The 4% rule in retirement has been a widely accepted retirement standard for over 30 years.
The rule states that you should draw 4% of your assets from your investments each year in retirement. This should, in theory, allow you to maintain a comfortable standard of living while continuing to let your investments appreciate in value.
However, it seems this longstanding rule could be poised to fall.
A recently retired caller to The Ramsey Show asked host and finance personality, Dave Ramsey, if it would be safe to go up to a 5% withdrawal rate in order to pay for trips he and his wife wanted to take in early retirement.
Ramsey has said he believes that retirees can earn up to a 12% annual return from mutual funds, and will therefore be safe to withdraw more than the standard 4% per year without jeopardizing their nest egg. He calls the standard rule “absolutely wrong” and “ridiculous.”
But another finance celeb has a very different opinion.
Suze Orman has called the classic 4% rule “very dangerous.”
Orman, a fellow best-selling author and expert, has once called for a tweak to the 4% rule — saying that retirees should only withdraw a maximum of 3% yearly if they are retiring in their 60s.
Who’s right? Here’s what to consider.
The importance of retirement accounts
Ramsey’s advice is based on a number of suppositions that may not reflect the real financial status of the average retiree.
Inflation will eat away at the value of your retirement savings, and it’s very possible that your retirement years could coincide with a period of higher inflation.
That’s not to mention the stock market’s volatility. Many experts believe a consistent 12% return, like Ramsey has optimistically said mutual funds can deliver, may not be likely.
Orman’s advice, on the other hand, is more conservative. She advises retirees to withdraw as little as possible from their savings, which is a safer approach.
Either expert would argue that the best way to make your money last in retirement is to start saving as early and as aggressively as you can.
One of the best ways to save for retirement is with an tax-free savings account (TFSA). But you can also put your money in a registered retirement savigs plan (RRSP), which may lead you to think: Which one is better for me?
The answer depends on your income and savings goals. High-income earners may benefit more from the tax deferral of an RRSP. However, if you prioritize easy, penalty-free withdrawals for various life events, a TFSA might be the better choice.
For comprehensive savings, consider contributing to both an RRSP and TFSA, balancing short-term flexibility with long-term tax efficiency.
Before you begin your retirement planning, however, you need a plan. And while Ramsey and Orman make good points on withdrawal strategy, you may need help that’s more tailored to your personal situation. If you’re unsure of how to navigate this on your own, calling a professional give you some peace of mind.
Boost your existing savings
If you’re already in retirement, you may want to follow Ramsey’s advice on growing your existing savings with safe vehicles like mutual funds. However, many retirees have not considered the benefits of guaranteed investment certificates, whose returns can now go up to 5%.
Because a GIC comes with a fixed term, it’s not recommended for everybody. If you’re saving for a short-term goal or might need to access your money before the GIC term is up, you’re better off sticking with a high-interest savings account.
But if you don’t expect to need your money for any reason during the duration of the GIC term, then a GIC is a great way to earn high interest on your cash savings.
Parking your savings in these short-term growth funds will allow you to plan year-to-year and continue to grow your savings when you’re on a fixed income.
You can also check out Money.ca’s Best High-Interest Savings Accounts to find some savvy savings options that earn you more on deposits.
Invest for passive income in retirement
Ramsey is a huge advocate for finding new passive income streams to pay down debt and build savings. While much of his advice is focused on finding a lucrative side hustle, for those in their golden years, a more relaxed approach may be easier to incorporate.
One of the easiest ways to grow your savings and portfolio is through an automated investing and saving platform such as Moka that simplifies the process of setting aside extra funds.
When you spend on anything — groceries, gas, or bills — it will automatically round up the price to the nearest dollar and deposits the difference into a smart investment portfolio for you, allowing you to grow your wealth without even thinking about it.
Professional investment managers at Mogo Asset Management then manage the invested funds. They create and manage a customized ETF portfolio tailored to your financial goals and risk tolerance. As your investment account grows, you can track your savings progress and portfolio performance through the easy-to-use Moka app.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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