The 4% Retirement Spending Rule Is Back — Here’s What it Means For You
There’s good news for retirees: The 4% retirement rule is here again. The 4% rule helps ensure safe spending in retirement, and Morningstar researchers say that retirees can go back to taking higher initial withdrawals, The Wall Street Journal reported.
See: 10 Jaw-Dropping Stats About the State of Retirement in America
Find: 5 Things You Must Do When Your Savings Reach $50,000
According to the 4% rule, retirees can make their money last for 30 years if they take 4% of their initial portfolio value in the first year of retirement and then make adjustments to account for inflation.
Last year, Morningstar estimated that the standard rule should be lowered to 3.3%, stating that 4% withdrawals may be too aggressive. However, this recommendation can change for new retirees from one year to the next. Researchers now believe that going back to something closer to the initial baseline makes retirement more feasible.
In a new report, Morningstar personal finance director Christine Benz and her co-authors stated that current market conditions now allow for a 3.8% spending rate for new retirees over a span of 30 years. The WSJ noted that the reasoning for this was that “today’s lower stock and bond valuations support expectations for higher future investment returns.”
Benz added that retirees who are willing to cut their spending when markets fall can start slightly above 3.8%. Also, new retirees who are willing to forgo inflation adjustments in any year following portfolio losses can withdraw 4.4% to start and have a 90% chance of not running out of money over the next 30 years.
Using Morningstar’s 3.8% recommendation, The WSJ reported that someone who retires today with a $1 million portfolio (with 50% in stocks and 50% in bonds) would spend no more than $38,000 in 2023. If inflation rises 5% the following year, then that annual income would increase to $39,000 in 2024.
Take Our Poll: Do You Think You Will Be Able To Retire at Age 65?
More: The Downsides of Retirement That Nobody Talks About
Per The WSJ, those who already retired should stay with the recommended withdrawal rate they started with instead of switching to 3.8%.
More From GOBankingRates
- 10 Best Cash Advance Apps That Cover You Until Payday
- What Happens to Social Security When You Die?
- The 10 Best Balance Transfer Credit Cards for 2023
- Experts: 4 Safest Places To Keep Your Savings
