Living on Five Percent

You’ve saved and saved and saved… and then saved some more. Are you ready for retirement? Do you have enough to make the withdrawals you need to cover your expenses (and dreams) and not deplete your savings? The short answer is, maybe...

We say “maybe” when looking at whether you have enough in your retirement because there are so many factors that influence how much is “enough.”

  • How long will you live?
  • How much do you need to withdraw every month?
  • What other sources of income do you have?
  • Do you need to preserve some of your principal for your kids or grandkids?

These factors can create a lot of angst for people. That’s where Living on 5 Percent comes in.


Retiring with a Source of Income

Wouldn't it be great to retire with a consistent stream of passive income? Living on Five Percent is a principle we use to determine how much you should withdraw from your retirement account each year. This principle seeks to provide you with a steady income stream while also maintaining an account balance that keeps income flowing through retirement!

We’ve found that the right answer for most people is to use their retirement savings as a supplement to other income they may have in retirement—Social Security, a pension or 401(k), part-time work, or deferred compensation.

Based on that, most people should withdraw between four and six percent of their retirement assets each year – hence the rule of living on five percent. That amount gives you a high potential for an enjoyable retirement, and a low likelihood that you’ll deplete your retirement savings.


Withdrawal as a Supplement

For many, managing their retirement savings is a tightrope balancing act. If they withdraw too much too fast, they'll risk running out of money. On the flip side, not withdrawing enough money can mean they don't get the full benefit of their hard-earned savings. That’s why it's so important to work with a Financial Advisor.

There’s history behind the “safe withdrawal rate” that we cover in our book. It’s based on decades of portfolio analysis and a few “torture-tested scenarios,” like someone who would have retired right before the oil crisis of the 1970s.

Ultimately, as we reviewed the theories on safe withdrawal rates, we landed on five percent because, among our clients, we’ve found it to be the right balance between having enough for an enjoyable retirement, while not outliving your money or depleting your savings while you still need it.


Should you use the Five Percent Rule?

Living on Five Percent is a principle, not a prescription. Think of it as a well-informed starting place from which your own personal plan can be thoughtfully crafted. While the five percent rule is powerful in principle, it is simply not enough on its own. How will you invest your portfolio? How confident do you want to be that your money will last? Will you make changes if conditions change? These are all questions that are left unanswered by the Five Percent rule.

Living on Five Percent also doesn’t account for medical expenses or your personal tax rate. Therefore, it is critically important that you work with a trusted financial planner.


Interested in learning about a wholistic and effective framework to retirement? Get a copy of Power of 5 Investing today!