Does the 4% Rule Still Work?


Jim Lorenzen, CFP®, AIF®

Before you can take income from a nest-egg, you have to HAVE a nest-egg; but, getting there takes more than discipline – it takes MOTIVATION!  What motivates YOU?

Here are some thoughts from The Financial Planning Association:

Reality Check

It used to be that Americans could count on a pension plus Social Security to get them through their Golden Years. But traditional pensions only account for an estimated 18% of the total aggregate income of today’s retirees, and Social Security accounts for only about 36%.1 Alas, the responsibility for the bulk of your nest egg now rests with you.

As you begin thinking about a comfortable retirement, consider that by most estimates you’ll need at least 60% to 80% of your final working year’s income to maintain your lifestyle after retiring. And don’t forget that your annual income will need to increase each year — even during retirement — in order to keep up with inflation. At an average annual inflation rate of more than 3%, your cost of living would double every 24 years.

You’ll also have to consider the likelihood of increased medical costs and health insurance premiums as you grow older. The average cost of a year’s stay in a semi-private room in a nursing home, for instance, is now over $80,000 a year and could rise more than $130,000 per year by 2030, assuming an annual inflation rate of 3%.2

Getting a Leg Up

If this dose of reality makes you glum, cheer up — you have some allies. Investment vehicles, such as your employer-sponsored retirement plan and individual retirement accounts (IRAs), allow you to put off paying taxes on your earnings until you begin taking withdrawals, typically during retirement when you may be in a lower tax bracket.

Additionally, time can be an ally — or an enemy. Delaying the process of investing can significantly reduce your results. Consider this example: Jane begins investing $100 a month in her employer-sponsored retirement plan when she’s 25. Mark begins investing the same amount when he’s 35. Assuming an 8% annual rate of return compounded monthly, when Mark retires at 65, he’ll have $150,030. Jane will have $351,428.3

While this is only a hypothetical scenario and there are no guarantees any investment will provide the same results, you can see the remarkable difference starting early may make. But no matter what your age, contributing the maximum amount to your employer-sponsored retirement plan and IRA each year could help you achieve the comfortable retirement that each of us desires.


1Source: Social Security Administration, Fast Facts & Figures About Social Security, 2013.

2Source: Genworth Financial, Inc. and National Eldercare Referral Systems, LLC, Cost of Care Survey, 2013.

3Example is hypothetical and for illustrative purposes only. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing and the example does not represent the return of any actual investment. Your results will vary.

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

 © 2014 Wealth Management Systems Inc. All rights reserved.

 Click on this video!

236-thumbRetiring the 4% Rule

A portfolio created with your long-term objectives in mind is crucial as you pursue your dream retirement.


IFG Report:  The Hidden Risk No One Talks About (registration required)

A Financial Conversation Checklist (does not require registration)

Subscribe to IFG’s Ezine:  IFG Insights

The IFG Website

The IFG Managing Life’s Risks Website

Follow Jim on Twitter:
Jim on LinkedIn
IFG on Face book

The Joint Committee on Taxation

Become an IFG client!  Don’t play phone-tag; schedule your 15-minute introductory phone call using this convenient scheduler!

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.