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What is the 3 rule in retirement?

Once you have an estimate of your annual retirement spending, you can begin to work out how much you need overall by multiplying your annual spending by the number of years you expect to spend in retirement, figuring in an extra 3% per year for inflation.

fool.com - 3 Dated Retirement ""Rules"" You Need to Forget | The Motley Fool

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There are so many variables in retirement planning that figuring out how much you actually need to save can be a real challenge. It's totally normal to want to simplify the process by falling back on well-known retirement "rules," but this could end up hurting you in the long run. If you want to retire comfortably, you're better off ignoring these common retirement standards from years past.

1. You need 70% of your preretirement income to live on

While it's true that annual expenses often decrease once you enter retirement, this isn't the case for everyone. And even among those who see their monthly bills shrink, there isn't a consistent rate for such decreases. You might end up spending about the same amount in retirement each year or maybe even a little more, depending on what you plan to do with your newfound free time. Rather than trying to guess what percentage of your current income you might need in retirement, you should focus on your estimated retirement expenses. You can use your current bills as a baseline, but don't forget to account for inflation and shifting spending patterns. Some of your current expenses, like child care, might decrease or disappear, while others, like healthcare, might rise over time. Once you have an estimate of your annual retirement spending, you can begin to work out how much you need overall by multiplying your annual spending by the number of years you expect to spend in retirement, figuring in an extra 3% per year for inflation. And if your plans for retirement change over time, you can always redo your calculations.

2. You should save $1 million for a comfortable retirement

A $1 million nest egg was once considered enough for a comfortable retirement, but several factors make this untrue today. Inflation has driven up living costs, so $1 million doesn't go as far as it used to. People are also living longer, and retirement can last 30 or more years for some. These people will need more money to cover more years of living expenses. Many workers today believe they'll need about $1.9 million to retire comfortably, according to a Schwab survey. That's quite a step up from $1 million. But not everyone will need this much, and you may not have to do it all alone. If you're married, your partner may be able to help you save. And you might also be able to count on some money from Social Security, a 401(k) match, or a pension.

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Once again, you're better off thinking about your actual retirement expenses than choosing an arbitrary dollar amount as your savings goal. This will enable you to tailor your retirement strategy to your personal goals.

3. You should follow the 4% rule when withdrawing your retirement savings

The 4% rule says that in your first year of retirement, you can withdraw up to 4% of your retirement savings. Then you adjust this amount every year thereafter to account for inflation. This strategy is supposed to help your retirement savings last 30 years, but it doesn't always work out that way. Some conservative retirees choose to follow the 3% rule instead. This is the same as the 4% rule, except you limit yourself to 3% of your savings in your first year. Others choose to adopt a custom withdrawal strategy based on their retirement goals. Those who plan to travel or make big-ticket purchases in retirement will likely want to create a custom plan, because the 4% rule and its derivatives don't allow for extra spending in any given year. It's your retirement, so you're the one who ultimately gets to decide how you want to spend it and how you save for it. But try to resist the temptation to take shortcuts when planning your retirement budget. The time it'll save you today isn't worth the headaches it'll create later.

fool.com - 3 Dated Retirement ""Rules"" You Need to Forget | The Motley Fool

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