Among the more remarkable numbers these days is the calculation that an estimated 10,000 boomers are turning 65 every day until 2030. Yet in critical ways the financial services industry isn't well prepared for an aging population. The industry has largely focused its efforts on developing products and persuasions geared toward boosting retirement savings. Much less brainpower has gone into devising smart and easy ways for people to turn accumulated savings into a reliable stream of retirement income.
"The financial industry is about to have a 'retirement income' epiphany," said Bill Meyer, head of Retiree Inc., a fintech firm owned by mutual fund company T. Rowe Price, during a recent webinar. "We need more innovation."
Financiers are working at devising better retirement income products and strategies. Meanwhile, the retirees often rely on a handful of guidelines. Best-known is the calculation that retirees can withdraw 4% of their total portfolio savings in their first year of retirement. The 4% base is adjusted annually to take inflation into account. The promise of this approach is that over a 30-year time horizon the odds of running out of money are slim. The 4% rule is also simple to follow.
The 4% rule is a reasonable baseline, but it also has serious drawbacks. Among them: Retirees often want to vary their spending during retirement. Many people don't retire for three decades. Market conditions affect how much you can safely withdraw. For example, the investment data firm Morningstar in 2021 calculated the safe withdrawal rate was 3.3% since market valuations were so high. Morningstar's latest report now says 4% is OK. Higher yields on bonds and cash hike the prospect for improved future returns. A more moderate inflation outlook also helps.
What is the typical retiree to do?
First, the most important decision for the typical worker is when to file for Social Security. The benefit is some 76% higher if you wait to file at age 70 compared to age 62. (That said, filing early is the smart option for people in poor health, caregiving responsibilities, and unemployed.)
Second, as the Morningstar authors note, build flexibility into your safe withdrawal strategy. Several factors should inform your flexible approach, including how much you want to leave to heirs and charity, the extent fixed expenses are covered by other sources of nonportfolio income, lifestyle goals, and how many years you're likely to be retired. The combination of planning and disciplined flexibility pays with designing a household's safe withdrawal strategy.
Chris Farrell is senior economics contributor, "Marketplace"; commentator, Minnesota Public Radio.
FAQs
What are some pros and cons of the 4% rule?
| Pros | Cons |
|---|
| You'll have predictable, steady income | The 4% rule doesn't respond to market conditions |
| Traditionally, the 4% rule protected you from running short of funds | It is outdated, and following it may no longer guarantee your account won't run short |
2 more rowsThe 4% rule comes with a major caveat: It's not really a “rule” since everyone's situation is different. If you have a large retirement investment portfolio, you might not need to spend 4% of it every year. If you have limited savings, 4% might not come close to covering your needs.
What is the biggest financial mistakes that retirees make? ›
Most Common Retirement Mistakes
| Rank | Most Common Mistakes | Share |
|---|
| 1 | Underestimating the impact of inflation | 49% |
| 2 | Underestimating how long you will live | 46% |
| 3 | Overestimating investment income | 42% |
| 4 | Investing too conservatively | 41% |
6 more rowsJan 8, 2024
With a 4% withdrawal rate, going from a 30-year to a 50-year retirement horizon decreases the probability of success from 81.9% to 36.0%. The first lesson in Vanguard's Principles for Investing Success is to develop clear, appropriate investment goals.
What is the average 401k balance for a 65 year old? ›
What is a safe withdrawal rate for a 70 year old? ›
If the individual retires at age 65, that percentage is typically 5% for a single life and 4½% on a joint and survivor basis; the percentages go up to 6% and 5½% if the retirement age is 70.
Is 300000 enough to retire? ›
Summary. $300,000 can last for roughly 26 years if your average monthly spend is around $1,600. Social Security benefits help bolster your retirement income and make retiring on $300k even more accessible. It's often recommended to have 10-12 times your current income in savings by the time you retire.
How many people have $1000000 in retirement savings? ›
However, not a huge percentage of retirees end up having that much money. In fact, statistically, around 10% of retirees have $1 million or more in savings.
How long will 500000 dollars last in retirement? ›
Yes, it is possible to retire comfortably on $500k. This amount allows for an annual withdrawal of $20,000 from the age of 60 to 85, covering 25 years. If $20,000 a year, or $1,667 a month, meets your lifestyle needs, then $500k is enough for your retirement.
What is the #1 regret of retirees? ›
Some of the biggest retirement regrets include: A vague financial plan. No retirement goals. Counting on long-term employment.
Orman says 10% of your salary is the minimum amount you should put in your 401(k), and she says 15% is a smarter target. If you're not putting in 15% yet, raise your contribution by 1% per year until you get there. Vow to use half of a raise for retirement.
What is the number 1 retirement mistake? ›
Retirement Mistake #1: Failing to take full advantage of retirement saving plans.
What is a good monthly retirement income? ›
Average Monthly Retirement Income
According to data from the BLS, average 2022 incomes after taxes were as follows for older households: 65-74 years: $63,187 per year or $5,266 per month. 75 and older: $47,928 per year or $3,994 per month.
What is the $1000 a month rule for retirement? ›
Understanding the $1,000-a-Month Rule: The $1,000-a-month rule is a simplified formula designed to help individuals calculate the amount they need to save for retirement. According to this rule, one should aim to save $240,000 for every $1,000 of monthly income they anticipate requiring during retirement.
How long will $1 million last in retirement? ›
Around the U.S., a $1 million nest egg can cover an average of 18.9 years worth of living expenses, GoBankingRates found. But where you retire can have a profound impact on how far your money goes, ranging from as a little as 10 years in Hawaii to more than than 20 years in more than a dozen states.
Is the 4 rule too conservative? ›
Use a Less-Conservative Rate
One criticism of the 4% rule is that, in the vast majority of market conditions, it leaves too much money in a portfolio at the end of a retiree's life. Four percent is a conservative rate that's meant to hold up in even the worst environments.
Does the 4 percent rule include Social Security? ›
Additionally, the 4% rule doesn't consider other income sources such as pensions, Social Security, annuities or part-time work and income. “Consequently, depending on your situation, you may not need a 4% withdrawal rate to generate your desired retirement income,” Fricke notes.
What is the 4% rule for 2000000? ›
For example, if you had $2,000,000 in portfolio assets, the 4% rule states that you withdraw $80,000 in the first year of your retirement. If inflation for that year was 2%, then your distribution amount for the following year would be $81,600.
