What should I have for dinner tonight? What movie should we go see? Where should we go on vacation this year? Many questions in life are relatively easy to answer. But if you’re wondering, “Am I on track for retirement?” it may quickly turn into a frustrating exercise.
To know the answer, you also need to know or decide things like when you should retire, whether you want to fully retire or pursue an encore career, what investment returns you can expect and what percentage of your income you should plan to live on. The list of unknowns goes on and on.
Fortunately, research from financial planning researcher, expert and author Craig Israelsen offers another way to think about how much you’ll need to have on hand for a successful retirement.
The 4% rule
The most common rule of thumb, the “4% Rule,” is a great place to start, but it doesn’t tell the whole story — especially if your retirement is far off.
The 4% rule holds that retirees can safely withdraw 4% from their retirement savings investment portfolios each year without running out of money. The actual percentage varies for everyone, with some retirees needing to withdraw a smaller percentage to never run out of money, while others can withdraw even more, particularly if they choose to work into their 70s.
In a retirement-planning context, you would want to save enough so that drawing on 4% of your retirement portfolio each year would supplement your other retirement income, like Social Security benefits or annuity or pension payments, to cover your projected retirement budget.
For example, let’s say you and your spouse set a budget of $80,000 per year and have $1 million saved for retirement. The 4% rule says you can safely withdraw 4% of this balance, or $40,000. Then look at your Social Security benefits. If you and your spouse are each projected to receive $2,000 a month, or a total of $48,000 a year, you’ll have a total of $88,000 — safely above your $80,000 budget.
Target RAM
The 4% rule can be helpful for those at or near retirement, but what if you’re in your 40s or 50s? Israelsen’s research could give people in this younger age bracket a way to think about whether they are on track for retirement.