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The 4% Withdrawal Rate Is a Lie, Use This Instead

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4% safe withdrawal rate

For many years people relied on the concept of the 4% withdrawal rate to plan for retirement. However, many experts now say that this method is outdated. If you’re planning on using it for your own future, think again. There are better options for a safe withdrawal rate that you need to consider instead.

What Is the 4% Withdrawal Rate?

The 4% withdrawal rate is a percentage that many people use in retirement planning. The idea is that you should plan to withdraw approximately 4% of your retirement account each year once you retire. Obviously, the intention is to allow you to have a steady amount of income to meet your needs in retirement. At 4%, you are supposed to have what you need and yet not max out your retirement savings during your lifetime. While it’s a popular retirement planning method, many experts now agree that this is not a safe withdrawal rate.

The History of the 4% Withdrawal Rate

Kitces has a great interview with Bill Bengen, the so-called father of the 4% withdrawal rate. Bengen was a financial planner who was trying to solve problems in retirement planning in the 1990’s. He used historical data on finances over several decades to determine a safe withdrawal rate for retirees. His plan became the standard rule of thumb for other financial planners and their clients.

However, even in the 1990s, he didn’t actually use the 4% withdrawal rate. He recommended a 4.5% withdrawal rate for his clients instead. And in the Kitces interview, he says that in today’s world, a 5% withdrawal rate is probably a safe withdrawal rate due to low inflation.

There Are a Lot of Factors To Determine a Safe Withdrawal Rate

The 4% withdrawal rate relied on data from the earlier part of the 20th century. People simply aren’t in the same place now as they are then when it comes to money. Moreover, the world’s economy is different. When trying to assess a safe withdrawal rate, you need to take into account a wide variety of individual and economic factors.

As Bergen suggests over on Kitces, low inflation allows for a higher withdrawal rate. Money Sense notes that low interest rates are one factor. Increasing investment rates, and long life expectancies pose additional considerations. Think about it: are you planning to retire at 65 and likely to live to 95? That may greatly affect your retirement planning in comparison with someone who wants to retire earlier or later or who has a family history likely to end in a premature death.

And you have to consider your own feelings about retirement and the risks you’re willing to take with your money. Whereas Bergen says that 5% is now a safe withdrawal rate, Money Sense errs on the side of caution and uses a 3% withdrawal rate to plan for a long period of retirement. And Financial Samurai is even more conservative, suggesting 1% or less withdrawal at least in the early years of retirement.

Financial Samurai’s Alternative Safe Withdrawal Rate

Financial Samurai suggests this equation for your retirement planning: A safe withdrawal rate is a 10-year bond yield x 80. The article explains in-depth how this would mean that a $1 million retirement investment today would result in $17,000 of pre-tax income at the current bond yield of 1.7%.

The reason that they suggest this method is:

  • You don’t have to touch your principal. Living off your interest in retirement is ideal to give you a cushion in case you need it.
  • It’s a conservative option that allows you to plan not only for your future but for the generations beyond yours. In contrast, the 4% withdrawal rate uses up all of the money you have.

Financial Samurai has also provided a Safe Withdrawal Rate chart that ranges from 0.08% to 5.6% depending on the ten year bond yield.

An Alternative Retirement Plan

Financial Samurai also suggest another calculation. That option is to try to amass 20x your gross income before retirement. This allows you to gather what you need in order to survive well in retirement. Plus, it’s an easy calculation. However, it’s a bit simplistic.

Again, whenever you do retirement planning, you really need to think about a range of different factors. Life expectancy is a big one as is the quality of life you want to have when you retire. Moreover, you have to ask yourself if you want to spend out your retirement in your lifetime or leave something for the next generation. None of these are easy decisions.

Moreover, as Financial Samurai points out, you want to think about what retirement income might look like. Have you invested in risky, but potentially high-yielding investments? Are you able to use passive income or part-time work to supplement retirement income? Again, these are all important factors that might change the decisions you make about a safe withdrawal rate for you unique situation.

Working With a Financial Planner for Retirement Planning

Because there are so many different factors to take into consideration, you might want to consider working with a financial planner to figure out your financial retirement plan. After all the “father of the 4% withdrawal rate” was a financial planner. He used what he knew to help his clients. Like him, your financial planner will use the current rules of thumb as a starting point to assist you in figuring out what some good safe withdrawal rates might be. However, they will then take into consideration all of those other personal factors that might change this rate for you in either direction.

You don’t want to follow “rules” blindly when it comes to finances. As we’ve seen since the time that the 4% withdrawal rate was the norm, things change. Even if you stay up to date with the current recommended rates, your own personal situation might change. Developing a rapport with a financial planner who truly understands your needs and wants can be a good way to implement the right rules while circumventing those that simply don’t make sense for you.

What is your retirement plan? What questions do you have about planning for retirement?

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Is There Ever a Good Reason to Purchase an Immediate Annuity?

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Good Reason to Purchase an Immediate Annuity

An immediate annuity is a really interesting financial tool. If you’ve never heard of it, then you’re not alone. People don’t commonly make use of this financial option because it’s rarely the smart move for someone. However, there are instances when you might have a good reason to purchase an immediate annuity. Let’s explore this further.

What Is an Immediate Annuity?

Basically, here’s how an immediate annuity works:

  • You pay a lump sum up front to a company.
  • The company repays you a set amount each year.

At a basic level, it truly is as simple as that. The purpose is so that you can have a guaranteed set amount of income coming in each year in the future.

Immediate Annuity Drawbacks

As aforementioned, most people don’t even know what an immediate annuity is. That’s because it simply doesn’t make sense for a lot of people. Even if you know what it is, you might quickly dismiss it as a tool for you.

The biggest drawback of the immediate annuity is that you have to have a large lump sum of money up front. You more or less give that to a financial service with the agreement that they’ll give it back to you in allotted amounts. However, if you have a large lump sum of money, then you might be better off investing it in other ways. For example, you might choose traditional retirement accounts, bonds, etc. for storing that money. Plus, let’s face it; most people don’t have a big lump sum of money to simply store away.

If you have a steady income, then there’s almost no reason to consider getting an immediate annuity.

Is There Ever a Good Reason to Purchase an Immediate Annuity?

That said, these things exist for a purpose. You might find that you actually do have a good reason to purchase an immediate annuity.

Benefits of the Immediate Annuity

This tool provides you with a set, steady income every year in the future for a guaranteed number of years. You can often start withdrawing as early as one year after investing in an immediate annuity. If you aren’t sure whether or not you’ll have a steady future income, then this can be an asset.

There are also some tax benefits of using an immediate annuity. These depend on several factors including whether or not you’ve already paid taxes on the lump sum money you’re investing in the first place.

Good Reasons to Purchase an Immediate Annuity

So, although this product isn’t right for most people, you might have a good reason to purchase an immediate annuity if any of the following scenarios apply to you:

  • You’ve received a lump sum of money. You know that you’re not good at saving and investing, so you might benefit from having a service allot that amount to you regularly in the future, rather than having access to all of it right now.
  • If you are close to retirement then you might want the security of a guaranteed income stream.
  • As someone who is risk averse, you’re looking for a predictable way to plan for your future income.
  • You have a lump sum to use for retirement but have maxed out your other retirement plans.

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Plan Your Financial Future with WeVest

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Financial planning apps are everywhere, and each has something different to offer. WeVest is a fairly new financial planning app that offers a new perspective on saving money and growing your net worth. The app promises a straightforward and inexpensive solution to you financial planning needs. But how well does it keep those promises?

How WeVest Works

When you create a WeVest account, you have to answer a few questions. In order to get your full financial picture, WeVest asks you basic questions about your assets, debt, income, age, and more. These questions allow their algorithm to create separate accounts on your dashboard for each item, as well as categorize you with peer groups who use the app. Then, WeVest asks about your saving goals. Their primary options are saving for retirement, building a college fund, and paying off credit card debt.

WeVest% and Your Financial Plan

The primary goal of WeVest is “to optimize the growth of your net worth in a way that achieves your goals.” Using your answers, WeVest algorithms formulate a financial plan specific to you, using the money you are willing to invest in yourself. Your WeVest% is the percentage of your income that you want to put towards growing your net worth. Your WeVest% is divided according to your goals – savings, retirement, college debt, etc. – in the most efficient way possible.

While this seems a lot like putting your money in someone else’s hands, fear not: WeVest also allows you to compare several recommended plans and pick the one you prefer. You have total control over your financial plan, supported by WeVest’s professional advice. In addition, you have constant access to that financial plan whenever you need it.

Once all your information is in and you have decided which financial plan you prefer,. Your dashboard shows how much money is going to which “bucket” – savings, debt repayment, retirement, etc. – for that month. You are given a graph that will measure and predict the growth of your net worth and savings, as well as whichever other buckets you prioritize. Finally, you can also see your exact current net worth with assets and liabilities, your financial plan, and a savings comparison between you and other users in your peer group.

WeVest Pricing

WeVest is not a free service. Their plans consist of a $4/month plan or a $35/year plan. Both plans have identical benefits, with the exception of the $35/year plan offering a 27% discount from the monthly plan. When you sign up, you have to select a plan and input your card information. However, you have a 45-day free trial before WeVest takes money from your account. You may also cancel your account at any time. This way, if you think you may use the app regularly, you can still sign up for the yearly plan knowing you have time before fully committing. This app boasts the low cost of its services in comparison to face-to-face professional financial planners.

WeVest Drawbacks

WeVest offers some fantastic insights into your financial planning, but it does have its drawbacks. Its primary drawback is its accompanying app. Rather than having an app which allows you to log in and view your information on your phone, WeVest’s mobile app is a simple calculator. It is free, and allows you to calculate simple savings projections for a large purchase, your child’s college tuition, or retirement. While these are useful, they are also pointless if you have an account with WeVest. Furthermore, toggling the “See The Full App” option within the mobile app simply opens the WeVest page in your mobile browser.

WeVest also caters more toward adults starting in their mid to late twenties with a stable, full-time job. College saving plans are geared towards planning and saving for your child’s future tuition rather than your own. Each financial plan prioritizes retirement funds. If you are a college student with a part-time job looking to get ahead in the financial planning game, or you are retired but still looking for a place to manage your finances, WeVest is not that place.

WeVest also requires a separate account for each individual item. For example, you need a separate account for student loans, a separate account for your retirement fund, a separate account for your savings, etc. Having this many accounts seems impractical, and having to input this many different accounts gets confusing on the website.

Is WeVest Worth It?

WeVest is perfect for the right people. If you are looking to keep track of your retirement fund, flesh out your savings, or invest in a home, WeVest has exactly what you need. If not, you may be better off looking elsewhere. WeVest is an incredibly thorough financial planning app that is truly a bargain for all it offers. If you want to invest in your financial future through financial planning, look no further than WeVest.

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Photos: WeVest