Q. I plan to retire soon, I heard that if I take out 4% from my saving each year, I shouldn't worry about outliving my money, is that true?
A. The 4% rule of thumb was developed in 1990's, and it has since been adjusted up to 4.5%. It means if you take 4.5% of your savings out each year, your savings should be able to last 30-years.
But I think the underlying assumptions for 4.5% no longer hold, for the following reasons:
1. The 4% or 4.5% rule was developed based on the assumption of the following asset allocation: 60% stock and 40% bond holdings. But with interest rates at near historical low level, the return from the bond holdings can't match the original assumptions.
2. The stock market performance is near historical high level, based on return to mean rule, don't expect the good performance of the stock market will continue in the future.
3. The "sequence of returns" is very important - if the initial years' returns of your assets are less desirable (due to reasons explained above), your asset won't grow as much as the original 4% inventor assumed, which means you will need to take more money out in order to meet your lifestyle requirement, which means you might outlive your savings.
4. Most importantly, people are living longer, if you plan to retire at age 55, you are probably still very healthy at age 85, but will your asset be as healthy as originally expected?
How to make sure you won't outlive your money? Annuity is a solution.
There are many types of annuities, and most of those products work for insurance companies rather than retirees. The only type of annuity worth considering is immediate fixed annuity - when you decide to retire at age 65, purchase the immediate fixed annuity, and insurance company will start giving you 5-6% of your money right away. This payment combined with social security income will give you a peace of mind for the rest of your life.
But don't put all your retirement money into the immediate fixed annuity - spend a third to half on it, and invest the rest by yourself.
A. The 4% rule of thumb was developed in 1990's, and it has since been adjusted up to 4.5%. It means if you take 4.5% of your savings out each year, your savings should be able to last 30-years.
But I think the underlying assumptions for 4.5% no longer hold, for the following reasons:
1. The 4% or 4.5% rule was developed based on the assumption of the following asset allocation: 60% stock and 40% bond holdings. But with interest rates at near historical low level, the return from the bond holdings can't match the original assumptions.
2. The stock market performance is near historical high level, based on return to mean rule, don't expect the good performance of the stock market will continue in the future.
3. The "sequence of returns" is very important - if the initial years' returns of your assets are less desirable (due to reasons explained above), your asset won't grow as much as the original 4% inventor assumed, which means you will need to take more money out in order to meet your lifestyle requirement, which means you might outlive your savings.
4. Most importantly, people are living longer, if you plan to retire at age 55, you are probably still very healthy at age 85, but will your asset be as healthy as originally expected?
How to make sure you won't outlive your money? Annuity is a solution.
There are many types of annuities, and most of those products work for insurance companies rather than retirees. The only type of annuity worth considering is immediate fixed annuity - when you decide to retire at age 65, purchase the immediate fixed annuity, and insurance company will start giving you 5-6% of your money right away. This payment combined with social security income will give you a peace of mind for the rest of your life.
But don't put all your retirement money into the immediate fixed annuity - spend a third to half on it, and invest the rest by yourself.
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