Monday, January 5, 2015

Retirement Funds - Have you ever heard of the 4% rule?

Like many people, I haven't been focused on retirement either. Coming up on my second year of having my own office I have been more focused on paying bills and keeping things running. Also, I hope to work well into my 60's and maybe my 70's if I build a practice and firm that allows it. So I haven't paid much attention to retirement myself.

While I was going through the headlines on line-this weekend, I found this article: Retirement: Is the 4% rule still relevant? It talks about the rule of thumb that retired people should not withdraw more than 4% a year from their retirement accounts once they retire. Of course other factors need to be considered but it gives you a good point to start planning.

So why am I talking about it here? I'm not a financial planner and do not pretend to be. But I found it interesting. I never really knew how to value some of the benefits I've already vested in. After conversations with financial people, the only question I was asked, "How much do you need to live on in retirement?" I don't know ... one thing I do know is I don't plan to live in a 4 bedroom house after I retire and that is my biggest expense now.

But if I use this 4% rule, I know what I should be able to draw out of my saving and estimate a value to my other benefits. For instance, the way I see it anyway, a social security benefit of about $20,000 per year after I reach 65 y/o is similar to have saving $500,000 ($500,000 x .04). So if someone has this amount of benefit and they save another $250,000 in an IRA or 401K, they can plan about $30,000 a year in retirement funds and it is about the same as someone who saved $750,000 with no social security benefit (like someone who was self employed their entire work life).

But this also touches several parts of my practice. When people come to talk about estate planning... Wills, POA's and Trusts. This can give you an idea of what to put into a trust and what you can expect to have left when you pass.

Retirement funds are also relevant in divorce cases. Dividing the assets is part of divorce. This rule can be used to estimate how much a person will need to make up to retire after a divorce. It gives a point to begin new planning.

It is also important when we talk about Bankruptcy and debt. One of the mistakes people make when they are in debt is to start drawing down their retirement funds. Also, parents need to think about their retirement funds as they look to co-sign school loans or bail their kids out of other debt. So considering how much you need in saving to draw a decent monthly figure, bailing out s child with retirement money may not be your best option and co-signing a student loan, a non dischargeable loan, may be too big of a financial burden to accept.

So the 4% rule is a good starting point for a few different conversations. If a financial planner comes across this blog, I welcome further comment. I know I probably over-simplified this rule and retirement planning overall. But I still think a good place to start.

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