Do I Need to Follow the 4% Rule -- Or Any Withdrawal Rule, For That Matter?

Many retirees worry about running out of savings at some point in time. It doesn't really matter whether you have $500,000 socked away for retirement or $2.5 million -- if you're not careful with managing your nest egg, you risk depleting it in your lifetime.

That's why financial advisors often talk up the importance of establishing a withdrawal rate and committing to it during retirement. And for years, the 4% rule was the rule to follow.

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The rule goes like this: During your first year of retirement, you withdraw 4% of your 401(k) or IRA balance. So if you have $1 million socked away, you'd take out $40,000 that year. You then adjust subsequent withdrawals to account for inflation. All told, if you stay on this path, your savings should last a good 30 years.

For a while, the 4% rule fell out of favor due to falling bond interest rates. These days, the rule seems to be back.

But you may be wondering whether the 4% rule is one you should follow. Along those lines, you may be wondering if you really even need to commit to a single withdrawal rate for your nest egg at all. The answer is: While it's important to manage your withdrawals wisely, you definitely have options.

You can look outside the 4% rule

The 4% rule makes certain assumptions that may not apply to you. It assumes you've got a fairly even mix of stocks and bonds, and that you want your nest egg to last 30 years.

But maybe that's not the case. Maybe you have your nest egg invested a bit more aggressively. Or maybe you retired on the later side and therefore aren't expecting to need your money to last for three decades.

That's why, while it can be a good idea to use the 4% rule as a starting point for managing your savings, you don't necessarily have to stick to it. You may decide that you're comfortable tapping your nest egg to the tune of 5% per year, and that's fine. Or you might think that a 4% withdrawal rate is too aggressive. And that's OK, too.

Do you need to commit to a set withdrawal rate at all?

One other problem with the 4% rule is that you're limiting yourself to a pretty rigid withdrawal schedule. In reality, there's nothing wrong with taking a more flexible approach to your savings if that works better for you.

Let's say you retire at age 65 and want to travel during your senior years. It may be that you're looking to take more trips in the coming five years because that's when you expect your health to be best. In that case, it could make sense to withdraw 6% of your nest egg during those years, but then scale back to 3% during your 70s, when you may not be traveling as much.

There's nothing wrong with adjusting your retirement plan withdrawals based on different factors -- your needs, wants, and even market conditions -- as long as you're going in with a plan and aren't just taking money out of your IRA or 401(k) at random. In fact, one thing you may want to do is enlist the help of a financial advisor to help you devise a strategy for taking withdrawals. But those withdrawals absolutely do not have to equal 4% of your savings balance per year if that system doesn't work for you.

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