What is the 4% rule, and is it right for you?
Everywhere you look, there seems to be a new rule for how to manage your finances. Be it for investing, savings, or debt relief, these rules can be confusing and quite frankly don’t work for everyone. One such rule is the 4% rule, an advisement for retirement savings. So, what exactly is the 4% rule, and should you follow it?
Basically, this rule suggests future retirees should put away 4% of their portfolio value each year so they won’t run out of money for retirement. The 4% rule is based on solid academic research, but it’s also missing a few key components.
The shortfall of the 4% rule is that it doesn’t account for changes in your lifestyle, salary, or retirement goals. Simply thinking you’re doing enough saving without considering the details of your retirement goals is not advised, because these things may change while your 4% savings schedule will remain the same.
Customize For Your Unique Goals
Generally, the 4% rule is pretty conservative. You may need to reevaluate whether 4% of your earnings will really be enough to meet your retirement goals.
Do you plan on traveling once retired? Saving money for your kids’ or grandkids’ college education? These are important things to consider when determining how much you should be saving each year.
Seek Assistance If Necessary
If this seems to be a bit too much for you, consider hiring a professional financial adviser. After all, their job is to help people with financial matters.
However, be cautious of who you hire. Make sure whoever you hire is taking your retirement and savings goals seriously rather than only offering general rules of thumb to help you out. Your retirement savings plan should be tailored to fit your unique goals, not some cookie cutter approach to saving.