Money Management

What should retirees do instead? 

For a long time, the 4% rule was one of the most trusted pieces of financial advice. The idea was that if you wanted to retire and maintain your lifestyle without running out of money, you should withdraw no more than 4% of your retirement savings each year. But with the recent market turmoil, changes to interest rates, and rising inflation, is this still true? Here is why it may no longer be.

The 4% rule explained

The 4% rule was first coined in 1994 by financial advisors William Bengen. According to his research, withdrawing no more than 4% of your retirement savings each year would give you enough money for 30 years of retirement without running out of funds. That means if you have $1 million saved for retirement, you could withdraw $40,000 a year and not worry about depleting your nest egg.

What has changed?

In the 30 years since the 4% rule was introduced, there have been some major changes that make it less reliable today. One big factor is inflation. The average U.S. inflation rate since 1913 has been 3.1%. With inflation hitting as high as 9.1% this past summer and currently at 6.5%, withdrawals under the 4% rule will increase considerably. Retirees now need more money just to maintain their lifestyle. This means their investment portfolios will need to earn higher returns or the portfolio will quickly be depleted.

Another issue is market volatility. With the increase in interest rates, Wall Street has taken a beating the past 12 months, at one point entering bear market territory. The S&P 500 was down close to 20% in 2022, while the Nasdaq fell 34%. Despite the market downturn, stocks are still trading at about 36 times corporate earnings over the past decade — double the historical average. This means that there may be more room for prices to fall. In addition, there may be an economic recession in the near future, adding more economic uncertainty to the future. During these periods, retirees will need to be even more cautious about making withdrawals to ensure they don’t run out of money.

A better rule?

Due to these factors — as well as longer life expectancies — even Bengen himself has stated that in today’s unprecedented economic situation, retirees will need to lower their withdrawal rate and cut back their spending. A recent Morningstar study shows that the 4% withdrawal rate is too aggressive, and retirees should start at a 3.3% withdrawal rate.

This lower rate gives retirees more cushion against inflation and market uncertainty so they won’t run out of money too soon. In addition, if you’re retiring, you should look at multiple sources of income during retirement — such as Social Security benefits or pension payments — so you aren’t dependent on withdrawals from your retirement accounts. The key is to be flexible with your personal finances and keep a long-term financial view.

The traditional 4% rule has served retirees well for decades but may no longer be relevant due to rising costs and increased market volatility. Retirees should consider using a rate closer to 3.3% withdrawal rate instead, as well as looking into other sources of income. By doing this, retirees can ensure they don’t run out of money during retirement.

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Unfortunately, there’s a good chance home prices will remain high this year. 

There’s a reason aspiring buyers have struggled to purchase homes over the past few years. Since mid-2020, housing inventory has been very limited. And any time you have a situation where there’s not enough supply of a given commodity to meet buyer demand, its price has a tendency to rise.

Now that said, buyer demand has been waning in recent months, largely due to an uptick in mortgage rates. Borrowing rates for mortgage loans rose sharply in 2022, and while they’ve softened in recent weeks, they’re still notably high. That’s led some buyers to pull out of the housing market.

In light of this, it’s not all that surprising to learn that about 75% of millennials think home prices could crash in 2023, according to a recent survey by Real Estate Witch. But while a steep decline in home prices might benefit sellers in a big way, it’s also pretty unlikely to happen.

It’s all about inventory

Low inventory and affordable mortgage rates drove buyer demand upward in mid-2020, and that demand has remained fairly strong. In recent months, buyers haven’t been clamoring for homes quite as much as they were in 2020 and 2021, when borrowing rates were low. But demand is still reasonably solid. And home prices are unlikely to plunge in 2023 for one big reason — there’s still a glaring lack of housing supply.

As of the end of December, there were an estimated 970,000 housing units available for sale, according to the National Association of Realtors (NAR). That represents a mere 2.9-month supply of available homes.

For context, it typically takes a minimum of a four-month supply of homes to fully meet buyer demand. And that’s really the minimum. In fact, it often takes a solid six-month supply of homes to create an equalized housing market — one that doesn’t favor sellers or buyers over the other.

Since we’re so far away from having a solid level of housing inventory, home prices are unlikely to crash in the coming year. They might drop, but even if they do, that doesn’t mean sellers won’t still be able to walk away with profits.

In fact, the median existing-home sale price in December was $366,900, as per the NAR. That’s a 2.3% increase from a year prior. So even though buyers have been pulling out of the market, demand hasn’t declined enough to drive home prices downward.

Buyers should gear up for another tough year

Unfortunately, between higher mortgage rates and elevated property prices, 2023 could prove to be a challenging year for home buyers. Those with financial constraints may want to consider postponing their house hunting until real estate inventory picks up. Once that happens, it could drive home prices downward. But we’re really a long way from there at this point in time.

Of course, one wild card factor this year will be mortgage rates. There’s a chance rates will start to come down in the coming months, though it’s premature to say that will happen. But if rates start to drop, that could drive an increase in buyer demand. And that would probably take a decline in home prices off the table.

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Consumers are still opening their wallets to celebrate the holiday of love. 

Sometimes, it takes a little money to keep the romance in your relationship alive. Whether it’s the occasional bouquet of flowers or box of chocolates, giving your romantic partner token gifts throughout the year is a great way to show that you’re thinking of them.

But one thing you don’t want to do is bust your budget and rack up credit card debt in the course of showing that affection. And given the way inflation has been surging, a lot of people have had to make changes to how they make romantic gestures.

In a recent Forbes Advisor survey, 60% of consumers say that inflation has impacted their ability to pay for dates or romantic gifts over the past year. In spite of that, 59% still intend to spend money on Valentine’s Day this year, either by going on a date, buying a gift for their significant other, or doing both.

But if money is tight in your world, then a better bet is to have a low-key Valentine’s Day — even if it means doing things differently than you normally would.

How much Valentine’s Day spending can you afford?

If you’re doing well financially, then by all means, take a little money out of your savings account to treat your partner to a fabulous Valentine’s Day — dinner, jewelry, flowers, the whole shebang. But if you can’t swing a big Valentine’s Day celebration, don’t rack up debt in the course of pulling one off. Instead, find ways to make the day special without compromising your finances.

For one thing, you can always cook your partner’s favorite meal at home. And if it’s a complicated one, you can bet they’ll appreciate the effort.

It also wouldn’t hurt to transform your dining area into a romantic haven for the night. Dim the lights, clear the clutter, and put out the candlesticks you rarely use. Dig out the nice tablecloth you typically reserve for special occasions, and bust out your fancy dishes, if you own any (if not, skipping this step is totally fine). Chances are, your partner will be thrilled with the meal and setup you’ve put together.

Be careful with Valentine’s Day spending

A good 40% of consumers plan to spend more money on Valentine’s Day this year than they did last year. Now part of that may be due to the fact that things just cost more these days due to inflation. But either way, if money has been tight, and inflation has been straining your paycheck, don’t get in over your head financially in the course of celebrating Valentine’s Day. Instead, scale back, but do what you can to make the day as meaningful as possible.

If you stretch yourself too thin financially by splurging on Valentine’s Day, you might end up stressed out about it for weeks or months as a result. And carrying around that financial stress could actually make for a tense situation with your partner — a consequence that’s really not worth bearing for a single night of romance.

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The president is pleased with the state of the economy. That’s not a great thing from a stimulus perspective. 

For well over a year now, many American consumers have been struggling financially. And we can blame inflation for that.

But despite higher living costs, and despite the string of recession warnings that filled the media during the latter part of 2022, the reality is that the U.S. economy is in pretty solid shape these days. And that’s a good thing — except from a stimulus perspective.

Biden is pleased with the economy’s progress

The arrival of the pandemic battered the U.S. economy in 2020. It caused a widespread uptick in unemployment and forced many Americans to deplete their savings and rack up scores of debt just to stay afloat.

Lawmakers were quick to respond with stimulus aid, and it helped. But over the past year, many people have called for follow-up aid to help cope with inflation. And the federal government hasn’t heeded that call.

But that’s understandable. It’s easy for lawmakers to justify stimulus policies when the economy is in shambles. But that hasn’t been the case for quite some time, and as a result, it’s unlikely that stimulus checks will start hitting Americans’ bank accounts anytime soon.

In fact, President Joe Biden addressed the nation in his State of the Union speech on Feb. 7, and he said himself, “Two years ago our economy was reeling. As I stand here tonight, we have created a record 12 million new jobs — more jobs created in two years than any president has ever created in four years.”

Not only have many jobs already been recovered since the pandemic, but we could see even more jobs come back or get created in the near term. In January, the U.S. economy added a whopping 517,000 jobs, and the national unemployment rate fell to 3.4%. If this pattern continues, we can pretty much write off stimulus checks for 2023. But we also shouldn’t need them.

Inflation is cooling, too

While job growth is a very positive thing, it doesn’t actually address the issue of inflation. But we’ve seen some improvements there, too.

The rate of inflation has been slowing month after month since peaking in mid-2022. If that trend continues, then consumers might see their living costs drop a notable degree before the end of the year.

Of course, there’s still the nagging question about whether a recession will hit in 2023. Last year, many experts seemed convinced that the economy would crumble on the heels of persistent interest rate hikes on the part of the Federal Reserve.

The Fed, however, has slowed down on rate hikes this year. Its first rate hike of 2023 was far less aggressive than the rate hikes we saw for most of 2022.

And all told, recent jobs and economic data makes a 2023 downturn less likely. That also means a stimulus round is most likely not going to happen this year. But we’re better off with a strong economy than a weak one that deteriorates to the point where lawmakers have to step in with aid.

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Don’t let your money sit fallow. 

The odds are good that once you’ve reached adulthood, you’ve had at least a few different bank accounts. Your first account as a kid was probably a basic savings account opened for you by a parent or guardian. Then you likely graduated to a checking account once you got your first job as a teenager (and if you were under 18, you likely needed that adult’s help again), so you’d have a place to deposit your paychecks.

But you’re older now, and perhaps a $200 paycheck from your retail job at the mall no longer makes you feel unimaginably rich. Maybe you now have multiple bank accounts, possibly even with multiple banks. But what if you no longer use one of those accounts? Here’s why you should consider closing it.

1. You could incur minimum balance fees

I’m living proof of what could happen if you stop paying attention to a bank account. Last year, in the hustle and bustle of life, I neglected my old savings account that’s linked to my main checking account and ended up losing $50 to fees since I let the account balance slip below the minimum requirement. Don’t let this happen to you! I resolved my issue by adding money to the account, and I intend to keep it open, as it gives me overdraft protection for my checking account, and I think that’s worth having.

If you have a bank account with a minimum balance requirement that you’ve stopped using altogether, consider closing it. The last thing you need is for an automatic payment you set up long ago to be debited out of the account, leaving you below the minimum (or worse, overdrafting your account). If your bank charges monthly maintenance fees, you could end up below the balance requirement that way, too, if your balance was already on the low side.

2. Your bank could slowly drain the money away

Let some more time go by without using that account, and you could find your bank slowly eating away at whatever money is left. According to Forbes, government regulations determine what happens to unused bank accounts, so the way banks get around losing control of those accounts is to charge inactivity fees. This either leads to the account holder noticing that the bank is taking their money, or eventually the bank fees will bring the account balance down to $0 — at which point, the bank will just close the account due to inactivity. Don’t let this happen to you. Keep your money and close the account on your own terms.

3. You probably need the money in an unused account

Chances are, you need every dollar these days to account for rising costs. So if you think you may have an extra bank account lying around that still has some cash in it, it’s a good idea to transfer that money to an account you do use, and then formally close the account. Your bills, emergency fund, and debt repayments will all thank you.

Be careful

A quick word of caution if you’ve just remembered an old bank account that you no longer use and can now close: If the account is overdrawn, you’ll need to settle up with the bank before closing the account. While closing a bank account that’s in good standing won’t impact your credit score (banks don’t report account activity to the credit bureaus), if you’re in the red and don’t pay your bank back, it could send the debt to collections, which will hit your credit report.

You might also get reported to ChexSystems, a reporting agency that collects banking information on consumers. If you end up with too many black marks with ChexSystems, you may find yourself unable to open new bank accounts in the future. So proceed with caution and be sure to pay off any money you owe the bank. And if you struggle with overdrafting your account, there are ways to break free.

There’s no reason to keep a bank account you no longer use. Transfer any remaining money out of it and close it, so you can forget about it for good.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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