Among the more remarkable numbers these days is the calculation that an estimated 10,000 boomers are turning 65 every day until 2030. Yet in critical ways the financial services industry isn't well prepared for an aging population. The industry has largely focused its efforts on developing products and persuasions geared toward boosting retirement savings. Much less brainpower has gone into devising smart and easy ways for people to turn accumulated savings into a reliable stream of retirement income.
"The financial industry is about to have a 'retirement income' epiphany," said Bill Meyer, head of Retiree Inc., a fintech firm owned by mutual fund company T. Rowe Price, during a recent webinar. "We need more innovation."
Financiers are working at devising better retirement income products and strategies. Meanwhile, the retirees often rely on a handful of guidelines. Best-known is the calculation that retirees can withdraw 4% of their total portfolio savings in their first year of retirement. The 4% base is adjusted annually to take inflation into account. The promise of this approach is that over a 30-year time horizon the odds of running out of money are slim. The 4% rule is also simple to follow.
The 4% rule is a reasonable baseline, but it also has serious drawbacks. Among them: Retirees often want to vary their spending during retirement. Many people don't retire for three decades. Market conditions affect how much you can safely withdraw. For example, the investment data firm Morningstar in 2021 calculated the safe withdrawal rate was 3.3% since market valuations were so high. Morningstar's latest report now says 4% is OK. Higher yields on bonds and cash hike the prospect for improved future returns. A more moderate inflation outlook also helps.
What is the typical retiree to do?
First, the most important decision for the typical worker is when to file for Social Security. The benefit is some 76% higher if you wait to file at age 70 compared to age 62. (That said, filing early is the smart option for people in poor health, caregiving responsibilities, and unemployed.)
Second, as the Morningstar authors note, build flexibility into your safe withdrawal strategy. Several factors should inform your flexible approach, including how much you want to leave to heirs and charity, the extent fixed expenses are covered by other sources of nonportfolio income, lifestyle goals, and how many years you're likely to be retired. The combination of planning and disciplined flexibility pays with designing a household's safe withdrawal strategy.
Chris Farrell is senior economics contributor, "Marketplace"; commentator, Minnesota Public Radio.
FAQs
The 4% rule is a reasonable baseline, but it also has serious drawbacks. Among them: Retirees often want to vary their spending during retirement. Many people don't retire for three decades. Market conditions affect how much you can safely withdraw.
What is the problem with the 4% rule? ›
But I have a couple of problems with the 4% rule. First, it assumes a fairly even mix of stocks and bonds, which not all retirees have. Also, it relies on fairly strong bond yields.
Is the 4 percent rule still relevant for retirees? ›
Retirees who are depending on their savings to fund essential expenses would want to have a conservative approach. However, those who have can withstand more market fluctuations may have more flexibility with withdrawal rates. For those retirees, the 4% rule likely will provide an outdated recommendation.
What is the biggest mistake most people make in regards to retirement? ›
Failing to Plan
The biggest single error mistake may be pretending retirement won't ever arrive when, for a large majority of people, it does. About 67.8% of men born in 1980 will live to age 65, according to the Social Security Administration. For women, the figure is 80.9%.
How long will money last using the 4 rule? ›
This rule aims to provide retirees high confidence that they won't outlive their savings for 30 years. Though popular, it has faced criticism in recent years due to forecasts for lower returns on investments. But some financial experts say that the 4% rule may be safe again due to higher bond yields.
What are the assumptions of the 4% rule? ›
The 4% rule assumes you increase your spending every year by the rate of inflation—not on how your portfolio performed—which can be a challenge for some investors. It also assumes you never have years where you spend more, or less, than the inflation increase.
What is an example of the 4% rule? ›
The 4% rule limits annual withdrawals from your retirement accounts to 4% of the total balance in your first year of retirement. That means if you retire with $1 million saved, you'd take out $40,000. According to the rule, this amount is safe enough that you won't risk running out of money during a 30-year retirement.
How much does Suze Orman say you need to retire? ›
Famed financial guru Suze Orman once told Paula Pant on the “Afford Anything” podcast that $2 million simply isn't enough to retire early on. So, how much does she say you will need to live comfortably in your golden years? She advocates saving significantly more — closer to $5 or $10 million in order to retire early.
How many people have $1,000,000 in retirement savings? ›
In fact, statistically, around 10% of retirees have $1 million or more in savings. The majority of retirees, however, have far less saved.
What is the $1000 a month rule for retirement? ›
One example is the $1,000/month rule. Created by Wes Moss, a Certified Financial Planner, this strategy helps individuals visualize how much savings they should have in retirement. According to Moss, you should plan to have $240,000 saved for every $1,000 of disposable income in retirement.
1. Not saving more. The biggest regret by far for older Americans was not saving more. Over half (52%) of Hurwitz's and Mitchell's survey respondents expressed this regret.
Does anyone regret retiring? ›
Many of the early retirees who've spoken with BI in the past have shared the challenges that come with quitting work altogether. Some felt having to stretch a sum of money over decades made life less enjoyable. Others said they lost their sense of purpose. Several returned to work.
What are the 9 retirement mistakes that will ruin your retirement? ›
- Top Ten Financial Mistakes After Retirement.
- 1) Not Changing Lifestyle After Retirement.
- 2) Failing to Move to More Conservative Investments.
- 3) Applying for Social Security Too Early.
- 4) Spending Too Much Money Too Soon.
- 5) Failure To Be Aware Of Frauds and Scams.
- 6) Cashing Out Pension Too Soon.
Average Monthly Retirement Income
According to data from the BLS, average 2022 incomes after taxes were as follows for older households: 65-74 years: $63,187 per year or $5,266 per month. 75 and older: $47,928 per year or $3,994 per month.
What are the flaws of the 4% rule? ›
The biggest problem with the 4% rule is that life is almost never as simple as we'd all hope. There may be some years in retirement that you need more than the rule allows and some years that you need less. This could be caused by moving locations, health problems, or other life changes.
Which is the biggest expense for most retirees? ›
Housing—which includes mortgage, rent, property tax, insurance, maintenance and repair costs—is the largest expense for retirees. More specifically, the average retiree household pays an average of $17,472 per year ($1,456 per month) on housing expenses, representing almost 35% of annual expenditures.
What is the 4 rule of? ›
The 4% rule states that you should be able to comfortably live off of 4% of your money in investments in your first year of retirement, then slightly increase or decrease that amount to account for inflation each subsequent year.
How do you calculate the 4 rule? ›
The 4% rule is a popular retirement withdrawal strategy that suggests retirees can safely withdraw the amount equal to 4% of their savings during the year they retire and then adjust for inflation each subsequent year for 30 years.
