Why Are People Talking About The 8% Rule For Retirees Now?

The 4% withdrawal rule has been a long-term staple among retirees. The idea behind this rule is that you withdraw 4% of your portfolio each year and use it to cover your living expenses. Then, your portfolio grows at more than 4% each year. It’s kind of like an infinite money glitch as long as your portfolio grows by at least 4% each year.

However, the 4% withdrawal rule isn’t as enticing as it sounds. This rule requires some people to operate on a shoestring budget, and it can lead to miserable retirement years. Some people are setting their sights on an 8% withdrawal rule instead of waiting until they can safely withdraw 4% of their portfolios each year. These are some of the reasons why 4% is out, and 8% is the new focus.

You Can Retire Sooner

An 8% withdrawal rule allows you to retire sooner than relying on the 4% withdrawal rule. If you need $5k per month to cover your living expenses, you need a $1.5 million portfolio to retire with the 4% rule. However, you’ll only need a $750k portfolio to retire if you use the 8% withdrawal rule. 

Retiring a few years sooner has many benefits. You can prioritize your health, spend more time with loved ones, and have more of your young years ready to go for retirement. Many people retire when their best years are behind them and don’t get the chance to travel or do what they envisioned at retirement.

Knowing that you’ll retire sooner can also prompt you to take your finances more seriously. It’s easy to get distracted if you know it will take many years and that you’ll need a $1.5 million portfolio to retire. However, a $750k portfolio is much easier to reach.

The Stock Market Can Deliver High Returns

One of the critical components of the 8% rule is the stock market’s ability to deliver high returns. Investors can choose from growth ETFs instead of having to pick individual stocks. You don’t even have to make it too complicated. The S&P 500 has delivered an annualized 16.4% return over the past decade, making the 85 withdrawal rule seem more feasible.

The only risk with this strategy is that a market downturn can leave you very vulnerable, especially if it takes place in the first year that you retire. It will also be more difficult to buy dips and capitalize on corrections. However, investors who can hold onto their shares can end up generating high annualized returns. 

It’s Easier to Find Part-Time Work

One final detail to consider is that it’s much easier to find part-time work if you have to make some extra cash. You can choose from various side gigs, remote opportunities, and other part-time work if necessary. Retirees don’t have to start over and try to climb the corporate ladder. The greater flexibility makes it more enticing for individuals to consider the 8% withdrawal rule instead of spending too many years at work.

When you pass away, you can’t take your money with you. Sure, you can give some of it to your heirs and save up a nice nest egg. However, you also don’t want to work so much that you miss out on completing big items on your bucket list. The 8% withdrawal rule is not for everyone and is riskier than the 4% withdrawal rule, but it may benefit some people. It’s good to check with your financial advisor before committing to the 8% withdrawal rule if you can.

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