BY ABIGAIL M. ROSEN

COMMENTARY

An article recently appearing in SmartMoney questioned the viability of the 4 percent rule which advocates withdrawing 4 percent from your savings each year in retirement.  That has long been the suggested percentage, as introduced by noted financial planner Bill Bengen, CFP® almost 20 years ago. More recent recommendations range anywhere from 7 percent (Retirement Management Journal) to 1.8 percent (Journal of Financial Planning) — quite a big difference. While 4 percent of savings may be a good point to start from, the reality is that any annual savings depends on many factors, both “external,” e.g., the state of the market, interest rates, and inflation, and “internal,” your lifestyle, your spending habits, and when you decide to retire, among others.

One school of thought rejects the notion of a fixed withdrawal percentage throughout retirement.  Typically, the formula for withdrawing a set amount of your assets each year is based on a fixed set of assumptions, e.g., how long your retirement will last, good health, an investment return of ___%, for example.  These straight line calculations are not always realistic and don’t account for all of the variables that can and will affect your finances in retirement.  Life is not static — each year’s expenses and priorities won’t be the same.

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Consider this approach — schedule a meeting with your financial advisor to develop a cash flow projection for your retirement years.  The purpose of this is to assess what you anticipate your retirement lifestyle to be and whether these plans match up well with your projected assets. Overall, there are many factors to bake into the plan.