With record numbers of Americans reaching retirement age in the next four years, knowing how much to save for retirement has never been more important. Financial expert Suze Orman has called the 4% pension rule problematic. This is why Orman believes this pension rule doesn’t work.
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Often known for her blunt and straightforward financial advice, Orman shared in an interview with Moneywise that she found the 4% pension rule very dangerous. While discussing the cost of living, Orman expressed her concerns about retirement savings, saying, “The 4% retirement rule doesn’t work anymore. I think it’s very dangerous.”
Before record high inflation and interest rate increases, the 4% pension rule was the gold standard for retirement savings. Now many people, including Orman, are wondering whether this rule can still be applied in the current economic climate. This financial practice was created in 1994 by financial planner Bill Bengen. He based his calculations on decades of statistics that were relevant at the time, with a more reasonable return. According to Bengen, if retirees adjusted their withdrawals to 4%, they could make their money last at least another 30 years.
In practice, this meant that people would have to withdraw 4% of their pension money in the first year of retirement, and after that that amount would be adjusted for inflation every year. The problem with this rule is that this calculation was based on stock and bond returns from 1926 to 1976. David Blanchett, head of pension research at PGIM DC Solutions, agrees with Orman that this pension rule is no longer feasible. Blanchett admitted: “It will be too low for most people who retire at a reasonable age.”
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Colin Gerrety, a financial planner, echoed this sentiment, revealing, “Very rarely have I ever seen a client who withdraws just 4% of their portfolio each year and calls it a day.” He adds, “Things are often a lot messier and messier than that.”
Instead of 4%, Orman suggests this figure should be lowered to 3%, saying: “I wouldn’t use the 4% figure at any level.” Orman acknowledges that the actual number of withdrawals will depend entirely on each person’s circumstances. She encourages people to wait as long as possible before taking out their Social Security benefits, preferably until they are at least 70 years old. This way they are guaranteed to receive the maximum monthly amount. But this is not always the case. Orman explains that people do not understand the tax implications of collecting Social Security early and that there is still the incorrect mentality that once people reach retirement age they will start claiming Social Security.
“Stop this: ‘Oh, I’m going to retire at 60. I’m going to claim Social Security at 62,’” Orman said.
Additionally, Orman emphasizes that no matter which withdrawal figure you use, “take the least amount possible out of your retirement accounts.” She encourages people to start building an emergency fund as early as possible to avoid withdrawing from retirement funds in the event of medical problems, stock market fluctuations and interest rate increases. She warns that without emergency savings, Americans face a “financial tornado” coming.
Other financial experts also agree that 4% will no longer cut corners and have instead suggested 3.3% to allow for a more flexible approach. In fact, Bengen himself no longer believes that a 4% withdrawal will work, although he differs with Orman and believes this figure should be increased to 4.7%.
Adopting a flexible withdrawal amount that meets your changing needs is a sensible approach.
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This article Suze Orman Warns A ‘Financial Tornado’ Is Coming For Those Without Emergency Retirement Savings – The 4% Retirement Rule Isn’t Working originally appeared on Benzinga.com
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