We all want to make it to retirement one day, but it’s sad to see when somebody reaches retirement age and has to keep working because they didn’t save enough money. Even worse than that, if someone makes it to retirement age, retires for, let’s say, 5 years, but then they have to go back to work because they realize they didn’t have enough money to stay retired. I’m going to help you avoid that in this blog.
Understanding the 4% Rule
The first thing we need to do is understand what the 4% rule is. I’ve talked about this numerous times in this blog and in previous posts, but one thing you should know is that 4% is the number from which you can safely withdraw money from your retirement account and still have effectively more money left over at the end of the year.
Some people adjust this number for inflation, but we can talk about that a little bit later. Right now, I just want to make sure that you understand this rule, because I’m not going to give you the math behind it. There are plenty of other websites and calculators out there where you can find out that number. However, this is the history of the 4% rule, and while there are many pros and cons to it, the fact of the matter is that it’s effective.
Exploring Dynamic Withdrawal Strategies: Adapting to Market Conditions
So, what I suggest instead of just using a flat 4% number and adjusting for inflation, is that you use 4% of your adjusted balance. What I mean by this is, the standard 4% rule dictates that you take 4% (adjusted for inflation) no matter what happens with the market – whether it goes up or down, whether you lose money or gain money. The problem with this approach is that over time, after adjusting for inflation, you may eventually take out more from your account than what you put back into it, effectively depleting your funds.
What I’m proposing is that if you gain a certain percentage throughout the year, take 4% of that new balance in your account. Vice versa, if you lose a certain percentage over the year, you should still take 4% of that new balance in your account. So, if the market does extremely well, you will take a little bit of extra bonus for that year, and if the market performs poorly, you’ll take a slight reduction in income the next year.
This should work because you should have your money in a nice, safe investment account that won’t dramatically increase or decrease the money you have in one year. Additionally, there’s also an adjustment for inflation automatically, as the market should autocorrect for inflation by the end of the year.
Understanding the Importance of Guaranteed Income
Outside of investment accounts like 401ks or Roth IRAs, there are other types of guaranteed income sources that you will have upon retirement. If you’re lucky enough to have a pension, you will gain one of those, and even Social Security can be counted as guaranteed income on top of the investments you made throughout your career. This guaranteed income will allow you to have a basis for how much money will be coming in, enabling you to compare it with your monthly bills or expenses. Whether you add it to your retirement account or keep it separate is up to you, but as long as you know the amount you have coming in, it’s beneficial for planning your retirement.
Tax-Efficient Withdrawal Strategies: Maximizing Retirement Income
We all want to pay fewer taxes and take more money home at the end of the day. Some of the things that you do in your career will affect how much taxes you pay while you’re in retirement. The difference between a 401k and a Roth IRA is a very traditional example of paying taxes now or paying taxes later.
You should be in a lower tax bracket when you retire, but you never know for sure. So, one thing I would make sure you do is to consult a tax attorney when you are planning out your financial future to ensure that you’re getting the most value for your money and not paying more taxes than you need to.
Balancing Withdrawals and Legacy Planning
I understand that we’re saving for our children, grandchildren, and great-grandchildren, but something I don’t want you to regret is not being able to enjoy and spend the money you have gained over your life. Yes, you want to leave generational wealth to your kids, but all that means nothing if they blow it in the first year they receive it.
There’s a saying that goes, ‘You came into the world with nothing, and you’re leaving with nothing.’ So, make sure you spend what you’re comfortably able to spend when you’re in retirement because this is the fruit of your labor, and you deserve to enjoy it. However, when you do leave money for your children, we need to make sure that you are doing it in the most efficient way possible, but that’s going to be covered in another blog post.
