retirement income

Securing Your Retirement Income: The 4% Rule

As your retirement edges closer and closer, there’s so much to think about when it comes to arranging your finances.

It can be a stressful transition if you don’t know what you are doing.

It doesn’t have to be that way. With the right know how you can transition into retirement full of confidence.

One of the biggest challenges you face as you enter retirement, is how are you going to generate an income to fund all the fun experiences you’re going to have.

And is it going to last…

In this series we are going to explore the different approaches to securing your retirement income.

One popular approach for many retirees is adopting the 4% rule. In theory if you withdraw 4% from your investments each year you won’t run out of money.

But first…

3 BIG Rocks In Retirement Planning

Have you ever seen the movie Groundhog Day? Bill Murray is a man who wakes up to find himself stuck in time. With each day he lives through, nothing changes and his life becomes more unbearable by the minute.

The same thing can happen when you plan for retirement. If your focus isn’t where it needs to be. On what’s actually within your control, rather than living with regrets from focusing too much on things that are outside of your grasp, then before long you’ll have an even worse problem to deal with!

3 BIG rocks to focus your attention on:

#1 Financial Visibility – given the financial resources you have. How can you squeeze the most life out of the money you have to live your best life?

Many approach their retirement with many questions still unanswered. That can’t be a good way to start your twilight years.

Understanding how your financial resources will pan out in your retirement years will provide you with the confidence to make meaningful decisions.

#2 Remain Agile – Your best laid retirement plans can be derailed by things such as inflation, life and bad share markets. Choosing the best income strategy for your unique circumstances will be critical to achieve a worry-free retirement.

#3 Financial Tools – choosing the tools to enhance your retirement journey. They may include tax planning, asset allocation and investment strategy to name a few.

ALSO READ: EPIC Retirement Framework: How To Confidently Maintain Your Lifestyle In Retirement

4% Rule

One approach which can be used to work out if you are going to be okay in retirement is using the 4%.

Quite simply, this means if you withdraw 4% pa from your portfolio, you’ll outlive your money. In other words, you’ll have enough money to last you for the rest of your life.

For instance, if you had $1 million dollars in investments. You could safely withdraw $40,000 pa and be confident you wouldn’t run out of money.

This framework was developed by William Bengen in the 1990’s.

It’s commonly used in the financial services industry still today as a quick guide for how much money you will need in retirement.

While this is great in theory. The fact of the matter is most people will hold account based pensions in retirement.

While if you are under age 65, the minimum you must withdraw each year is 4%. As you get older the amount you have to withdraw increases.

Pro’s of using the 4% rule

Like any rule of thumb there are pros and cons.

It’s simple to understand and apply.

You can be confident that if you apply this rule you have a good chance you’ll never run out of money.

Con’s of using the 4% rule

For some, the 4% may not be flexible enough to deliver the retirement lifestyle they desire in retirement. It’s a simplistic way to approach life. But each person’s life is different.

It assumes investment conditions, inflation and your life will remain the same. It doesn’t allow for a changing landscape. For instance given the rise in sharemarkets leading up to 2021, future returns are likely to be lower.

It’s an average and most people’s retirement lifestyles are not average. It does not allow for individualisation. So you’ve got to be careful using this approach.

What works for everyone, may not actually work for you. It’s great for a ballpark number.

But when it comes down to your life, your plan. Your life that you only get one chance at. It’s a lot less flexible. It’s a strict rule.

The Holy Grail

ALSO READ: The Couples Retirement Conundrum: More Than A Number

We talk a lot about dying with too much, being a risk. Using the 4% may lead to regret. It means you probably didn’t do enough when you were fit and able.

Using the financial resources you have to live the lifestyle you want. Isn’t that what you really want?

Are you on track to fund your lifestyle in retirement?

If you’re like most, you’re trying to work out if you’re on track and wondering whether you will be okay in retirement.

This is exactly what our complimentary “Retirement Breakthrough Sessions” are designed for.

To help you identify the lifestyle you want, how to achieve it and most importantly how do you maintain it for the rest of your life.

Retirement planning involves many moving parts. We make it simple for you.

Schedule your complimentary “Retirement Breakthrough Session” here.

Live your best life in retirement!

Glenn Doherty – CFP – Retirement Planning Specialist | Retirement Planning made simple for over 55 white collar professionals

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Advice Disclaimer: Any reference in this publication to the provision of advice refers to advice of a generic nature, and should not be taken as product or investment recommendations. Before any action is taken based on the information provided, independent financial advice from a licensed financial adviser should be sought. Financial Freedom Project Pty Ltd ATF GA & DC Doherty Family Trust Trading as Jigsaw Private Wealth is a Corporate Authorised Representative of Exelsuper Advice Pty Ltd. The information contained in this publication is of a factual nature only and is not intended to constitute financial product advice. Information is current as at date of publication. This is an online information blog. It does not imply an offering of securities.

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