If you’re a retiree, you’ve probably heard that you’re especially vulnerable to soaring inflation, since it means that you’ll have to stretch your dollars further – something that can be challenging when you’re living on a fixed income.
This strategy suggests that, in order to not run out of money during retirement, retirees should plan to withdraw 4% of their investment portfolio in the first year of retirement. Then, in each subsequent year, the annual withdrawal rate would vary based on inflation.
However, consumer prices in the U.S. have hit a 40-year record high. According to the consumer-price index, inflation skyrocketed by 8.5% year over year in March.
With such a high inflation rate, many retirement planning experts say that the 4% rule isn’t feasible for the long-term retiree – including Bill Bengen, the man who created the rule back in the 1990s. There are a few reasons for this:
- Stock prices are historically high
- Bond rates are very low
- Inflation is rising quickly
Before inflation took off in recent months, Bengen had gone on record to state that most new retirees could probably afford to follow a 4.7% withdrawal rate.
But lately, he’s been giving interviews and issuing warnings to retirees to cut back on their early-retirement withdrawals, at least until there’s a clearer picture of whether this red-hot inflation will be a short-term phenomenon or if it will stick around for the long term.
What is the new rule?
There actually isn’t a hard-and-fast new withdrawal rate. Everyone has a different financial situation, with different considerations and different life expectancies.
According to Bengen, retirees who followed his updated 4.7% withdrawal rule might be more comfortable with cutting back slightly to 4.4%.
Meanwhile, other sources (such as Morningstar) say that 3.3% is the current suggested withdrawal rate.
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