The Main Reason I Refuse to Use the 4% Rule for My Retirement Savings

As someone who writes about Social Security regularly, trust me when I say I know how important it is to save well for retirement. And to be clear, that isn't because Social Security is going away.

Rather, I know those monthly benefits will replace only a portion of my current income. And I can admit that while I'm willing to live somewhat frugally in retirement, there are only so many corners I want to cut. I'm hoping that if I save enough money, I can maintain my current lifestyle.

I'm also aware that it's extremely important to manage my retirement savings well. And that means investing in the right assets and being careful with withdrawals.

A lot of financial experts are quick to talk up the 4% rule for managing a retirement nest egg. But I have one really big problem with that rule, and it's the main reason I refuse to adopt it.

How the 4% rule works

The 4% rule is pretty simple. You start by withdrawing 4% of your individual retirement account or 401(k) balance your first year of retirement. You then adjust future withdrawals for inflation. If you follow that system, there's a good chance your savings will last 30 years.

Why I won't use the 4% rule

My main issue with the 4% rule is that it's pretty restrictive. And I would rather have more flexibility with retirement plan withdrawals based on different factors.

Let's say there's a year when I want to take a major trip. That may require me to take out more than 4% of my savings. But if I have the money, why should I give up that opportunity?

Also, I'd rather let the market help dictate what withdrawals I take. If there's a year when my portfolio enjoys strong gains, why shouldn't I take more money out? And if there's a year when the market underperforms, I should probably try to tap my portfolio as little as possible.

It's pretty similar to how I manage my finances now, actually. As a freelance writer, I have a fluctuating income.

If I have more money coming in, I might splurge a little more on things like restaurants. If I'm not pleased with my earnings, I might cut back in different areas. I don't see why I would manage my nest egg any differently.

Create your own system for managing your savings

The 4% rule is certainly a good starting point to work with in the context of managing retirement savings. But ultimately, I think it's too restrictive for me.

I'd rather be flexible and adjust my withdrawal rate upward or downward as needed rather than be locked into a system that may not work well for my specific circumstances. And you may want to do the same.

I should also mention that the 4% rule may not work well for you because of your investments. A very conservative portfolio may not be able to sustain a 4% withdrawal rate from year to year. A more stock-heavy portfolio, on the other hand, might easily be able to pay you 5% or 6% a year (though if you're going to load up on stocks, I recommend having plenty of cash on hand for protection against a market downturn).

The point, therefore, is to figure out a withdrawal strategy that's as specific to you as possible. And you may decide that you'd like to start by withdrawing 4% of your savings your first year of retirement and take things from there.

But you should reach that conclusion after some careful number-crunching to make sure it's the right decision for you rather than follow a general rule of thumb.

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