Retirement and the 4% Rule
The financial services industry has been depictive in the past 2 decades or so of the fact that the retired officials of the federal government have a great chance of making their savings outlive them if they align their spending and savings in such a way that they manage to limit their withdrawals to around 4 percent every year to spend on living expenses.
4 percent of Retirement:
Retirement is a phase that is going to dawn upon you as a federal employee, and this 4 percent rule’s inception dates back to the early 1990s and at that time the Federal Funds interest rate ranged from 8.1 percent to 6.24 percent. The interest rates of today have been near or at 0 percent for so long now that realists believe that the 4 percent rule is something that can be considered obsolete.
Nick Besh, who is an investment director at the Wealth management of PNC says that the 4 percent distribution was very achievable when you look at the rates of the past when you could make conservative investments. He believes that now if somebody makes investments in the same manner in money bonds and markets, then they are liable to only getting around 1 percent.
This situation leads to a need to invest more rigorously and fast. There are a lot of factors that come into play when you are deciding on your safe withdrawal rate and some, as mentioned by Nick are: Your life expectancy, market return expectations, timing of the distributions, retirement portfolio size and of course risk tolerance.
These truths are around us for a long time now and to be realistic in the world of today is the only way to survive. Making withdrawals might make your present life happier but post retirement life can get hampered in the process.
