Is the 4% retirement rule right for you?

Meet the 4% rule

The 4% rule has been around for a long time. It was introduced by financial advisor Bill Bengen in 1994. It says that you can withdraw 4% of your nest egg in your first year of retirement, adjusting future withdrawals for inflation. This withdrawal strategy assumes a portfolio of 60% in stocks and 40% in bonds, and it’s designed to make your money last through 30 years of retirement.

Here’s how it works: Imagine that you’ve saved $500,000 by the time you retire. In your first year of retirement, you can withdraw 4%, or $20,000. In year two, you will need to adjust that rate by inflation. Let’s say that inflation over the past year was at its long-term historic rate of 3%. You’ll now multiply your $20,000 withdrawal by 1.03 and you’ll get your second year’s withdrawal amount of $20,600. The following year, if inflation is still around 3%, you’ll multiply that by 1.03 and get your next withdrawal amount of $21,218.

So what’s the problem with this seemingly super-helpful rule? Well, unfortunately, several things.

Interest rates have fallen: For starters, remember that the rule was created more than 20 years ago, when interest rates were higher. Mortgage rates in 1994 were in the 8% range. In such an environment, the bond portion of a portfolio would have been generating more income than bonds today.

It assumes a certain asset allocation: Then there’s the rule’s assumption that your portfolio will be split 60-40, respectively, between stocks and bonds. You might not have or want that allocation. If your portfolio is split 50-50, or you have 75% of it in stocks, then the 4% rule won’t work as advertised.

People are living longer: Many people are living much longer lives. The 4% rule aims to make your money last for 30 years, but if you retire at 62 and live to 96, your retirement will be 34 years long and you might be quite pinched in your last years.

Should you use the 4% rule?

Clearly, the 4% rule is flawed. But you don’t necessarily have to throw it out altogether.

If you think you stand a decent chance of having a retirement that’s more than 30 years long, you can be more be more conservative, perhaps using a 3% or 3.5% withdrawal rate in the early years of retirement. Don’t be too rigid about it, though. If the market grows briskly in your first few years, you can re-evaluate and perhaps increase your withdrawals.

It is a good idea to reassess your financial situation regularly during your retirement. For example, if you’re 80 and you don’t think you’ll be around in a decade and your coffers are rather full, you could start withdrawing and enjoying more each year, or just plan to leave more to your loved ones.

We all need to plan carefully for retirement.



Are you ever too old to learn a new skill? The short answer – NO!

You would be aware of the saying ‘‘You can’t teach an old dog new tricks”. Which literally means asking older people to change their habits or acquire new skills is impossible.

It is a very broad statement that we overly use in reference to all people over a certain mythical age, but like most broad statements, it is certainly not applicable to all older people.

As we grow older there is a preference to carry out tasks and activities the way we have always done them. This familiarity is understandable as it is comfortable and does not require a lot of effort and will not strain the brain.

It is very easy to use the phrase “old dogs and new tricks” when it comes to learning a new activity or process. The reality is that for most of us over the age of 60, the simple answer is: “I cannot be bothered, it is all too hard”.

This is a mistake. The brain benefits by you tackling something new, a task that it is not familiar which requires effort and mental activity. This increased mental activity in later life is associated with lowering the risk of dementia.

My mum is a very good example, she is 86 years of age, does not have dementia but is quite vague, forgetful and can get a little depressed. Last Christmas we gave mum an adult colouring book and pencils.

She was not impressed and I think was a little insulted. However, after some coaxing she finally opened the book and started to use her imagination and colour in the complicated designs and pictures inside the book.

Over a short period of time, we noticed an improvement in her hand-eye coordination, she is no longer watching as much television, has started to once again listen to music and would appear to be a much happier person.

This is only my observations and not conclusive proof that colouring will improve the lives of those people over the age of 80, but I do believe that this small mental activity has made my mum a more contented person.

The new skills you decide to learn do not have to be complicated.

A good friend who has retired has decided to grow all his own veggies and herbs in his front yard in large raised garden beds. Over the last few months he has acquired the knowledge, to first build his garden beds, understand the soil requirements to grow the perfect zucchini and sweet potatoes, install the irrigation system and build the necessary scarecrow to keep the birds off his vegetables.

Dementia is a growing problem and if remaining mentally alert through activity delays or prevents this insidious condition, it is time to move away from the television, pick up a book, go for a walk or learn a new skill before it is too late.

Source: Mark Teale – Centrepoint Alliance

Pitfalls to Avoid When Getting Financial Advice

Good advice isn’t something to take lightly. Listen too often to the wrong people and you can do serious damage to your retirement accounts.

It’s natural for investors to seek advice from friends and family. But those closest to you don’t always have the right answers – because they aren’t financial experts.

Those claiming to be financial advisers sometimes are not. Paid financial advisers could represent a different problem from the well-meaning advice of friends and family. If the advisers are paid through commissions by third parties to sell insurance or exotic mutual funds, they may have their own best interests at heart rather than yours.

It’s up to everyday investors to determine if their financial adviser is putting their best interests forward. In order to do so, ask the adviser how they get paid. If it’s by commission, then look for a fee-only adviser who will get paid a flat amount for work.

Parental bias can leave children in harm’s way. More young investors turn to parents for financial advice, but parents are limited by their own experiences. While the parent probably means well, emotionally charged financial advice rarely results in good decisions.

Finally, there’s the issue of risk tolerance. The parent’s taste for risk may differ from the child’s. While a young investor has decades to save – and can therefore take more risk – an older investor could be more inclined to choose a strategy that favours bonds and less volatile equities. Young investors copying that strategy could be left wanting more when they are ready to retire, and if things go wrong, it can cause conflict within the family.

Friends often share successes, but forget about the failures. Clients who are considering buying a first home and converting it into a rental property often hear from friends about the potential profits, but not the effort or risk.

More than a quarter of young investors take advice from friends. It’s often difficult to ignore someone who brags about a sweet stock pick or huge returns from an investment. But people are less likely to talk about stock picks that fail or the hard work involved on a real estate property.