(ReliableNews.org) – The high rate of inflation in America and around the world is affecting the way most households function financially. Since retirees are on a fixed income, they may need to pay special attention to how they arrange their finances to continue making ends meet. Those who saved for retirement by estimating how much they would need per month to sustain their life and accomplish their goals during their golden years may now be unprepared. Financial planner Bill Bengen originally suggested a system for retirees in 1994 but has since spoken out to address accelerated inflation and its effect on retired people.
Bill Bengen’s Rule
In the early 1990s, Bergen suggested retirees withdraw only 4% of their retirement savings to live on in the first year and adjust for inflation in subsequent years. The recommendation was based on the assumption those with retirement funds had their money tucked away in 55% of large-cap stocks (big companies) and 45% of intermediate-term US Treasury bonds. However, he did alter his advice to include mid-cap stocks (medium-sized companies), micro-cap US stocks, and international stocks in retirement portfolios in the early 2000s. He increased the recommendation to 4.7% withdrawals.
That method used to work fine when inflation was experiencing reasonable increases year over year. Now that inflation is up at the 8.5% mark, using the 4% method and adjusting for inflation will likely cut too deeply into retirement savings and leave too little to sustain the status quo.
To adjust for the possibility, Bergen suggests retirees decrease their spending this year. In fact, Morningstar Inc. recommended lowering withdrawals to 3.3% instead of the standard amount to ensure the stockpile of money will last. However, Bergen suggests a more modest adjustment of 4.4%.
Eyes on the Market
Those with IRAs, 401(k), or other retirement vehicles know the market fluctuates over time. The financial advisor suggested that when inflation is high, the stock market may increase in value to match and could “prevent depletion.” The key to maintaining a steady amount of retirement income is to highly diversify your portfolio so it will withstand both bull and bear markets. Over the long haul, investors are bound to experience both.
Bergen suggested retirees limit their exposure to the stock market at this time. His recommendation is to keep about 20% of retirement investments in stocks, 10% in bonds, and keep the rest as cash. When the market dips again, the advisor suggests using the cash to buy back in at cheaper prices for the possibility of bigger gains in the future.
Retirees should be sure to talk to their own individual financial advisors, let them know their goals, and consider following their personalized recommendations to keep, grow, and withdraw retirement funds in a way that optimizes long-term value.
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