This Formula Could Help Predict Your Retirement Readiness
Greg Lavelle • August 6, 2020
Most of us become eager to retire as we enter our sixties, but feelings of uncertainty are common too. You might wonder whether your monthly income will be sufficient to support your lifestyle, and you might be particularly worried about how long your savings will last. Those are common emotions, and it’s smart to investigate those issues before taking the leap into retirement.
That’s why many financial experts have long promoted the “four percent rule”. This rule revolves around the idea that retirement income will be derived from two sources (Social Security benefits and withdrawals from a retirement savings account), and that annual withdrawals of about four percent should be sufficient for most people. Theoretically, your money should last for the rest of your expected lifespan, so that you have enough income each year and it lasts for the rest of your life.
But does that formula work for everyone? According to research by Fidelity, this plan will work for a 30-year retirement about 90 percent of the time. In other words, it will work for most people, but there’s about a 10 percent chance that you could outlive your money.
The four percent rule, therefore, could be viewed as a good starting guideline for retirement planning. But certain factors will impact the validity of that formula in individual cases, such as:
Age at which you retire.
If you retire at 60 and live until age 90, that’s a 30-year retirement. But what about those who live past 90? Or those who retire earlier, due to economic factors, eagerness, or some other reason?
Your cost of living.
Some people are naturally more frugal than others. Some are still paying for expensive mortgages or their children’s college expenses. Some wish to pursue travel or expensive hobbies in retirement, while others look forward to downsizing into a tidy condo in a low-cost area. Your own preferences greatly influence your income needs in retirement.
Your savings.
Four percent of $100,000 is $4,000… But four percent of $2 million is $80,000. Not many people could live off of $4,000 a year, but most would find $80,000 to be perfectly reasonable. Therefore, you can only rely on the four percent formula to the extent that a reasonable budget allows.
On that note, make an appointment with us to discuss your savings rate and retirement readiness. We can help you calculate factors like potential Social Security benefits, life expectancy, withdrawal rates and more. Then together we can set a target retirement date and savings goal.
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