Retirement and the 4 Percent Rule: You will need $300,000 in savings to generate $1,000 a month
Eileen St. Pierre, The Everyday Financial Planner
I recently read another article on the 4 Percent Rule, the amount of money you can safely withdraw per year in retirement to make sure you do not run out of money. It assumes you have at least 50% of your retirement portfolio invested in stocks. For the average person, it is hard to conceptualize this rule of thumb. At a conference a while back, I heard a colleague phrase it in a way that everyone can understand:
You will need $300,000 in savings to generate a cash flow stream of $1,000 a month in retirement.
This is the equivalent to purchasing an annuity at retirement for $300,000 at an interest rate of 4% that promises to pay you $1,000 for the rest of your life.
Your portfolio needs to earn 4% after inflation.
This is why all the financial experts tell you that you need to have at least half of your portfolio invested in stocks during retirement. Let’s say the long-term inflation rate is 3% a year. You will need to earn 7% on your portfolio (3% inflation + 4% withdrawal rate).
- Bank CDs and savings accounts just aren’t going to provide you with enough return.
- If your portfolio earns less, you will need to scale back your monthly withdrawals.
- If your portfolio has a good year and exceeds this benchmark, you can withdraw more that year.
The reality is that in retirement your cash flow needs are not that consistent.
Early on in retirement your travel expenses may be higher than you anticipate because there are grandkids to visit. After all that travelling, you may decide to downsize and move closer, lowering your cost of living. Ten years later you may have a health scare and your cash flow needs will increase.
I have been teaching finance for 22 years. It can be hard to get the point across. I found that putting some numbers to it usually does the trick. I hope this helps.
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