In 1994, United States citizen Bill Bengen came up with a rule to save money through the Social Security benefit. This rule quickly became the norm and people started to rely on it. This rule had as its main basis that retirees can fearlessly withdraw the amount equal to 4% of their savings. This is done in the year in which the retirement of the Social Security benefit is requested.
The mechanism to use this method is very simple and below you will be able to understand it perfectly. In order to get a good savings and have a more peaceful life when you start collecting Social Security, Mr. Bengen planned this useful rule, but it should be updated to adjust for inflation in recent years.
How to use the 4% rule with Social Security
Here’s how the rule works: first add up your total investments and withdraw 4% of the total amount during your first year of Social Security retirement. After that, you must adjust for inflation each year for the next 30 years.
This rule also includes that after you retire on Social Security, your portfolio will reach 50% stocks and 50% bonds. Therefore, if you have saved $1 million, during year one you spend $40,000. This assumes 2% inflation, on an estimated basis.
Then, in the following year you can take out $40,800. Many retirees have been able to follow this rule and confirm that they remain financially stable. It has worked for many years, too, so it has been a relief for many people.
The 4% rule needs updating
It is more than 3 decades using this method, according to Mr. Bengen. But the inventor himself of this increased amount in Social Security says that small adjustments need to be made. Two years ago he already said that it was necessary to go up to 4.7% to reach the desired amount.
In spite of this recommendation, in the current year he states that it is not necessary to raise so much. A 4.5% or 4.4 of the Social Security check may be sufficient. In addition to this, the financial advisor assures that the best thing to be able to save is to spend less money and make a spending plan with our Social Security retirement. The categories of this spending plan and their percentages are:
- 50% destined to the essentials.
- 30% for savings.
- 20% for non-essentials.