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This is one of the questions we hear the most when working with clients.
With years of experience in the insurance and investment industry, we understand the importance of saving and investing for retirement. Most financial advisors can help you build your nest egg; however, most do not offer their clients any direction or a plan as to how to SPEND the assets.
THE 4% RULE AND WHY IT DOESN'T WORK
You may have heard of the 4% rule when it comes to withdrawing money from your retirement accounts. This rule states that a retiree can usually withdraw about 4% of the value of his or her portfolio each year – provided that the portfolio is allocated at least 40% in equities without depleting the portfolio prematurely.
When it comes to retirement planning, the 4% rule has stood as a tried-and-true method of drawing retirement income from an investment portfolio, however, this traditional strategy has recently come under fire from retirement experts who claim that this rate of withdrawal is no longer realistic in the current economic environment.
The problem is that the annual returns earned in a portfolio during the first few years will have a much larger impact on the total return received by the investor than the returns that are earned in later years.
Therefore, if a retirement portfolio only grows by an average of 2% or is has a negative return in a year – and the investor withdraws 4% – then the principal in the portfolio will be materially reduced for the remainder of the withdrawal period. Thus, substantially increasing the possibility that the client will run out of money much sooner than expected. This is called the Sequence of Returns risk.