Forgot the 4% rule? Here’s what you should really consider in retirement.

Everyone’s retirement is different, but we all have one common goal: to make sure our retirement savings last long enough.

The 4% rule is arguably the gold standard for determining how quickly you can spend your savings. It states that a retiree can withdraw 4% of the initial value of their savings each year, adjusted for inflation. In other words, someone retiring with $1 million would withdraw $40,000 per year, increasing that amount slightly each year to account for inflation.

This is a good starting point for developing some basic frameworks, but it’s not really a retirement plan. The problem with broad strokes is that you’ll never get to the finer details.

There are a few things to consider when applying the 4% rule and some key tips to ensure you get the right plan for your needs. Here’s what you need to know.

The 4% rule poses some problems

I’m not criticizing the 4% rule, but people shouldn’t use it to plan their retirement finances. It’s a guideline, not a plan from A to Z. Here are some potential problems with the 4% rule:

It does not take into account market volatility

One of the biggest problems with the 4% rule is that it doesn’t account for the market volatility your savings might face. The stock market has historically averaged annual returns of between 8% and 10%, but those year-over-year fluctuations can be 20% to 30% up or down in any given year.

Let’s say something happens that hits your savings hard the year you retire or shortly after; mathematically, you’ll deplete your savings faster. Luck plays a role in investing, something the 4% rule doesn’t account for very well.

Some living expenses could increase faster

Housing and health care are major expenses for most retirees. Both have skyrocketed since the pandemic, and it’s difficult to predict what those expenses will look like years down the road.

Unfortunately, America’s rising debt means that future retirees, especially those with decades to go, shouldn’t expect welfare programs like Medicare to cover as much as they do today. Whether it’s health care, food, transportation, or housing, essential expenses could exceed the 4% rule.

It’s not specific to you

Finally, the 4% rate is a general guideline, not tailored to your financial situation. The typical American worker retires between the ages of 63 and 65 with a median capital of $200,000. You may have saved more or less, or you may have retired earlier or later than average.

You can get away with sloppy planning early in your retirement, but you could face big problems if your savings run out years later when you’re too old to work. Plus, you don’t want to save your entire life and then leave a ton of money on the table because you lived too conservatively.

Consider these potential changes

The 4% rule gives you a basic idea of ​​your retirement lifestyle, but you shouldn’t stop there. Consider these additional tips to help you live the best retirement possible.

Evaluate your schedule

The 4% rule is meant to stretch your savings over at least 30 years. However, the math may not be accurate. The average life expectancy in the United States is 77 years. In other words, the average person lives about 12 to 14 years after retirement. The 4% rule may be too conservative unless you are retiring early. Consider building a retirement plan with multiple timelines in mind. You want to make sure your savings will last without overly restricting your lifestyle to the point that it hurts your quality of life.

Review your investment strategy

Many people retire with less than they expected. However, your savings don’t stop growing once you retire. You may be able to help your portfolio grow during retirement by changing your investment strategy. The 4% rule assumes a portfolio that is 60% stocks and 40% bonds. You should never take on more risk than you are willing to accept, but a little more aggressiveness could make a big difference in your retirement portfolio over the 10-plus years after you retire.

Consider dynamic spending

Finally, the 4% rule assumes that you’ll withdraw roughly the same amount from your savings each year. As we mentioned earlier, a market downturn could disrupt your retirement plans. If your finances allow, consider a dynamic system where you withdraw smaller amounts when the market is down and larger amounts when it’s up. This could mean making simple lifestyle choices, like saving that big vacation for years when the market is doing well or extending the life of your old car a little bit. These small changes could add up to several years of savings.

Questions? Ask the pros

Retirement planning is a complex topic. If you have questions or feel overwhelmed by the process, don’t hesitate to consult a professional advisor. While it will cost you money to get professional advice, the benefits of an effective retirement plan will far outweigh the costs.

Retirement planning is the financial foundation for much of your life. Skimping on preparation or taking retirement lightly can only hurt you and could cost you thousands of dollars in taxes and opportunity costs. Make your retirement plan a success by going beyond the 4% rule.