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In 1994, Bill Bengen has published a pioneering research that reshaped the method in which retirees approach their income planning. He provided a 4 % base, which indicates that retirees can withdraw 4 % of their wallet safely in the first year of retirement and then set this amount annually for inflation.
This strategy is designed to help retirees to keep their savings and avoid money running over 30 years of retirement.
Thirty-one years later, Bengen-his next book is scheduled to publish, “Wealthy Retirement: The Useful Shipping of a 4 % Base to spend more and enjoy more” later this year-now it is believed that retirees can withdraw safely 4.7 % of their wallets in the first year of retirement, and a sacrifice of the original 4 % base, while there are still what they still save them for 30 years.
However, before the retirees blindly follow the rule of Bengen, it was set in a modern episode of deciphering the eight main factors that must be taken into account when formulating the retirement income plan.
“Many people are suspended immediately at first, what is my number? Is it 4 %? Is it 5 %?” “See the video above or listen below,” said Benghan. “There are a lot of things that you have to look before you can reach this point.”
The first step in developing your personal retirement plan is to choose a scheme to withdraw your money.
Benghan said that most people do not realize that the base of 4 % – which has now been promoted to 4.7 % – is based on a specific mathematical approach to withdrawing funds in retirement that explains the severe market declines early in retirement, as well as the historically high inflation periods. Under this rule, retirees with a million dollars from the Irish Republican Army will withdraw 4.7 % in the first year, or $ 47,000.
After that, Benghan said that the ratio was no longer used. Instead, withdrawals are modified annually on the basis of inflation, It is very similar to social security. For example, if inflation is 10 %, then the withdrawal of the following year will increase by 10 %.
Bengen said this method aims to maintain the power of buying retirees over time. However, it is just one of many methods. Other strategies include withdrawing a fixed percentage of assets, using pensions, or spending on front loading in early retirement and reducing it after about 10 years. He said that every approach has different financial effects.
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Benghan said the second factor is to determine the “planning horizon.” This is one of the most difficult aspects of developing the withdrawal plan, as it is directly related to your life as an individual, and if possible, as a couple.
He said: “You don’t necessarily want to plan to spend the last dollar with your breath that you die because most of us cannot decrease.”
Because it is impossible to predict the longevity of life, Benghan said it is wise to build a margin of error – perhaps more than 10 years or about 30 % more than your expected life.
Due to the increase in the average life expectancy, as many people now live after 100, he said it is better to plan conservative instead of running out of money in the nineties.
“You don’t want to reset this somewhere in the mid -1990s,” Benghan said. “You want to take care of him when retirement.”
Benghan said that the third main factor is whether you withdraw from a taxable or non -taxable wallet, because this can have a significant impact on your withdrawal rate.
The 4.7 % base assumes a non -taxable account, such as the Irish Republican Army. However, if you owe taxes for your gains, benefits and profit distributions in retirement, this will lead to your head erosion, which reduces the rate of sustainable clouds at the end.
“My methodology assumes that the investment account used to finance the withdrawal during retirement will pay all income taxes resulting from the investment income – achieved gains, distributions and benefits,” Benghan explained in his next book. “With regard to the tax exhibition tax account, these taxes are zero by definition. I do not care about myself to impose taxes on withdrawals from such accounts, as I left these wallets. Instead, I focus on what is happening for the money while staying inside the portfolio.”
Since the taxable accounts are subject to the ongoing tax rivalries, retirees must calculate how taxes affect the rate of withdrawal. “The higher the tax rate, the higher the penalty that will pay it in taxes,” Benghan said. “So you have to take it into consideration.”
The fourth main factor is if you want to leave money for your heirs. Benghan said the assumption that is often ignored for a 4.7 % base, is that your wallet balance will be zero by the end of your planning horizon – usually 30 years.
He said that if your goal is to leave a big inheritance, you will need to control the withdrawal rate accordingly. This often means withdrawal less every year, sometimes much lower.
“There is a high price to pay to make your heirs happy, and you have to trade this against making yourself happy during retirement,” Benghan pointed out. “This is a discussion between you and your financial advisor.”
He said in the end, this is a very personal decision.
“It is a very individual thing, and everyone must make this decision themselves,” he said. “But it is a decision to make – you cannot leave it for chance. It will affect your cloud rate.”
How to organize your investment portfolio is another factor that plays an important role in determining your cloud rate.
His research indicates that maintaining shares customization between about 47 % and 75 %, with the rest in bonds and cash, leads to a sustainable withdrawal rate of about 4.7 %. However, getting away from this range, either by keeping some shares or a very large number of stocks, can reduce the withdrawal rate.
In his research to develop a 4.7 % base, use a well -wallet of seven different assets categories, settled in a fixed way over the retirement.
In addition, he pointed out that although many retirees maintain the allocation of fixed assets, other strategies – such as the high route of shares, where exposure to stocks begins less and gradually increase – can actually improve withdrawal rates. Other ways, including handrails that modify withdrawals based on market conditions, offer alternative approaches to managing pension risks in retirement.
He said: “There are many ways to deal with them – fixed allocations, increased slide paths, and handrails – but in the end, it is a decision that every retired must make.”
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Benghan described the sixth important strategy, re -balance, as one of the “four free lunch meals” available to retirees.
In essence, the balance re -adjusting your portfolio periodically to allocate the original assets after a specified period. He said once a year is perfect in general.
Besides improving withdrawals, re -balance is also a decisive risk management tool.
“It is important because it prevents the wallet from being overweight in risky origins such as stocks and so much volatility that if you reach the stock bear market, it is fully destroyed,” said Benghan.
Some experts argue that retirees should reduce the allocation of stocks as they age to reduce the risk of wallet, but Bengen’s research indicates otherwise. When testing different methods, it was found that reducing exposure to stocks during retirement actually reduces the sustainable withdrawal rate – contrary to what many might expect.
“There are three options: reduce, preserve, or increase stocks,” Benghan explained. “Of the three, the worst is to reduce your stock customization.”
In his research, it was found that reducing the customization of the shares reduces your withdrawal rate. “This is the only thing you don’t want to do,” Benghan said.
The next best is to keep allocating fixed assets during retirement. The slightly best approach is to start allocating shares a little less – such as 40 % of the shares and 60 % of the bonds – and gradually increasing the exposure of shares over time, as the “rising route” can boost the cloud rates slightly.
Benghan’s research assumed that retirees invest in index funds, with the aim of obtaining the market return for each group of assets instead of outperforming it. For example, if the wallet includes the S&P 500 (^Gspc) The component, the goal is simply the matching returns of the index – not overcoming it.
However, for those who trust their investment skills, Benghen provides an analysis in his book on how the higher returns affect withdrawal rates. He calculated the amount of retirees ’withdrawal rate that could increase for each point of additional return – but also warned against the risks if these expectations are not fulfilled.
“Unless you are an exceptional individual – there are some who can overcome the market – you may want to adhere to the index money,” said Benghan. “If you fail to achieve your goal, you will suffer your cloud rate, and this is a real concern.”
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The final factor is when you want to receive your payments.
Many retirees prefer to receive clouds on a regular schedule, similar to the salary. In his research, Bengen took an equal distribution of clouds throughout the year, which is in line with this common practice.
However, he also analyzed the effect of taking withdrawals as a lump sum, either at the beginning or end of the year, and found that this could significantly affect the sustainable cloud rate.
“If you get all out in the end or all of that in the beginning, you will have a different number,” Benghen explained. “It will be significantly different from 4.7 % or any number that results from an equally dispersed withdrawal pattern.”
Ultimately, retirement planning is not the process of “appointing and forgetting it” – it requires continuous monitoring and adjustments to stay on the right track. For 30 years of retirement, unexpected challenges must arise, and how retirees can be in response to them as important as the primary plan itself.
“The 30 -year -old plan will face problems, just like anything else,” Benghan confirmed. “And how do you deal with them really important to the success of your withdrawal plan.”
