The 4% Rule for Retirement Is Back
For those wondering if now is a good time to retire, here’s some encouraging news: The 4% rule is back. Thanks to higher interest rates and bond yields, it is likely safe for new retirees to spend 4% of their nest eggs in their first year of retirement and then to adjust that amount for inflation in subsequent years, according to a new analysis from Morningstar released Monday. Though 4% had long been the gospel of retirement math, retirees in recent years were warned that starting at that spending rate raised the risk of running out of money.
The recommended initial withdrawal can rise and fall with projections of future market conditions and inflation. Two years ago, Morningstar recommended starting retirement by spending 3.3% of savings. The advice proved prescient, since inflation in June 2022 recorded a 12-month increase of 9.1%, while stocks fell nearly 20% that year.
Last year the safe withdrawal rate inched up to 3.8%. “It is relatively good news," said John Rekenthaler, director of research at Morningstar and a co-author of the report. “Stock and bond valuations are lower and there is more cushion for investors." Morningstar runs 1,000 simulations of future market conditions to find the spending rate that allows retirees to maintain a steady annual income, adjusted for inflation, without running out of money in 90% of those scenarios.
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