Retirement Savings: Focus on Flexibility Instead of That 4% Rule

Doctor Talking to a Patient

There is a longstanding 4% rule of thumb that was developed in the mid-1990s, outlining how much a person could safely withdraw from retirement savings each year and still have a nest egg to last a lifetime (aka 30 years).

Scratch that rule, advisors are now saying because there are too many other factors to consider. The old 4% rule, reports Forbes in the article “Here’s How to Refresh Your Retirement: The 4% Rule of Thumb,” doesn’t work anymore, in light of increasingly high healthcare costs, jobs that can be done well into one’s later years and a longer life expectancy.

It is now thought that the 4% rule is a decent baseline.  However, you’ll need to go deeper into the details to plan for your retirement. Your spending also has a lot to do with what you expect from retirement and how expensive a lifestyle you choose.

One key factor today is tax-deferred investing. The importance of being taxed at the highest rate versus paying a lower tax rate can be misleading. Many people defer taxes on their investments because they don’t want to pay 30% to 40% income taxes when they could defer to a higher bracket if tax laws change.

Some are considering an investment in single-family rental properties. If you buy a rental house with a small capital investment, the house will ideally appreciate overtime on a tax-deferred basis. Owners benefit by depreciating expenses on their tax returns. The single-family rental home can be paid off in 15 years to 20 years and create income for the owner—predictable income that could also increase from year to year.

Another strategy is to create an investment portfolio that combines diversified stocks and high-quality fixed annuities, paired with a systematic withdrawal plan and a built-in buffer strategy to reduce risk in the case of severe stock market swings.

One advisor noted that if a retiree today relies on a traditional 60/40 stock/bond portfolio, they could be looking at a financial disaster. The yields on bonds are at historic lows and a 4% withdrawal is just asking for trouble.

An effective tax reduction strategy has the potential to raise a retiree’s safe withdrawal rate even higher.

The best advice is to have a plan in place that works for the lifestyle that you and your spouse want and being prepared to adjust, if necessary. Your plan may include working, until you both reach full retirement age, working part-time during retirement, moving to a location that is more affordable, or aging in place.

Your plan should include putting your estate plan in place, by working with an experienced estate planning attorney. At the very least, you’ll need a will, power of attorney, and a medical directive. Depending upon your situation, you may need more complex planning tools.

Reference: Forbes (Aug. 7, 2018) “Here’s How to Refresh Your Retirement: The 4% Rule of Thumb”

Get Help from a Wisconsin Probate and Estate Planning Attorney

The estate planning lawyers of Krause Donovan Estate Law Partners, LLC practice law in the areas of Probate, Wills, Estate Planning, and Trusts. We assist clients in and around Madison, Wisconsin with all matters related to estate planning, trusts, and probate matters. Our dedicated attorneys will even make house calls if you are unable to come to our office.

To attend a free estate planning workshop or to receive our client planner to assess your estate planning mindset, contact our office by calling (608) 344-5491 or use our online contact form.

Related Posts
  • When Do I Need to Change My Estate Plan During Divorce? Read More
  • How to Successfully Pass On Heirlooms Read More
  • Can I Leave Family Members Out of My Will? Read More