“How much money do I need to retire comfortably?” That’s a question every adviser dreads hearing – because the answer is difficult. The easy route used to suggest that you could draw 4% of your nest egg in retirement, and never run out of money.
So – just multiply your desired monthly draw by 20 – and voila – there’s how much money you need. Want $5,000/month – you need $1.2 million.
But two factors have the mainstream advisory community re-thinking that axiom. First, people are living longer, so the money has to last longer. Second, the kinds of fixed-interest rate instruments they typically recommend, are not generating enough earnings to last that long.
A recent Wall Street Journal article suggests that as many as 50% of retirees could run out of money before they run out of life if they use the old 4% rule. That’s a scary proposition. But what’s the answer?
Put at least some of your money into things that either guarantee lifetime income; or that have non-depleting accounts. Despite the complaints we may have with social security, it is just such an account – guaranteeing income payments for life – even beyond in some cases.
Outside of Social Security, guaranteed lifetime income can come from instruments like deferred and immediate annuities, Charitable Gift Annuities, and certain kinds of cash-value life insurance. Comment back to get more information.
Whatever you do – don’t buy into the 4% rule and think you have it made.