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The 4% rule in retirement has been a widely accepted retirement standard for over 30 years.
The rule states that you should draw 4% of your assets from your investments each year in retirement. This should, in theory, allow you to maintain a comfortable standard of living while continuing to let your investments appreciate in value.
However, it seems this longstanding rule could be poised to fall.
A recently retired caller to The Ramsey Show asked host and finance personality Dave Ramsey if it would be safe to go up to a 5% withdrawal rate in order to pay for trips he and his wife wanted to take in early retirement.
Ramsey has said he believes that retirees can earn up to a 12% annual return from mutual funds, and will therefore be safe to withdraw more than the standard 4% per year without jeopardizing their nest egg. He calls the standard rule “absolutely wrong” and “ridiculous.”
But another finance celeb has a very different opinion.
Suze Orman has called the classic 4% rule “very dangerous.”
Orman, a fellow best-selling author and expert, also called for a tweak to the 4% rule in an interview with Moneywise — saying that retirees should only withdraw a maximum of 3% yearly if they are retiring in their 60s.
Who’s right? Here’s what to consider.
Ramsey’s advice is based on a number of suppositions that may not reflect the real financial status of the average retiree.
Inflation will eat away at the value of your retirement savings, and it’s very possible that your retirement years could coincide with a period of higher inflation.
That’s not to mention the stock market’s volatility. Many experts believe a consistent 12% return, like Ramsey has optimistically said mutual funds can deliver, may not be likely.
Suze Orman’s advice, on the other hand, is more conservative. She advises retirees to withdraw as little as possible from their savings, which is a safer approach.
Either expert would argue that the best way to make your money last in retirement is to start saving as early and as aggressively as you can.
