Will You Die Broke?

There is a well-known rule of thumb—the 4% Rule—that suggests if you spend 4% of the value of your capital a year, you are unlikely to outlive your savings. It is used to determine the amount of funds to withdraw from a retirement account. T.Rowe Price believes it is a reasonable starting point. And according to a Vanguard study, “The 4 percent spending guideline remains intact for retirees who stay diversified split between stocks and bonds, contain their costs and consider their time horizon. They can safely withdraw 4% from their initial balance.”

This rule indicates that 4% should provide a steady stream of funds to the retiree while also maintaining an account balance that allows funds to be withdrawn for many years down the road. A Harris Poll concluded that 21% of Americans are “not at all confident” that they will be able to reach their financial goals and retire comfortably. Unfortunately, the 4% Rule may be a moot point to these people.

Die Early? A Realistic Alternative?

A recent survey conducted by Wells Fargo shows that 22% of people say they would rather die early than not have enough cash to live comfortably in retirement. Other surveys bear those numbers out. For example, one by financial services company Allianz found that a shocking 77% of people in their late 40s worried more about outliving their money in retirement than death itself. Despite this fear, the Wells Fargo survey also found that 41% of those in their 50s are not putting aside anything for retirement, while 48% have resigned themselves to the fact that they will not have enough money to survive in their golden years. So, why on earth would these people just give up and not try to solve the problem and put their fears to rest?

A fee-only advisor would suggest that instead of just putting fear on the back burner, you can take control and start saving a small amount, then a little more at regular intervals. As soon as the balance begins to increase, levels of stress and fear will ease up. Consider delaying your retirement for a few years. If you can’t, then you could think about various ways to consult if you have expertise to share. This will help you supplement your income. You can also downsize and reduce your expenses, as well as readjust your standard of living both now and in retirement.

The Multiply-by-25 Rule

There is another rule that people have used to calculate the amount of money they will need in retirement. The Multiply-by-25 Rule and the 4% Rule are often confused with one another, but they contain an important difference: one determines how much you should save, while the other estimates how much you can safely withdraw. The Multiply-by-25 Rule estimates how much money you’ll need in retirement by multiplying your desired annual income by 25, and how much you need to safely withdraw.

For example, if you want to withdraw $40,000 per year from your retirement portfolio, you need $1 million dollars in your retirement portfolio. ($40,000 x 25 equals $1 million.) If you want to withdraw $50,000 per year, you need $1.25 million. To withdraw $60,000 per year, you need $1.5 million.

When all is said and done and you know the 4% Rule and the Multiply-by-25 Rule, it is important to understand the financial risks of “dying broke” and then develop a retirement plan that allows you to live securely in your later years. Even though saving for retirement can be challenging sometimes, it is important to plan ahead so that you do not have to spend your retirement years worrying about how you will survive.

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