Planning for retirement is a long-term process, but one thing you may want to do early on is start mapping out how much you can safely withdraw from your investments without running out of money.
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Financial educator and TikTok influencer Delyanne the Money Coach has created several videos explaining the 4% rule in a fun and accessible way. She emphasizes that the rule is a starting point rather than a one-size-fits-all solution to determine how much you need to have during retirement.
One of her recent TikTok videos shows you an estimate of what you can expect from various retirement savings amounts.
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The 4% Rule Explained
The 4% rule is a popular guideline for retirees to determine how much they can withdraw from their retirement savings each year without depleting their nest egg too quickly. Here’s how it works:
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Calculate Your Total Retirement Savings: Add up all your retirement accounts, investments, and savings.
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Determine 4% of Your Total Savings: Multiply your total savings by 0.04. This gives you the amount you can withdraw in the first year of retirement.
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Adjust for Inflation Each Year: In subsequent years, adjust the withdrawal amount for inflation to maintain your purchasing power.
For example, if you have $1,000,000 in retirement savings, the 4% rule suggests that you can withdraw $40,000 in the first year. If inflation is 2%, you would withdraw $40,800 in the second year ($40,000 * 1.02).
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But how much can you withdraw per month? In Delyanne’s TikTok video, she shares these figure as an example:
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$150k saved – $500/month
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$375k saved – $1,275/month
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$750k saved – $2,500/month
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$1.2 million saved – $4,000/month
And so on.
How to Determine What You’ll Need to Live Comfortably During Retirement
Knowing how much you’ll need during retirement is crucial for effective planning. Here are some steps to help you estimate your retirement expenses:
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Assess Current Expenses: List all your current monthly expenses, including housing, utilities, food, transportation, healthcare and leisure activities.
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Consider Future Changes: Think about how your expenses might change during retirement. For example, you may spend less on commuting but more on healthcare.
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Factor in Longevity: Consider the possibility of living longer than average. It’s better to plan for a longer retirement and not need the funds than to run out of money and be left with fewer options.
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Include Emergency Funds: Set aside a portion of your savings for emergencies or unexpected expenses.
By estimating your future expenses and comparing them to your projected retirement income, you can determine whether the 4% rule will work for you or if adjustments are needed.
Tips for Saving for Retirement During Your Working Years
Saving for retirement requires discipline and strategic planning. Here are some tips to help you build a robust retirement fund during your working years:
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Start Early: The earlier you start saving, the more time your investments have to grow. Take advantage of compound interest by contributing regularly to your retirement accounts.
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Maximize Employer Contributions: If your employer offers a 401(k) match, contribute at least enough to get the full match. It’s essentially free money for your retirement.
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Diversify Investments: Spread your investments across different asset classes (stocks, bonds, real estate) to reduce risk and increase potential returns.
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Automate Savings: Set up automatic contributions to your retirement accounts to ensure consistent saving without the temptation to spend.
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Review and Adjust: Regularly review your retirement plan and adjust your contributions and investment strategy as needed.
By following these tips and understanding the 4% rule, you can confidently plan for a financially secure and comfortable retirement. Remember, the key to successful retirement planning is starting early and staying disciplined with your savings and investments.
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This article originally appeared on GOBankingRates.com: How Much You Can Withdraw From Investments and Not Run Out of Money
