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Yahoo
4 days ago
- Business
- Yahoo
Creator of the '4% rule' for retirement withdrawals has fresh advice for today's retirees
Who hasn't pondered the possibility of running out of money in retirement? It's a pervasive undercurrent in retirement planning for millions of Americans. The fear is particularly palpable for many of those nearing and living in retirement. We all want our nest egg to last our lifetime. Sign up for the Mind Your Money weekly newsletter By subscribing, you are agreeing to Yahoo's Terms and Privacy Policy In his new book, 'A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More,' William P. Bengen rolls out the data to argue that everything is going to be okay — with the proper investing and spending plan throughout your retirement. Bengen is the guy who proffered the celebrated '4% rule' for withdrawing money from retirement accounts decades ago, explaining how much retirees can safely spend each year without the well running dry. He's been refining that strategy ever since. Here are edited excerpts of our conversation: Kerry Hannon: How did you get fascinated with this question of whether people will outlive their money more than three decades ago? Bill Bengen: I was a financial advisor then, a relatively new one. I was an early baby boomer, as were many of my clients. They were just starting to ask questions in the early '90s about retirement, which was some 20 years off for them, and how much they could spend and how much they needed to save. When I tried to find answers to those questions in literature, from other advisors, from textbooks, there was nothing available. That's really not surprising because at that time it was just starting to become a big issue because my generation was the first really to have such a long life expectancy in retirement. If you retired in the '50s or '60s you might have looked forward to about 10 years of retirement, and that's about it. But the rest of us now are looking at 20, 30, even longer periods of time. Read more: How much should I have saved by 50? Can you explain in the simplest way possible, what the 4%, now 4.7%, rule is? I basically reconstructed the investment experience of hundreds of retirees from 1926 to date and tested them with various withdrawal rates from retirement accounts, primarily IRA accounts, over a 30-year period. And back in '94, I came out with a number, 4.15% as the lowest safe withdrawal rate for any person. So if you use that number, you would've always been successful with 30 years of withdrawals. It's actually not something I recommend to everybody — it's a very conservative number. Did you ever expect when you came up with a 4% rule that this was going to become the gold standard? Not a clue. I was doing it for my clients at that time. It's an amazing thing. One big problem I have found is that retirees don't spend enough. Most people are so conservative. They'll take only their dividends and their interest and try not to tap the principal. That runs counter to the approach that I use. In most cases, people will be able to take considerably more than that safe withdrawal rate. You worked your whole life to accumulate all this wealth. Why not get the most out of it while you're retired? What does this mean in terms of how much you have saved in your retirement accounts? If the withdrawal rate you choose is 5%, that means the first year you'd be taking out 5%. So you need 20 times your draw in the first year to start. So if you take out $50,000, you need to have a $1 million portfolio. Read more: What's changed since your initial number to the new number today? My research is more sophisticated. In '94, I was looking at a portfolio with two investments — US bonds and large US company stocks. That hardly qualifies as a diversified portfolio. I've increased the number of assets and created a more diversified portfolio. I added small company stocks and micro-company stocks in the US, international stocks, mid-company-sized stocks. Each one of them has their own cycle of investing, and each contributes to the diversification of the portfolio and increases the withdrawal rate. So diversification works? Yes, as you increase the number of assets, you increase the withdrawal rates. I suspect it'll probably peak out somewhere around 5% when you add in all the other assets. I haven't looked at gold, precious metals, commodities, real estate investments, and other alternative investments. There are a lot of other things folks can invest in and do invest in: bitcoin, for example. I think there's a pretty good chance adding some of those to your portfolio will further enhance your withdrawal rate — assuming you get the performance out of the investments. Can you talk a little bit about someone who's retiring into an uncertain economic environment, whether it's high inflation or a bear market? My research shows that if early in retirement you encounter a bear market or sustained high inflation, your withdrawal rates are going to drop quite significantly. So if there's anything you could do to avoid that in terms of timing your retirement, it'd be a good idea. Inflation, in my opinion, is the greatest enemy of retirees, especially those who try to maintain a lifestyle with inflation. During the 1970s inflation was 8% or 9% a year for 10 years, and it devastated portfolios. That's where we got the 4.7% rule from. The worst-case scenario was right there in the '60s. What are the four free lunches that add to your withdrawal rate without adding an additional risk? Diversification, rebalancing once a year — if you do those properly, you'll give yourself an increase in withdrawal rates — tilting your equity allocations slightly toward small-company and micro-company stocks. Fourth, a rising equity glide path — starting with a much lower allocation of stock. Let's say 30% to 40%, rather than the normal 60% that we might begin with, and increasing it each year. When I tested that glide against my database, it resulted in an increase in withdrawal rate. Very curiously, it's hard to explain why. We think it has to do with the fact that if you encounter a bad bear market early in retirement and you're using this method, you're going to have a low exposure to stocks. So you won't be damaged that much. After the bear market is over, the market always recovers and usually pretty strongly, and you'll be buying into thought? The 4.7% rule is the worst-case scenario, and retirees should be looking for more. For today's retirees, I'd probably recommend something around 5.25% to 5.5%. Everyone is different. Personalize it for your situation. Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 books, including the forthcoming "Retirement Bites: A Gen X Guide to Securing Your Financial Future," "In Control at 50+: How to Succeed in the New World of Work," and "Never Too Old to Get Rich." Follow her on Bluesky. Sign up for the Mind Your Money newsletter
Yahoo
4 days ago
- Business
- Yahoo
Creator of the '4% rule' for retirement withdrawals has fresh advice for today's retirees
Who hasn't pondered the possibility of running out of money in retirement? It's a pervasive undercurrent in retirement planning for millions of Americans. The fear is particularly palpable for many of those nearing and living in retirement. We all want our nest egg to last our lifetime. Sign up for the Mind Your Money weekly newsletter By subscribing, you are agreeing to Yahoo's Terms and Privacy Policy In his new book, 'A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More,' William P. Bengen rolls out the data to argue that everything is going to be okay — with the proper investing and spending plan throughout your retirement. Bengen is the guy who proffered the celebrated '4% rule' for withdrawing money from retirement accounts decades ago, explaining how much retirees can safely spend each year without the well running dry. He's been refining that strategy ever since. Here are edited excerpts of our conversation: Kerry Hannon: How did you get fascinated with this question of whether people will outlive their money more than three decades ago? Bill Bengen: I was a financial advisor then, a relatively new one. I was an early baby boomer, as were many of my clients. They were just starting to ask questions in the early '90s about retirement, which was some 20 years off for them, and how much they could spend and how much they needed to save. When I tried to find answers to those questions in literature, from other advisors, from textbooks, there was nothing available. That's really not surprising because at that time it was just starting to become a big issue because my generation was the first really to have such a long life expectancy in retirement. If you retired in the '50s or '60s you might have looked forward to about 10 years of retirement, and that's about it. But the rest of us now are looking at 20, 30, even longer periods of time. Read more: How much should I have saved by 50? Can you explain in the simplest way possible, what the 4%, now 4.7%, rule is? I basically reconstructed the investment experience of hundreds of retirees from 1926 to date and tested them with various withdrawal rates from retirement accounts, primarily IRA accounts, over a 30-year period. And back in '94, I came out with a number, 4.15% as the lowest safe withdrawal rate for any person. So if you use that number, you would've always been successful with 30 years of withdrawals. It's actually not something I recommend to everybody — it's a very conservative number. Did you ever expect when you came up with a 4% rule that this was going to become the gold standard? Not a clue. I was doing it for my clients at that time. It's an amazing thing. One big problem I have found is that retirees don't spend enough. Most people are so conservative. They'll take only their dividends and their interest and try not to tap the principal. That runs counter to the approach that I use. In most cases, people will be able to take considerably more than that safe withdrawal rate. You worked your whole life to accumulate all this wealth. Why not get the most out of it while you're retired? What does this mean in terms of how much you have saved in your retirement accounts? If the withdrawal rate you choose is 5%, that means the first year you'd be taking out 5%. So you need 20 times your draw in the first year to start. So if you take out $50,000, you need to have a $1 million portfolio. Read more: What's changed since your initial number to the new number today? My research is more sophisticated. In '94, I was looking at a portfolio with two investments — US bonds and large US company stocks. That hardly qualifies as a diversified portfolio. I've increased the number of assets and created a more diversified portfolio. I added small company stocks and micro-company stocks in the US, international stocks, mid-company-sized stocks. Each one of them has their own cycle of investing, and each contributes to the diversification of the portfolio and increases the withdrawal rate. So diversification works? Yes, as you increase the number of assets, you increase the withdrawal rates. I suspect it'll probably peak out somewhere around 5% when you add in all the other assets. I haven't looked at gold, precious metals, commodities, real estate investments, and other alternative investments. There are a lot of other things folks can invest in and do invest in: bitcoin, for example. I think there's a pretty good chance adding some of those to your portfolio will further enhance your withdrawal rate — assuming you get the performance out of the investments. Can you talk a little bit about someone who's retiring into an uncertain economic environment, whether it's high inflation or a bear market? My research shows that if early in retirement you encounter a bear market or sustained high inflation, your withdrawal rates are going to drop quite significantly. So if there's anything you could do to avoid that in terms of timing your retirement, it'd be a good idea. Inflation, in my opinion, is the greatest enemy of retirees, especially those who try to maintain a lifestyle with inflation. During the 1970s inflation was 8% or 9% a year for 10 years, and it devastated portfolios. That's where we got the 4.7% rule from. The worst-case scenario was right there in the '60s. What are the four free lunches that add to your withdrawal rate without adding an additional risk? Diversification, rebalancing once a year — if you do those properly, you'll give yourself an increase in withdrawal rates — tilting your equity allocations slightly toward small-company and micro-company stocks. Fourth, a rising equity glide path — starting with a much lower allocation of stock. Let's say 30% to 40%, rather than the normal 60% that we might begin with, and increasing it each year. When I tested that glide against my database, it resulted in an increase in withdrawal rate. Very curiously, it's hard to explain why. We think it has to do with the fact that if you encounter a bad bear market early in retirement and you're using this method, you're going to have a low exposure to stocks. So you won't be damaged that much. After the bear market is over, the market always recovers and usually pretty strongly, and you'll be buying into thought? The 4.7% rule is the worst-case scenario, and retirees should be looking for more. For today's retirees, I'd probably recommend something around 5.25% to 5.5%. Everyone is different. Personalize it for your situation. Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 books, including the forthcoming "Retirement Bites: A Gen X Guide to Securing Your Financial Future," "In Control at 50+: How to Succeed in the New World of Work," and "Never Too Old to Get Rich." Follow her on Bluesky. Sign up for the Mind Your Money newsletter Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
01-08-2025
- Business
- Yahoo
What $500K in Retirement Savings Looks Like in Monthly Spending
When Americans think about how much savings they need to retire, they often think in terms of retirement account balances. You might set a retirement savings goal of $500,000, for example. Trending Now: Check Out: But unless you know how that balance breaks down into monthly income, you won't know whether it's enough to cover your expenses and leave room in your budget for spending on travel, hobbies and other 'wants.' What $500,000 looks like in terms of monthly spending depends on how long you need the money to last, how you calculate income from your savings and how you invest the money. How Long Does the Money Need To Last? To calculate your monthly income from $500,000, you'll need to determine how long you're likely to live in retirement — or the number of months you expect to withdraw money. If you retire at 65, you can assume a 20-year time horizon, according to the Teachers Insurance and Annuity Association of America. That's 240 months, or $2,083 per month in spending, to take the principal from $500,000 to $0. Consider This: Returns on Your Investment Remember that the unused portion of your retirement savings changes due to interest earnings and investment gains and losses. You can apply the 4% rule to figure out your monthly spending allowance in a way that accounts for the changing balance over time. The 4% rule says that you can withdraw 4% of your retirement savings in the first year of your retirement, then withdraw 4% plus inflation in subsequent years. That would give you $20,000 in income in the first year, which comes out to $1,667 per month. This rule assumes a 30-year time horizon and a portfolio allocated evenly between stocks and bonds. Charles Schwab offers suggestions for customizing the withdrawal rate to reflect your personal situation. Reducing the time horizon to 20 years and changing the allocation to 60% stocks and 40% bonds and cash lets you withdraw 5.4% to 5.9% per year. The monthly income would be $2,250 to $2,458 per month. A 10-year time horizon with 20% of your portfolio in stocks and 80% in bonds and cash would let you withdraw 10.2% to 10.6% per year. That would provide a monthly income of $4,250 to $4,417. How Your Money Is Invested The 4% rule assumes you hold your savings in brokerage accounts. But some retirees roll their retirement savings directly into an annuity, per Thrivent. If you were to purchase a $500,000 immediate lifetime annuity, which begins paying out right away and pays you for the rest of your life, your monthly income might look like this, according to $3,002 for a male, $2,919 for a female, if purchased at age 60. $3,269 for a male, $3,151 for a female, if purchased at age 65. $3,671 for a male, $3,498 for a female, if purchased at age 70. Final Thoughts: Consider Getting Professional Advice No one calculation can tell you with certainty how much monthly spending a $500,000 nest egg allows. If you think you're cutting it close, consider working with a certified financial planner (CFP). They can make a plan for you based on highly detailed income and expense projections and offer investing suggestions based on your goals and tolerance for risk. More From GOBankingRates 3 Luxury SUVs That Will Have Massive Price Drops in Summer 2025 How Much Money Is Needed To Be Considered Middle Class in Your State? How Much Money Is Needed To Be Considered Middle Class in Your State? This article originally appeared on What $500K in Retirement Savings Looks Like in Monthly Spending
CBS News
28-07-2025
- Business
- CBS News
What is the 4% rule for annuities (and why does it matter to retirees)?
After decades of hard work, retirement should be a time to enjoy the fruits of your labor. But figuring out how to make your retirement funds last, especially in an uncertain or volatile economy, is often easier said than done. After all, if you make one wrong move, you could run the risk of outliving your savings, which would put you in a precarious financial position. That's where retirement income strategies come into play, and one of the most well-known is the so-called "4% rule." This simple guideline has long been used to estimate how much retirees can safely withdraw from their savings each year without running out of money. But what happens when annuities are part of the equation? Does the 4% rule still apply, or does it become irrelevant? Understanding how the 4% rule interacts with annuities can make a big difference in how you structure your income in retirement. Below, we'll examine what you need to know before relying on this decades-old rule. Find out more about the annuity options available to you today. The "4% rule" is based on the idea that if retirees withdraw 4% of their retirement portfolio in the first year — and adjust that amount for inflation each year thereafter — their savings will likely last for at least 30 years, even in turbulent markets. The rule, which is based on historical returns, assumes a mix of stocks and bonds and is based on historical returns. But while the 4% rule is a popular starting point for retirement planning, this rule wasn't created with annuities in mind. So when annuities entered the picture, the 4% rule for annuities was born. The 4% rule for annuities refers to a way to evaluate whether an annuity's guaranteed income stream is equal to — or better than — what you might safely withdraw from a traditional portfolio using the 4% rule. For example, if you have $500,000 saved and you follow the 4% rule, you'd withdraw $20,000 in the first year. But if an annuity offers you $25,000 per year for life (a 5% payout rate), it may appear to offer more value, especially since that income is guaranteed and not subject to market risk. However, annuities are more complex than a simple withdrawal strategy. They're insurance products, which means part of what you receive is a return of principal, and part is interest. And, unlike a traditional portfolio, annuity payments usually don't adjust for inflation unless you opt for that feature. Compare annuities and lock in a top rate on this retirement tool now. Understanding how the 4% rule applies to annuities matters because it helps retirees make smarter decisions about how to generate steady income and avoid draining their savings too quickly. Here are a few ways it can impact retirees: It helps compare income options. The 4% rule acts as a benchmark. If you're considering buying an annuity, you can compare the payout it offers against the 4% withdrawal you'd take from your investment portfolio. If the annuity offers a significantly higher guaranteed income and fits your needs, it may be worth the trade-off of liquidity. It highlights the value of longevity protection. Annuities can protect against outliving your money, which is something the 4% rule doesn't account for on its own. Even if your portfolio theoretically lasts 30 years, living beyond that point can pose a problem. An annuity that pays for life, no matter how long you live, can eliminate that risk. It calls attention to inflation and flexibility. The 4% rule assumes you'll increase withdrawals with inflation. Many fixed annuities do not. So while an annuity might initially pay more than a 4% withdrawal, its real value can erode over time unless it's inflation-adjusted. On the flip side, annuities don't require active management or decision-making during market downturns. It helps diversify income sources. Using the 4% rule and annuities together can create a hybrid strategy. For example, you might use an annuity to cover essential expenses like housing, utilities and food, and rely on your investment portfolio for discretionary spending. This approach can balance security with flexibility, something that neither strategy provides alone. It provides a sanity check for retirement readiness. Comparing your current savings to what a 4% withdrawal would look like can give you a quick check on whether your assets are likely to support your lifestyle, even if you're not sure you want to buy an annuity. If not, an annuity may help you stretch your resources more efficiently. The 4% rule isn't a hard-and-fast solution for retirement planning and it wasn't designed with annuities in mind. But when used as a benchmark, it can help retirees assess whether an annuity offers comparable or better income potential. For many people, annuities provide peace of mind that a traditional withdrawal strategy might not. For others, the lack of flexibility may be a dealbreaker. Ultimately, though, the best retirement income plan often involves blending strategies. Whether you follow the 4% rule, invest in annuities or use both, understanding how each approach works and how they interact can help you make confident decisions about your financial future.
Yahoo
19-07-2025
- Business
- Yahoo
Dave Ramsey vs. Suze Orman on the 4% rule: Who's right?
Moneywise and Yahoo Finance LLC may earn commission or revenue through links in the content below. The 4% rule in retirement has been a widely accepted retirement standard for over 30 years. The rule states that you should draw 4% of your assets from your investments each year in retirement. This should, in theory, allow you to maintain a comfortable standard of living while continuing to let your investments appreciate in value. However, it seems this longstanding rule could be poised to fall. Don't miss Thanks to Jeff Bezos, you can now become a landlord for as little as $100 — and no, you don't have to deal with tenants or fix freezers. Here's how I'm 49 years old and have nothing saved for retirement — what should I do? Don't panic. Here are 5 of the easiest ways you can catch up (and fast) You don't have to be a millionaire to gain access to this $1B private real estate fund. In fact, you can get started with as little as $10 — here's how A recently retired caller to The Ramsey Show asked host and finance personality Dave Ramsey if it would be safe to go up to a 5% withdrawal rate in order to pay for trips he and his wife wanted to take in early retirement. Ramsey has said he believes that retirees can earn up to a 12% annual return from mutual funds, and will therefore be safe to withdraw more than the standard 4% per year without jeopardizing their nest egg. He calls the standard rule 'absolutely wrong' and 'ridiculous.' But another finance celeb has a very different opinion. Suze Orman has called the classic 4% rule 'very dangerous.' Orman, a fellow best-selling author and expert, also called for a tweak to the 4% rule in an interview with Moneywise — saying that retirees should only withdraw a maximum of 3% yearly if they are retiring in their 60s. Who's right? Here's what to consider. The importance of retirement accounts Ramsey's advice is based on a number of suppositions that may not reflect the real financial status of the average retiree. Inflation will eat away at the value of your retirement savings, and it's very possible that your retirement years could coincide with a period of higher inflation. That's not to mention the stock market's volatility. Many experts believe a consistent 12% return, like Ramsey has optimistically said mutual funds can deliver, may not be likely. Suze Orman's advice, on the other hand, is more conservative. She advises retirees to withdraw as little as possible from their savings, which is a safer approach. Either expert would argue that the best way to make your money last in retirement is to start saving as early and as aggressively as you can. A gold IRA is one option for building up your retirement fund with an inflation-hedging asset. Gold has historically acted as a hedge against inflation, and many professional investors such as Ben Mallah and Peter Schiff tout it as a solid alternative investment to the stock market and way to diversify your IRA as the price of gold continues to rise. Opening a gold IRA with the help of Goldco allows you to invest in gold and other precious metals in physical forms while also providing the significant tax advantages of an IRA. With a minimum purchase of $10,000, Goldco offers free shipping and access to a library of retirement resources. Plus, the company will match up to 10% of qualified purchases in free silver. If you're curious whether this is the right investment to diversify your portfolio, you can download your free gold and silver information guide today. Read more: Rich, young Americans are ditching the stormy stock market — Boost your existing savings If you're already in retirement, you may want to follow Ramsey's advice on growing your existing savings with safe vehicles like mutual funds. However, many retirees have not considered the benefits of certificates of deposit, whose returns can now exceed 5%. Between 2008 and 2022, when certificate of deposit rates were practically zero, and their appeal to investors about the same, they fell out of favour. But since the Fed started aggressively raised interest rates to combat inflation, certificates of deposits (CDs) have become a hot topic once more. And even though rates are slowly coming back down, these accounts are still worth a look. A certificate of deposit is a low-risk savings account that could earn as much interest as a high-yield savings account, possibly more. However, to earn that higher rate, you'll have to park your money in the account for a certain period of time. Invest for passive income in retirement Dave Ramsey is a huge advocate for finding new passive income streams to pay down debt and build savings. While much of his advice is focused on finding a lucrative side hustle, for those in their golden years, a more relaxed approach may be easier to incorporate. Before you begin investing however, you need a plan. And while Ramsey and Orman make good points on withdrawal strategy, you may need help that's more tailored to your personal situation. If you're unsure of how to navigate planning for retirement on your own, calling a professional give you some peace of mind. simplifies the search process by connecting individuals with an exclusive network of fiduciary advisors, each dedicated to transparency and held to high ethical standards. All you have to do is answer a few simple questions regarding your finances and long-term goals, and will connect you with a vetted expert near you who is best suited for your needs. You can then set up a free, no-obligation consultation to see if they're the right fit for you. What to read next How much cash do you plan to keep on hand after you retire? Here are 3 of the biggest reasons you'll need a substantial stash of savings in retirement 5 simple ways to grow rich with US real estate — without the headaches of being a landlord. Start now with as little as $10 This tiny hot Costco item has skyrocketed 74% in price in under 2 years — but now the retail giant is restricting purchases. Here's how to buy the coveted asset in bulk Financial aid only funds about 27% of US college expenses — but savvy parents are using this 3-minute move to cover 100% of those costs Stay in the know. Join 200,000+ readers and get the best of Moneywise sent straight to your inbox every week for free. This article provides information only and should not be construed as advice. It is provided without warranty of any kind. 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