By Daniel Korleski, MBA
You’ve worked hard and made smart financial decisions in preparing for retirement. You started saving early to leverage compounding, contributed consistently to your 401(k) and IRA, made wise investments, built extra savings, reduced your debt, and optimized your Social Security benefits. Thanks to your dedication, your retirement fund is in great shape.
But now you might be asking: What comes next? When do you transition from saving to enjoying your retirement? And how much can you safely withdraw from your retirement portfolio without running out of money?
The good news is, determining your retirement portfolio withdrawal rate isn’t as complicated as it may seem. It comes down to a straightforward financial concept, often called the 4% Rule. In this article, we break down what this rule is and how to use it effectively to keep your retirement stable.
What Is The 4% Rule?
When you retire, you’re essentially turning your portfolio into a paycheck. The trick is deciding how much that paycheck should be. Pay yourself too little and you’ll sacrifice quality of life during your golden years. Pay yourself too much and your nest egg will dry up before you do (if you catch my drift).
So how do you find the sweet spot? That’s where the 4% Rule comes in. According to this rule, your retirement savings should last at least 30 years if you withdraw 4% per year (adjusting for inflation). Here’s how to use it...
Deciding When to Retire
If you’re nearing retirement age and trying to determine when it’ll be safe to leave work, the 4% Rule can help. Start by calculating 4% of your current retirement fund. Let’s pretend you have $500,000 saved. Four percent of $500,000 is $20,000 per year. Then add in $16,000 from Social Security (if eligible) and any other income sources. With Social Security, you’re up to $36,000 per year. Not so great. If your estimate is less than your expected living expenses, you might want to stick it out by working a few more years.
Creating a Savings Plan
For younger people, the 4% Rule can be used to create a savings plan to reach your retirement goals. Having a retirement fund target in mind is essential for monitoring progress and staying on track through the years.
To calculate your retirement goal, start by estimating your yearly living expenses in retirement. Let’s say $50,000. Subtract the $16,000 you’d receive annually from Social Security (assuming that’s still a thing when you retire), and you’re left with $34,000/year to be funded by your retirement account.
Now, using the 4% Rule and your amazing algebra skills, calculate the total savings you will need to retire. (Hint: Multiply $34,000 by 25.) This comes to a grand total of $850,000. From there, work backward to determine how much you should be saving per year (and per month) to reach your goal.
Adjusting As Necessary
It’s important to remember that the 4% withdrawal rate isn’t set in stone. In fact, some argue that it’s not as relevant as it once was. After all, it is based on a study done in the 1990s using market data going back to 1926. However, most agree it’s a good benchmark. To be safe, start with 4% and then adjust accordingly.
Is It Possible to Withdraw More Than 4%?
The 4% Rule is an equation that keeps your retirement portfolio withdrawal rate sustainable, but the real challenge is building those savings.
At Cobalt Private Wealth, we will craft a tailored investment strategy to help you work toward your goals. Contact us today at danielkorleski@cobaltprivatewealth.com or 719-332-3863 to schedule a meeting.
About Dan
Daniel Korleski is the President & CEO for Cobalt Private Wealth, where he helps his clients grow, manage, and protect their wealth so they can work toward a stronger financial future. With over 30 years of experience in the financial services industry, Dan has served as the managing director for Investment Trust Company, chief investment officer for the Wealth Management Group at American National Bank in Denver, and regional investment manager for the Greater Colorado Region of the Private Bank at Wells Fargo, where he oversaw the management of over $2 billion. In 2008, he was appointed by the mayor of Colorado Springs to the City’s Investment Advisory Committee. Dan holds an MBA in investment management from Midwestern State University in Wichita Falls, Texas, a Bachelor of Science in Finance from Florida State University, and is a member of both the CFA Society Colorado and The Financial Planning Association.
Dan loves to give of his time to his community and is currently serving as the Board Chair of Catholic Charities of Central Colorado and oversees the Homebound Ministry at St. Paul Catholic Church. He has also served as Chair of the Board of Trustees of Pikes Peak Hospice Foundation, President of the Broadmoor Rotary Club, and Vice President of the Board for the Pikes Peak Chapter of Trout Unlimited. Dan was born and raised in Spain and is fluent in Spanish. To learn more about Dan, connect with him on LinkedIn.
