Setting a goal for retirement can be daunting. It may seem foolish to set a specific target in the present for a future that feels distant and uncertain. And yet, my advice is to be as specific as possible with your goal because this helps you to adjust to variation and the unexpected as you track your progress.
The “Four Percent Rule” suggests that if you limit your withdrawals from your nest egg to 4% each year in retirement, you are very likely to never run out of money. The rule is based on market history, and so all the usual caveats of “past performance does not guarantee future returns” hold sway. And yet, it’s a good place to start.
Teresa and Seth planned around a more conservative 3.5% withdrawal rate, to give themselves more flexibility and peace of mind:
4% isn’t a magic number. You might have more guaranteed income and feel comfortable targeting a more aggressive withdrawal rate. You might have more uncertainty and a smaller social safety net and wish to target a more conservative withdrawal rate. The important thing is not what your specific goal is, but rather that you HAVE a specific goal from which to make a plan.
The 4% rule is a good jumping off point towards establishing that specific goal. Once you have a target, it’s a lot easier to take aim at it.