As you count down the years to retirement, you might be wondering whether or not your nest egg will be sufficient. Conventional retirement planning wisdom would tell you to accumulate savings over the course of your whole career, and then draw down on that savings at about 4% per year once you reach retirement to make sure it lasts. However, as changes in policy and financial products have taken place, this traditional retirement plan may not be the answer you're looking for. Here's how to determine if your nest egg will be enough.
Rethinking the 4% Rule
In the past, retirees would have accumulated enough in their retirement accounts to outpace inflation and grow at a reasonable interest rate. This would allow them to draw from their account at a rate of about 4% per year without dipping into their principal and running out of money.
Unfortunately, interest rates have dropped significantly in recent years, and traditional safe retirement planning vehicles like bonds are paying out less. As a result, most retirees will have to draw from their accounts at a rate of less than 3% to achieve sustainability. Not to mention the fact that the next generation of retirees will likely have less money saved, so that 3% may not account for much. If you were to do the math today, would 3% of your accounts be enough for you to live on?
Planning for Taxes
For many people, retirement means falling into a lower tax bracket at the same time you start drawing from your retirement accounts. Ideally, this means that all of that money that you've put away into tax-deferred accounts will come out when you are subject to the lowest possible taxes. Again, this strategy may need some serious rethinking as you examine your nest egg. The truth is that tax rates are unpredictable right now, and you could end up paying more in taxes than you anticipated. To determine whether or not your nest egg is enough, take time to calculate which tax bracket you'll fall into and see how your 3% holds up in this area.
Is Your Nest Egg Enough?
Now that you've assessed your nest egg based on the realities of the current financial marketplace, do you believe your nest egg is enough to last you through retirement? If you realize that traditional retirement planning has failed you, don't worry.
There are many ways to supplement your retirement plan with cash flow opportunities meant to overcome tax changes and the 4% rule so you can have enough money for a long, prosperous retirement.