The 4% Rule

After undertaking an assessment of retirement expenses, identifying avenues of retirement income, and devising a suitable strategy for investing retirement income, a retiree needs to take into account various withdrawal strategies for retirement savings. Also, one needs to determine which options of withdrawal are suitable in a particular situation. Withdrawal planning could be a tricky issue for some considering the time, frequency, length, and volume of distributions remain difficult to forecast.

Whatever may be the withdrawal strategy that one may choose to adopt, it is essential to anticipate and plan out various retirement costs carefully. Also, an annual evaluation of the retirement income plan should be undertaken. This should be undertaken whenever circumstances change, this way things remain updated as per spending strategy and withdrawal rate as needed. 

So, what is the 4% withdrawal rule?  On retirement, a retiree may withdraw 4% of the retirement assets in the first year. In subsequent years, add an extra 2% to take into account the rise in inflation.

This is a simple rule which provides an overview of a predictable amount of income on a yearly basis.

This technique has been a preferred mode for various retirees as it is straightforward to implement and provides a consistent amount of money on a yearly basis.

However, this approach fails to take stock of the effects of rising interest rates as well as market volatility. So, this remains a debatable issue. For instance, if an individual retires at the beginning of a steep stock market plunge, the threat of exhausting funds too soon is large.