Though the 4% rule has been around for decades, in recent years a good number of financial experts have come to believe it’s outdated. For example, according to the 4% rule, a federal retiree with $1 million in their Thrift Savings Plan (TSP) would withdraw $40,000 of income in their first year of retirement. In each subsequent year, withdrawals would be adjusted for inflation. Then again, in reality, any number of unexpected financial disrupters would require withdrawing more than 4%, putting you at risk of outliving your TSP.
Stock Market Volatility
Also known as the Sequence Of Return risk, this is when the stock market goes through a number of downturns. If this happens in the early years of your retirement it can quickly deplete your TSP and negatively impact your long-term financial security in retirement.
Healthcare Inflation
According to the Peterson-KFF Health System Tracker, since 2000, the average price of medical care – including provider services, insurance, drugs, and medical equipment – has increased by 114.3%. Over the same time period, prices for all consumer goods and services rose by 80.8%. With healthcare inflation outpacing overall inflation rates, the 4% rule may not provide enough income in retirement.
“Since living longer costs more money, saving for retirement based solely on the 4% rule is risky.”
Underestimating Longevity
According to the Social Security Administration, upon reaching age 60, men can live another 22 years while women can live 25 more years. Yet, a recent survey reveals that over 50% of American adults have no idea how long people tend to live in retirement. Since living longer costs more money, saving for retirement based solely on the 4% rule is risky.
The Rising Cost Of Long-Term Care (LTC)
Living longer also increases the need for non-medical, custodial care. A study cited by LongTermCare.gov indicates a person turning 65 today has a nearly 70% chance of needing non-medical long-term care in the future. Yet, according to the National Council on Aging, 80% of adults over age 60 do not have the financial resources to cover the out-of-pocket cost of long-term custodial care in a facility or at home.
The Social Security FRA May Rise To Age 70
With Social Security’s cash reserves projected to run out in 2035, one popular proposal floated by the US Senate is to raise Social Security’s Full Retirement Age (FRA) for 100% of your earned benefit from 67 to 70. For federal workers who can retire as young as age 57, waiting longer for their full benefit would require withdrawing more than the 4% rule allows.
To create a retirement plan that anticipates these risks, connect with an FRC® trained advisor.
