deduct approximately 8% each year you retire before and add 8% to each year after up to age 70.

Everyone should know when and how much you'll get at full retirement and then talk to a financial advisor on how and when you can maximize it. There are hundreds of options when filing for Social Security and you should know them because everyone has a different situation. Don't be afraid to talk with an advisor, it doesn't cost you anything and the Social Security Administration is restricted from helping you decide your options.

Let's say that you've determined that you need $5,000 a month in retirement to continue to live the lifestyle you're accustomed to. Let's also assume that you'll retire at age 66 with a Social Security Benefit of $1,500 a month, a little bit over the average. That leaves you $3,500 a month short. But that's okay because you had a 401(k) and saved like they told you to and so now you're ready to live your retirement dream.

Recent studies have shown that most individuals don't completely understand their 401(k) plan. Most know the basics but not the details.

One of the biggest problems of the program is not the program itself but the fact that individuals use it as a savings account instead of a retirement plan. I'm sure you know someone, possibly yourself, who has taken money out of their plan and paid the penalty for bills, purchase items, pay off debt, etc.

The Bad News - The mean average 401(k) balance for individuals retiring today, as reported by Vanguard at the end of 2014, is $202,800; however, the median balance is only $72,957. What does this mean?

A critical difference - $202,800 is the average; however, the median of $72,957 is a more appropriate number to assess because it reflects the typical saver's situation. Given the average and median balances it's clear that some people have very big balances, while most do not. The "typical" saver has just $72,957 after 40 plus years of savings.

Now let's add the 4% rule to the IRA. If you retired at the beginning of the century and have saved in your account what most individuals have then it breaks down like this. I'm assuming the account was invested in the S&P 500 and I'm also assuming a standard 1.5% management fee and only 1% of other fees. There are 17 different fees they can charge so I'm being conservative.

As you can see with a starting balance of $72,957 and using the 4% rule you can withdraw $2,557 the first year. Taking into account market volatility and fees for the next 15 years you can take an average of $1,612 a year. That's only $134 a month. A far cry from the $3,500 needed. Doesn't look pretty does it?

It doesn't get much better if you were one of the lucky ones and saved the average of $202,800.

With this example, starting balance of $202,800 and using the 4% rule you can withdraw $7,107 the first year. Taking into account market volatility and fees for the next 15 years you can take an average of $4,481 a year. That's only $373 a month. See you at Wal Mart.

Let's say you really concentrated and was able to save ONE MILLION DOLLARS in your 401(k). Great job! Are we ready for a financially secure retirement? Not really. Here's the numbers.

Starting with $1,000,000 and using the 4% rule you can withdraw $35,045 the first year. Taking into account market volatility and fees for the next 15 years you can take an average of $22,094 a year. That's $1,841 a month. You've saved a Million Dollars and unless you do something to protect your money or change your lifestyle you'll probably be counting pennies into your retirement.

These examples did not take into account the realities of life and other variables I mentioned above.

This is not an article about annuities, but if you put the $1,000,000 into an annuity you could protect your money from the market fluctuations and have a guaranteed income of $40,000 a year for the rest of your life.

Would you be interested to learn of another way to save for retirement that:

Lets you retire 100% tax-free
Is NOT reportable to the IRS
Pays you an average of 5% per year
Has paid out, on average, for 121 straight years
And which, unlike traditional retirement plans like IRAs and 401(k)s, lets you withdraw money anytime you like, for whatever reason you like, and with no penalties whatsoever.

You need to talk to me or another safe money advisor if: