The 4% rule
One simple test to see whether your savings will last throughout retirement is to apply the 4% rule. This states that if you begin by withdrawing 4% of your savings balance in your first year of retirement, and then adjust subsequent withdrawals to account for inflation, your savings should last 30 years. Though the rule isn’t perfect, it can serve as a reasonable starting point for evaluating the health of your nest egg.
Let’s say you expect to need €3,000 a month as a total retirement income, and that your State Pension will be €800 a month plus a works pension of €1,200 a month. This means you’ll need to withdraw the shortfall of €1,000 a month from savings, or €12,000 per year. If you multiply €12,000 by 25, you get €300,000, which is the savings target you should aim for. If you are approaching retirement, or are newly retired but don’t have that much in savings, you’ll need to make some adjustments to avoid running out of money further down the line. This could mean initially adopting a more frugal retirement lifestyle, so you don’t need as much monthly income, or working part-time to supplement your income.
The above assumption also makes no account of interest or investment returns on your savings, and this is important. If you simply held the €300,000 in a non-interest bearing cash account, then you are not giving yourself any chance of growing that capital to make it last longer. Although you should generally be taking a more cautious approach with your savings and investments as you reach retirement, this doesn’t mean that all your savings should be in risk-free investments. This critical area is where a financial adviser can carefully direct you as to how much of your savings you should allocate to investments where the value can fluctuate. Remember, if you are 65 now, then you can expect to live for 18-21 more years. You therefore require a long-term investment strategy despite now reaching retirement. Your financial adviser can then advise you on a suitable investment plan that will include both risk-free cash deposits plus a risk-assessed investment portfolio that is designed to give you a happy, worry-free retirement and not one where you outlive your savings.
This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.
John Westwood, Managing Director and founder of The Blacktower Group, has taken up the post of Chairman at FEIFA, the Federation of European Independent Financial Advisers, following the trade association’s AGM on 21st September. Following two years as an Executive Committee Member John is both pleased and proud to take on this important role.
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