Rethinking Retirement: Beyond the 4 Percent Rule

“The 4 Percent Rule”

As outlined by financial planners like David Reed, this rule suggests withdrawing 4 percent of one’s retirement savings in the first year and adjusting for inflation annually thereafter. Although a simplification, this rule has proved a practical frame work for retirees to manage their finances over the long term without fear of running out of funds.

 For example, Jill’s retirement savings are $1 million. She would withdraw $40,000 in her first year of retirement, and then in each subsequent year, she would adjust the withdrawal amount for inflation. So, if the cost of living rises by 2 percent,Jill withdraws $40,800 the next year, and so on for the next 30 years.

Yes, but what happens if inflation numbers are significantly higher than expected?

Let’s say the cost of living continues to increase. How much of an impact would this have on those who have been following this rule, and is it still the SAFEMAX figure it once was? 

The recent cost of living increases in Australia have been felt across the board, and I have even noticed it when checking out at the grocery store. Having retired parents myself, I always wonder how my parents would fare without the strength to travel and minimise their food bill by shopping at fruit and veggie markets and cooking.

Now, digging deeper than just the cost of living is the “Golden Years” Dilemma – this concept where the“golden years” are those of retirement filled with globe-trotting adventures and newfound passions. Jamie Nemstsas reminds us that these years may demand a heftier financial outlay, challenging the linear projections of the 4 Percent Rule, meaning we may be spending more in the years whilst we are still 65 years old as we are fit and healthy enough to enjoy it compared to when we are 90 years old if we are lucky enough to make it to this age.

As I write this, I’m reminded of the words of Charlie Munger – Warren Buffett’s partner at Berkshire Hathway, who passed away at age 99. “I don’t have the strength I used to when I was 96. Now at 99 I don’t have the strength even to want to go. I have never caught a 200lb Tuna. I would have paid any amount when I was younger to catch one. But I never did” 

As I ponder the 4 percent rule and similar linear calculations, I realise it is a useful rule of thumb for accumulating wealth leading up to retirement. However, I am rethinking retirement because, again, I’m personally over 10 years older than when I first learned about it. Although I believe that retirement savings is important, I’m beginning to wonder where my 200 Tuna is. 

What's the Price Tag on Comfortable Living?

Imagine a life with out mortgage payments or dependent children. In today's AUD, how much annual income would secure a truly comfortable lifestyle?

A) $30k-40k p.a. 

B) $50k-$60k p.a. 

C) $80k-$100k p.a. 

D) $100k p.a.+"

We would love to know what you think?

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Disclaimer:

The information provided in this article or poll is for general informational purposes only and should not be construed as financial advice, whether general or personal. Everyone’s financial situation is unique, and factors beyond the scope of this poll may impact financial decisions. We strongly recommend consulting with a qualified financial adviser regularly to assess and tailor strategies based on your specific goals, circumstances, and risk tolerance. Any decisions made based on the results of this poll are at the sole discretion and responsibility of the individual participant."

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